Oil, Business Travel Accentuate Revised IATA Forecast - Business Travel News

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Oil, Business Travel Accentuate Revised IATA Forecast

March 20, 2012 - 11:55 AM ET

By David Jonas

The International Air Transport Association reduced its profit forecast for the global airline industry to $3 billion from the previous $3.5 billion projection, primarily resulting from "the sharp rise" in oil and fuel prices. "The downgrade would have been larger but macro-economic conditions appear to have improved," according to IATA, which noted "no significant worsening in the eurozone sovereign debt crisis," strengthening U.S. economic and consumer confidence, tighter capacity controls and a "stabilized" freight market.

IATA indicated that the "uptick in confidence" in some of the world's largest economies "is consistent with further growth, albeit in low-single figures, of business travel and the important premium travel segment." For example, global premium travel in January grew 2.9 percent year over year. Overall, IATA projected passenger demand in 2012 would increase 4.2 percent, up from the 4 percent prediction conveyed in December.

IATA also reported that capacity growth this year should be "slower than we had previously expected. We now expect load factors to marginally improve this year, rather than decline, supporting both yields and unit revenues."

But the specter of rising oil and jet fuel prices casts a pall over all such optimism. IATA now projects the 2012 average price of Brent crude oil at $115 per barrel, up from the December forecast of $99. "This will push fuel to 34 percent of average operating costs," which would be up from 30 percent last year and 26 percent in 2010, according to the association. A further spike in fuel costs—perhaps brought on by escalating tensions in and around Iran—would represent another "shock" that drags the global industry back into the red.

"The industry is fragile," according to IATA director general Tony Tyler. "Global forecasts are for GDP to grow by 2 percent this year. Historically, if GDP falls below 2 percent, the industry returns a collective loss. So it would not take much of a shock to turn our very modest profit projection to a net loss."

Regional Variances 

According to IATA, "all regions will see reduced profitability in 2012 compared to 2011, and Europe and Africa will see losses." In Europe, where airlines of course face weakened economies and, according to Tyler, "are by far in the most difficult situation," IATA pegged total net losses at about $600 million, unchanged from its December report. African carriers as group will lose about $100 million, according to IATA, where passenger and freight load factors "are very low on average."

On the other side of spectrum, Asia/Pacific airlines—which powered the global industry in 2011 to an estimated $7.9 billion profit—are expected to maintain strong performance. IATA now expects them to post a collective 2012 net profit of $2.3 billion as "the region's relatively strong economies will continue to generate more rapid growth in travel and cargo than the other large regions." The regional outlook is mixed, however, as Chinese carriers likely will post solid numbers while Indian carriers face ongoing financial struggles.

In North America, IATA predicted airlines as a group would generate $900 million in profits, down by about half from the December forecast. "Higher fuel costs are responsible for the downgrade, but airlines in this region will see the smallest deterioration from last year's performance among the major regions, as a result of the very small increases in capacity expected," according to IATA.

IATA added that Middle Eastern carriers in 2012 collectively will deliver profits of about $500 million, partly due to "relatively robust" long-haul markets, while Latin American carriers will manage a $100 million profit, pressured by fuel, "intense competition in some major markets and slowing economies."

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