IATA AGM: Middle East carriers facing drop in expectations

Middle East airlines are expected to post profits of $0.4 billion this year according to global industry body IATA, but this is down from the March projection of $0.5 billion.

Speaking at the AGM in Beijing today, IATA described this latest projection as a significant drop compared with 2011, when the region’s carriers returned a profit of $1.0 billion.

“The weakness of European originating traffic will damage long-haul markets, but Middle East airlines continue to lead the industry on growth. Along with capturing long-haul passenger traffic through the Gulf hubs, they have been the beneficiary of 80% of the improvement in cargo markets during the past six months. Overall, capacity by the region’s carriers is expected to expand by 13.3%, behind the 14.1% growth in demand,” IATA said in its industry forecast.

IATA said global industry profits are expected to be $3.0 billion, unchanged from the last update in March. A fall in oil prices, stronger than expected growth in passenger traffic and a bottoming out of the freight market are driving some improvements in the profitability outlook. However, this is offset by the continued and deepening European sovereign debt crisis, which has led markets to expect a further deterioration and damage to economic growth, the adverse impact of which has been built into this forecast.

This will be the second year of declining returns since airline profits peaked in 2010 at $15.8 billion with a net profit margin of 2.9%. In 2011, industry profits fell to $7.9 billion for a 1.3% net profit margin. This year’s projected $3.0 billion industry profit would yield a net profit margin of just 0.5%.

Cargo demand has bottomed out, following a sharp fall in 2011, in line with the moderate improvement of business confidence in a number of economies outside Europe. But the upturn is weak and narrowly based, with only Middle Eastern airlines seeing significant volume gains. European economic weakness is expected to limit any further improvement. Overall 47.8 million tonnes of freight are expected to be shipped by air in 2012, basically unchanged from the 47.7 million tonnes carried in 2011.

The outlook for African carriers is unchanged with an expected loss of $0.1 billion. This is a downgrade on the break-even performance in 2011. Weakness in originating traffic from the key European market is expected to adversely affect international passenger markets in the region. Moreover, load factors are already low and capacity is expected to grow 5.2% this year, ahead of demand growth of 4.2%. The region’s carriers continue to face stiff competition on long-haul routes.

“There has been no let-up in the volatility of the economic environment. A few months ago, an oil price crisis was the biggest risk. Now all eyes are back on Europe. Markets are expecting the Eurozone sovereign debt crisis to intensify and economic damage to follow. But with little clarity on how European governments will manage the situation beyond providing further liquidity, the risk of a major downward shift in economic prospects is very real. The next months are critical and the implications are big,” said director general Tony Tyler.