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IATA Cuts Airlines Profit Outlook On Fuel Prices

IATA Cuts Airlines Profit Outlook On Fuel Prices
3/20/2012 12:07 PM ET

The International Air Transport Association on Tuesday slashed its outlook for 2012 airline industry profits, citing rising oil prices amid political unrest in the Middle East.

The industry group was releasing its quarterly update on the airline industry.

"2012 continues to be a challenging year for airlines. The risk of a worsening Eurozone crisis has been replaced by an equally toxic risk—rising oil prices. Already the damage is being felt with a downgrade in industry profits to $3.0 billion," IATA's Director General and CEO Tony Tyler said in a statement.

IATA said it now projects airline industry profits for 2012 to be $3 billion, 20 percent lower than the $3.5 billion in profits forecast in December. The profit guidance cut is primarily driven by a rise in projected average price of oil to $115 per barrel from the previously forecast $99.

The rise in oil costs will push fuel to 34 percent of average operating costs and see the overall industry fuel bill rise to $213 billion. The political tensions in the Gulf region will also increase the risk of further higher oil prices.

However, a larger cut was avoided due to the improvement in the US economy, cargo market stabilization and the Eurozone crisis not worsening.

The projected profit for 2012 of $3 billion is also 62 percent lower than the $7.9 billion of net profit currently forecast for 2011. The 2011 profit guidance was raised from $6.9 billion, due to the significantly better-than-expected performance of Chinese carriers.

Further, the industry group marginally raised its forecast for passenger demand for the year by 0.2 percentage points to 4.2 percent from the prior guidance of 4.0 percent, reflecting stronger business and consumer confidence in the US and Asia-Pacific.

Meanwhile, overall capacity of combined passenger and cargo is expected to expand 3.2 percent, below the prior anticipated combined increase in demand of 3.6 percent.

However, the group raised its 2012 passenger and cargo traffic yield growth outlook to 2.0 percent from the earlier forecast of being flat, reflecting higher fuel costs, tighter capacity management in passenger markets and the stabilization of freight markets.

The outlook for the average annual oil price for 2012 was also raised by 16 percent to $115 per barrel from the previously projected $99 in December. Fuel is now estimated to comprise 34 percent of airline costs, more than double the 13 percent in 2001.

IATA noted that all regions are following the global trend of reduced profitability in 2012 as compared to 2011, with Europe and Africa seeing losses. North American carriers are now projected to record 2012 profit of $900 million, down from previous projection of $1.7 billion.

Asia-Pacific carriers are now expected to post the largest absolute profit of $2.3 billion in 2012, higher than the $2.1 billion expected earlier, as the regions relatively strong economies will continue to generate more rapid growth in travel and cargo than the other large regions.

IATA noted that European carriers continue to project a net loss of $600 million in 2012 as many European economies are in deep recession, leading to continued weakness in both the cargo and passenger business. Air travel in the region is also being hit by taxation and the cost of the EU ETS.

The 2012 profit forecast for Latin American carriers also has been maintained at $100 million, due to mixed performance across the region. However, it will be the only region to deliver consecutive years of profits.

Middle Eastern carriers are expected to see 2012 profits of $500 million, up from the prior forecast of $300 million as passenger load factors have improved by a slowdown in the introduction of new capacity, and long haul markets have been relatively robust.

Meanwhile, African carriers, the only region other than Europe to project a loss, is currently maintaining its loss projections of $100 million in 2012. Passenger and freight load factors in the region are very low on average, which will make it difficult to recover the rise in fuel costs.

"While we have seen some improvements in economic prospects any further significant rise in the fuel price will almost certainly turn weak profits into losses," Tyler added.

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