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Looking at the Numbers


Airline financial performance improved in the second and third quarters of this year, after a sharp deterioration in the first quarter.  We have revised up our forecast for industry profits in 2012 from $4.1 billion to $6.7billion. That is still down on 2011 but better than expected given the difficult business environment.

  • Jet fuel prices have fluctuated not far from an average of $130 a barrel for the past two years, and compared to much lower fuel prices in 2010 the rise has added over $60 billion to fuel costs.
  • Adding to a difficult business environment has been slow global economic growth.  Global GDP is close to the ‘stall’ speed of 2% where airline industry profits typically turn to loss.
  • Despite difficult business conditions major airlines have managed to generate cash flows equivalent to the 2006-7 period, when global economic growth was twice as strong and oil prices $40/barrel lower. 
  • This is partly due to the efficiency measures undertaken by many airlines.  Most obvious is consolidation on the US domestic market, reducing capacity some 10% below pre-recession levels. An increase in exits and a decline in entry of new airlines have also influenced industry structure recently.
  • However, that has not substantially changed the fact that the industry remains intensely competitive and, for the industry as a whole, profitability and returns on capital remain extraordinarily weak, well become the cost of capital.
  • The outlook for 2013 has been lifted by the better performance this year.  We now expect net post-tax profits to rise to $8.4 billion next year (previously we had forecast $7.5 billion), which is less of an improvement over 2012 than we had previously expected.  The improvement is driven by slightly higher economic growth and slightly lower fuel prices. 

Detailed forecast on

Policy Risks

Financial risks facing the industry from government policy and regulation are in many cases as large as the risk being generated by macro-economic developments and in some cases are linked.

  • One major source of policy risk arises from the large budget deficits governments are seeking to reduce in many developed economies.  New taxes have already been seen in Europe, in some cases adding billions of dollars to costs. More are threatened.  
  • Climate change policy remains a financial threat, despite the postponement of the EU ETS.  Funding the proposed Climate Fund through a levy on international air travel is being actively considered and could cost in excess of $6 billion.  
  • A trend towards scaling back the economic regulation of infrastructure pricing is already raising costs. As an industry wide cost these risks are not on the scale of the climate policy threat. However, the airport charge increase at Delhi is the equivalent of 8-9% of the average ticket price on these markets. 
  • Where infrastructure is congested proposals for congestion pricing or slot auctioning have not so far been accepted but threaten the addition of billions of dollars to costs.
  • Perhaps not fully appreciated is the cost of passenger rights legislation, which is started to be introduced in many jurisdictions.  In Europe the cost is around €4 billion, which is several times the cost of the now postponed EU ETS.

More on risk analysis

Policy Risks are high

Policy risks are high




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