Global airlines on Thursday revised upwards widely watched industry profit forecasts for 2012 and 2013, but said that carriers remain vulnerable to risks including the euro zone crisis and the threat of a US fiscal cliff.

The International Air Transport Association (IATA), which represents 240 airlines, said that airlines were set to make a collective profit of $6.7 billion in 2012, up from a previous forecast of $4.1 billion. For 2013, it predicted an industry profit of $8.4 billion, up from its previous estimate of $7.5 billion.

2012

Improved prospects for 2012 are being driven by strong airline performance in the second and third quarters. Despite high fuel prices and a slowing world economy, airline profits and cash flows held up at levels similar to 2006 when oil prices were about $45/barrel lower and world economic growth was 4.0 per cent.

The improved performance is most evident in large airlines for which Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) averaged between 10 per cent and 15 per cent of revenue in the third quarter of the year.

“It’s a diverging picture. Economies of scale are helping larger airlines to cope much better with the difficult environment than small and medium-sized carriers which continue to struggle,” said Tony Tyler, IATA’s director general and CEO.

Overall performance has been positively impacted by strong passenger traffic growth (5.3 per cent) and a 3.0 per cent improvement in yields. Despite the slowing world economy business travel was supported by more robust international trade in goods and service. This contributed to a positive picture for both passenger volumes and yields.

In sharp contrast, cargo markets have contracted by 2.0 per cent and cargo yields are down 2.0 per cent on 2011 levels. Although world trade is still expanding, the pattern of economic growth – concentrated in the emerging markets – has favored ocean over air freight.

The slight relief in oil prices (at $109.5/barrel, down from $110/barrel in the October forecast) did not translate into relief on the fuel price. Moving in the opposite direction, because of a widening of refinery margins, jet fuel costs are expected to average $129.5/barrel which is a $1.8/barrel increase on the previous forecast.

Improved industry performance

Middle East airlines are expected to post a profit of $800 million (+ $100 million on the October outlook). That is slightly below the $1 billion that Middle East carriers made in 2011. While the region is maintaining strong growth with long-haul connection traffic, its performance has been weakened by the Arab spring and lingering instability.

African airlines are expected to end the year at breakeven—unchanged from the previous forecast and from 2011. While the continent’s economy is expanding rapidly, its carriers are suffering from strong competition on long-haul routes, high cost structures and a regulatory regime that inhibits the development of intra-Africa links.

2013

“Prospects for 2013 will be largely unchanged from 2012. Net profits are expected to rise to $8.4 billion leaving the industry with a 1.3 per cent net profit margin. It is good that we are moving in the right direction, but the year ahead is shaping up to be another tough one for the industry,” said Tyler.

Regional Performance

Middle East airlines are expected to see profits rise by $300 million to $1.1 billion and EBIT margins improve to 3.0 per cent. Airlines in this region are forecast to continue to expand their share of international markets.

African airlines are expected to post a third consecutive year of breakeven performance with an EBIT margin of 0.1 per cent.  Economic growth and trade flows are robust but airlines performance remains uneven.

“We need to make sure that cash strapped governments understand aviation is a catalyst for economic growth and ensure that light touch regulation does not become a license for infrastructure providers to let costs get out of control. We will also maintain pressure on governments for important infrastructure improvements—including the Single European Sky so that hard-won cost efficiencies are not lost to battles with congestion,” said Tyler. – Reuters and TradeArabia News Service