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Wednesday, December 15, 2010

IATA Sees Big Boost In Airline Profits

The International Air Transport Association (IATA) has upgraded its forecast for 2010 profits; it expects its members to reach $15.1 billion in profits this year, significantly more than the $8.9 billion it anticipated in its last forecast earlier this year.

However, IATA cautioned that 2011 will be more difficult with profits contracting to $9.1 billion.

According to Chief Economist Brian Pearce, the rebound of the global economy combined with a much better operational performance led to the improved performance. Airlines have significantly upped their aircraft utilization. Single aisle utilization is up from 10.4 to 11.4 block hours in the course of this year, widebody block hours are up from 10.6 to 11.

Carriers are also seeing higher yields as a result of a “much better mix.” Pearce also points out the benefits of capacity cuts made in 2008 and 2009, particularly in the U.S. But he predicts that yields “now level off as capacity comes back.”

Load factors are also at an all time high as the industry “was slow to provide new capacity.”

Travel markets “are looking very strong, there are no signs of a slowdown,” Pearce points out. While freight may have peaked earlier this year, IATA does not believe that has been the end of the upward cycle.

The current upturn in air travel is based to a significant extent on business travel and less so on leisure trips. While consumers are prepared to spend money on private trips in the emerging markets, “consumer confidence is nowhere near recovery in the developed world” as they are still trying to reduce personal debt levels. Pearce believes that caution will persist for another 1-2 years.

IATA highlights a fundamental shift in travel demand “from West and North to East and South.” Of the $15-billion profit, $8 billion was made in Asia-Pacific and $5 billion in North America. But Europe is lagging behind at a mere $400 million. “Europe is a source of instability,” Pearce says. In addition to the weak performance of home economies, the continent’s airlines are suffering from a new wave of taxation. “The air traveler is an easy target for taxation,” Pearce points out. Additional charges such as the British air passenger duty and the new $1 billion German departure tax “will have another serious impact on demand in Europe.”

“A 2.7% profit margin does not justify a party,” IATA CEO Giovanni Bisignani says. He points out that the industry lost $51 billion in 2001-2009 and even now recovers only half of the cost of capital. “We remain a sick industry,” he says. “The industry still destroys shareholder value.”

The margin will be down to 1.5% next year as global GDP growth slows down from an expected 3.6% to 2.6% and the sector “is starting to see overcapacity.”

Nonetheless, IATA predicts massive growth in passenger numbers. Airlines will carry 800 million passengers more in 2014 than in 2009 when 2.4 billion boarded their aircraft.

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