Fragile Outlook for Airline Profitability

Developments in the economic and air transport market environment during January and February emphasize the fragile state of the current expansion:

• Business confidence in major economies around the world during February remained higher than the fourth quarter, signaling some further expansion, but failed to improve on January.
• The US economy started to generate jobs and confidence among consumers, providing some offset to the downward pressure on economic growth from Europe.  Confidence is growing that the lower growth target for China will still support global economic growth this year.
• Air freight volumes showed further signs of stabilization during January and February, having declined during Q3 and the early part of Q4 last year.  Air travel volumes continue to expand, albeit at a slower pace than the post-recession rebound.
• The second bailout for Greece and continued support from the European Central Bank has calmed fears for an immediate worsening of the Eurozone sovereign debt crisis.  The risk that this deteriorates into a banking crisis has diminished but, with no solution of the underlying problem of a lack of growth in the ‘peripheral’ economies, problems may resurface later.
• High oil and jet fuel prices have replaced Eurozone debt as the most pressing risk facing the industry in 2012.

We downgraded our central case forecast for airline net profits in 2012, from $3.5 billion to $3 billion, in our March update:

• Revenues are not expected to slow as much as before, with evidence that capacity will be added at a slower pace than expected, helping yields, and some improvement to business confidence helping the demand side.
• However, we now expect Brent oil prices to average $115 a barrel, up from out previous forecast of $99.  The economic environment is not strong enough for the industry to fully recover this cost shock.
• We also examine a scenario where conflict in Iran pushes oil prices up to $150 a barrel in the second half of the year.  In this scenario we estimate the industry would see losses in excess of $5 billion. 
• Full financial forecast (pdf)