If the European Union loses control of its sovereign debt crisis, airline industry losses could reach $8.3 billion, and the effects could be felt worldwide, the (IATA) says. Europe would be the most affected, “but we doubt any region will be able to escape losses,” the organization warned yesterday during its annual media day.
“The biggest risk facing airline profitability over the next year is the economic turmoil that would result from a failure of governments to resolve the Eurozone sovereign debt crisis,” says IATA.
For the time being, though, IATA still thinks the airline industry will make money in 2012, but the expected size of the profit is shrinking. Yesterday, the organization revised downward its earnings guidance for next year and now forecasts a global airline profit of $3.5 billion in 2012, down nearly 29% from its previous forecast of $4.9 billion. Its outlook for this year did not change, and IATA still expects the world’s airlines to post a $6.9 billion profit this year.
According to IATA Chief Economist Brian Pearce, Europe could fall into a deep recession if the debt crisis turns into a banking crisis. That, in turn, would cause a small U.S. recession and pull down China and other emerging economies. “Travel markets rarely decouple in economic downturns,” Pearce says.
IATA’s latest forecast is based on the assumption that financing problems in Italy and Spain are resolved, but IATA also believes that a short-lived recession in Europe cannot be avoided.
Airline financial performance is expected to differ markedly by world region. European carriers will suffer a combined loss of $600 million in 2012, but North American and Asian airlines will be able to sustain profitability, IATA says, noting that North American carrier earnings will remain more or less unchanged from 2011. Profitability in Asia is supported mainly by the booming Chinese domestic market. Small profits also are expected in Latin America and the Middle East, while African airlines will remain in the red.
To date, airline financial performance has been “reasonably good” in spite of high fuel prices. Airlines have been able to push through higher yields and cut non-fuel costs, and aircraft utilization has remained high.
Pearce said oil prices are still 30% above last year’s level in spite of the slower demand growth. He expects prices to fall in 2012, but not much below $100 per barrel. Airlines will pay about $198 billion for fuel in 2012, about 32% of their total costs, according to IATA estimates.
Too much capacity also could affect airline profitability, according to Pearce. “Excess capacity has made it difficult to make money,” Pearce warned. In the U.S., carriers have been able to retire older aircraft because they had already been written off, he said. But in Europe, cutting into capacity can be more difficult because fleets are younger and airport slot use-it-or-lose-it rules make it difficult to pull put of markets, he believes.
“Airlines are resilient,” IATA CEO Tony Tyler said at the annual media day in Geneva. “The last decade has built an industry that is very experienced in dealing with crisis, shocks, downturns and twists of events.” He warned, however, that “financing will be much more difficult and much more expensive. It will be a constraint in the short term.”
Tyler said that “a consolidated industry will be a more profitable industry. It is quite possible that we will see further consolidation as the economic difficulties continue. That would be a good thing,” he says.
In the upcoming economic crisis, passengers will be moving to the back of the aircraft and to low-fare airlines, Pearce predicts. Low-cost carriers will grow relatively stronger than the rest of the industry, but they are also hit hard by high fuel prices, making rock-bottom fares difficult to sustain.