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Date: 21 September 2010

Press Conference, Singapore

Today we have some good news.  We are upgrading again our global profit forecast for the world’s airlines.

In June, we predicted a profit of $2.5 billion for 2010.  Since then, many developments in global and regional economies have positively impacted air transport.  We now forecast that the world’s airlines will show a profit of $8.9 billion this year.

What has caused this improvement?  The first factor is careful capacity management.  Demand improvements have been very strong.  Already traffic is 3-4% above the pre-recession levels of early 2008.  In July, premium traffic was up 13%.  Unfortunately it is still 8% below pre-recession levels. 

Over the full year, we expect global demand to expand by 11% and capacity by 7%.  The tighter supply and demand conditions are boosting load factors.  The average load factor for January to July was 78% globally.  With that, airlines are getting some pricing power.  As a result we see a strong improvement in yields. 

Our previous forecast was for a 4.5% yield improvement in both cargo and passenger.  We now see yield improvements of 7.3% for passenger and 7.9% for cargo.  This is some good news.

We are maintaining our forecast for average crude oil at $79/barrel.  Excess refinery capacity has made jet fuel a little cheaper.  Even with faster-than-expected growth, we expect the fuel bill to decline from $140 billion to $137 billion.  Instead of being 26% of costs, it now represents 25%.

Perspective
Some of you may be surprised at the size of the increase in profitability.  Globally, airlines will see $560 billion in revenue this year.  So the move from $2.5 billion to $8.9 billion means that the margin improves from 0.5% to 1.6%.  That is well below the 7-8% we would need to cover the industry’s cost of capital. 

So it is a significant improvement, but not enough for a big celebration.

The regions

There are some interesting regional stories. 

Asia-Pacific continues to drive the recovery.  We upgraded the profit forecast from $2.2 billion to $5.2 billion.  Behind this is a 33% improvement in cargo traffic and a 23% increase in intra-Asia business travel.  China is the key driver with 9.9% GDP growth driving exports.  And India, which had some major problems, is now starting to make some money as well.

Europe is the only region in the red.  We cut the forecast from a $2.8 billion loss to a loss of $1.3 billion.  Europe’s economy is weak with a 0.8% growth in GDP.  Consumer confidence is low, with concerns over the continent’s debt.  The improvement is coming largely from travel into Europe and exports taking advantage of the low Euro.

North America on the other hand saw profitability forecast increase from $1.9 billion to $3.5 billion.  The story here is strong capacity management.  Capacity was cut in 2008 to deal with the rising price of oil.  Since then, it has been returned at a very disciplined pace.  To July, we saw a 6% increase in North American traffic and a 1% increase in capacity.  This is driving significant improvements in yield.

Middle East is also seeing some improvement, from $100 million profits to $400 million.  The carriers are gaining market share and introducing capacity (13%) at a slower pace than demand growth.

Latin America is basically stable.  The profit outlook increased from $900 million to $1 billion. And African carriers were also stable at $100 million.

Looking ahead

The real question in this forecast is how long we see the recovery lasting.  It is clear that there will be a slowdown in the fourth quarter.  We are already seeing that in our traffic.  2010 is as good as it gets.  It will be the peak of this cycle.  2011 will be a much tougher year.

Why?  First is the big economic picture.  Government stimulus monies are ending.  Now they have to pay the bill which means austerity measures.  We have already been hit by an increase in the UK APD to $3.8 billion and a new German tax of another billion (or more).

Jobs have not been created.  So consumer confidence will be low.  The bounce that we saw this year was to re-stock inventories.  Now consumer spending needs to support demand. 

Growth will certainly be at a slower pace.  We estimate a 5% growth in demand but a 6% increase in capacity.  Why?  Because of a surge in aircraft deliveries - 1400.  As a result, we expect yields to be flat.  The industry will still post profits of $5.3 billion, and we still expect Asia Pacific to be the leader with $3 billion profit.  Europe will still be the weak point and will only break even.

Consolidation

One positive development for this year and next is the acceleration of industry consolidation.  We see it in Europe. The latest being British Airways with Iberia.  North America has seen two major consolidations – United and Continental, and Delta/Northwest. 

And recently, TAM and LAN announced an intention to merge.  This could be a major force for consolidation.  Their market capitalization exceeds $12 billion.  The other groupings are in the $7-$8 billion range. 

It is critical that this industry has the commercial freedom to merge and consolidate where it makes business sense.  That is the only way that we can get the margins to normal levels of profitability and be in a position to fund growth and our environmental projects.

Environment

Lastly a comment on environment.  Last week, we had our Aviation and Environment summit in Geneva.  Industry re-affirmed our commitment to a 1.5% improvement in fuel efficiency to 2020, capping emissions from 2020 with carbon-neutral growth, and cutting emissions in half by 2050 compared to 2005.

Next week is the International Civil Aviation Organization (ICAO) Assembly in Montreal where environment will be at the top of the agenda with recent confirmation from the United Nations Framework Convention on Climate Change (UNFCCC) that ICAO is the right organization to manage aviation’s international emissions.  And that whatever agreement is reached, ICAO will not compromise the use of Common But Differentiated Responsibility (CBDR) at the UNFCCC in Cancun.

I am hopeful that ICAO will deliver the global solution that we need. The ICAO Assembly starts on 28 September.  I hope that you will follow developments closely.

With that I am happy to take your questions.

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