Bloomberg News

Airline Profits Forecast Cut 54% on Oil, Japan Quake by IATA

June 05, 2011

June 6 (Bloomberg) -- The International Air Transport Association cut its 2011 airline-industry profit forecast by 54 percent because of higher oil prices, political protests in the Middle East and North Africa, and the Japan earthquake.

Carriers will make $4 billion in profits this year on sales of $598 billion, a margin of 0.7 percent, the group, representing 238 airlines, said in a statement today at its annual general meeting in Singapore. It raised its forecast for the average price of Brent crude to $110 a barrel from $96.

“The oil price is a concern for the whole industry,” Singapore Airlines Ltd. Chief Executive Officer Goh Choon Phong said yesterday. “And, it’s not something within our control.”

IATA also pared its forecasts for passenger and cargo growth as it released the new profit estimate, which represents a 78 percent decline from last year’s earnings. Every $1 increase in the price of Brent crude adds $1.6 billion to industry costs, IATA said.

“This year started in a very difficult way with the unrest in the Middle East and the crisis on fuel,” Giovanni Bisignani, the group’s head, said yesterday in an interview with Bloomberg Television. The aftermath of the March 11 earthquake in Japan, which accounts for almost 10 percent of global airline sales, has also been a “nightmare,” he said.

The group expects passenger demand to grow 4.4 percent this year, down from a forecast of 5.6 percent in March. The cargo growth forecast was cut to 5.5 percent from 6.1 percent.

IATA, whose members account for 93 percent of global passenger traffic, in March forecast global profits of $8.6 billion this year, a decline from a December forecast of $9.1 billion. Carriers made $18 billion last year, IATA said today, revising an earlier estimate.

‘Nightmare’ Year

The rising price of oil means that fuel will account for 30 percent of industry costs this year, compared with 13 percent a decade ago, IATA said. The price of Brent crude has risen 61 percent in the past year, closing at $115.84 a barrel in London on June 3.

IATA reduced its forecast for North American carriers’ profits by 63 percent to $1.2 billion. Delta Air Lines Inc. last month announced plans to cut capacity by 4 percent and offered workers buyouts for the first time since 2009.

United Continental Holdings Inc., the world’s largest carrier, has scrapped plans to boost capacity by as much as 2 percent this year and instead will keep it about the same.

‘Drawn Out’ Recovery

In the Asia-Pacific region, IATA cut its forecast to $2.1 billion from $3.7 billion. Japan Airlines Co. and other carriers curtailed flights serving Asia’s second-biggest economy after the nation’s biggest quake on record triggered a tsunami that left more than 23,000 dead or missing and crippled a nuclear- power plant north of Tokyo.

Japan Air, the nation’s largest international carrier, expects a “very long, drawn out and slow recovery” for demand for flights to Japan from Europe and the U.S., President Masaru Onishi said in an interview in Singapore yesterday.

Economic growth in China and India means that Asia-Pacific still will be the most profitable aviation market this year, according to IATA forecasts. Cathay Pacific Airways Ltd., Hong Kong’s biggest carrier, plans to boost passenger capacity about 10 percent this year.

“The future is in Asia,” said Bisignani, who is due to be succeeded by former Cathay Pacific CEO Tony Tyler on July 1. “What is impressive is the rate of growth -- double digits in China.”

IATA pared its Middle East profits estimate by 86 percent to $100 million. The region and North Africa have been hit by political protests in countries including Libya, Tunisia, Egypt and Yemen this year, deterring leisure and business travel.

The airline group left its forecast for European carriers’ profits unchanged at $500 million. The Latin American estimate was reduced to $100 million from $300 million, while the Africa forecast was cut to a $100 million loss from about breakeven.

--With assistance from Kyunghee Park in Singapore. Editors: Neil Denslow, Michael Tighe

To contact the reporter on this story: Andrea Rothman in Paris at aerothman@bloomberg.net; Robert Fenner in Singapore at rfenner@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net; Neil Denslow at ndenslow@bloomberg.net


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