Dubai: The International Air Transport Association (IATA) has further reduced its 2011 airline industry profit forecast to USD 4 billion amid Natural disasters in Japan, unrest in the Middle East and North Africa.

This would be a 54 per cent fall compared to the USD 8.6 billion profit forecast in March and a 78 per cent drop from the USD 18 billion net profit (revised from USD 16 billion) recorded in 2010.

On expected revenues of USD 598 billion, a USD 4 billion profit equates to a 0.7 per cent margin.

"Natural disasters in Japan, unrest in the Middle East and North Africa, plus the sharp rise in oil prices have slashed industry profit expectations to USD 4 billion this year. That we are making any money at all in a year with this combination of unprecedented shocks is a result of a very fragile balance," said Giovanni Bisignani, the IATA's Director General and CEO.

"The efficiency gains of the last decade and the strengthening global economic environment are balancing the high price of fuel. But with a dismal 0.7 percent margin, there is little buffer left against further shocks," he said.

According to IATA, Middle East carriers will deliver a USD 100 million profit, down from USD 900 million in 2010.

Political unrest in parts of the region is hurting demand. The major airlines in the region are expected to continue to win market share on long-haul markets, flying passengers via Middle Eastern hubs.

However, high fuel costs will weaken demand from key passenger segments and asset utilisation will be under downward pressure.

Capacity growth of 15.5 per cent is expected to outstrip demand expansion of 14.6 per cent. The cost of fuel is the main cause of reduced profitability. The average oil price for 2011 is now expected to be USD 110 per barrel (Brent), a 15 per cent increase over the previous forecast of USD 96 per barrel.

For each dollar increase in the average annual oil price, airlines face an additional USD 1.6 billion in costs. With estimates that 50 per cent of the industry's fuel requirement is hedged at 2010 price levels, the industry 2011 fuel bill will rise by USD 10 billion to USD 176 billion.

Fuel is now estimated to comprise 30 per cent of airline costs -- more than double the 13 per cent of 2001.

"We have built enormous efficiencies over the last decade. In 2001, we needed oil below USD 25 per barrel to be profitable. Today, we are looking at a small profit with oil at USD 110 per barrel," said Bisignani.

This fuel price spike is substantially different from the one that occurred in 2008. Asia-Pacific carriers are expected to earn USD 2.1 billion -- the most profitable of all regions. Even so, this is dramatically down from the USD 10 billion profit that the region achieved in 2010.

Airlines in this region are more exposed than others to cargo markets and fuel price fluctuations. Asia-Pacific airlines carry 40 per cent of all air freight volumes, while low labour costs and relatively low hedging means fuel accounts for a bigger proportion of total costs.

 

(Agencies)