Looking at the Numbers

Looking back, Q3 airline profits show reasonable performance so far this year.

• During Q3 airline financial performance was reasonably good by historic standards, with a sample of 60 airlines reporting net profits of $5 billion. Profits are down 20% on last year, at the EBIT level.  In Europe, where the economic outlook is dire, airlines limited the decline in Q3 profits to 5%. 

Q3 Airline Profits

• Jet fuel prices were back up above $130/b, despite economic gloom, as the supply squeeze persisted.
• Air freight markets are in clear decline, as business confidence falls, but air travel is still trending higher.
• Asset utilization has been kept high in passenger markets so far, but has fallen sharply in freight markets.
• Also helping profitability was a stabilization of breakeven passenger load factors, by rising yields and non-fuel cost efficiencies.

But the environment over the next few quarters looks much more challenging.

• Airline share prices, according to the Bloomberg global index, are down 40% so far this year and fell 14% last month alone reflecting market pessimism about the future. That’s not too far away from the lows of early 2009, in the depths of the ‘great recession’.
• Moreover, airline shares have fallen considerably further than other sectors.  The FTSE Global All-Cap index was down 7% last month and is down 15% so far this year. In the worsening economic environment investors expect airline profits to be hit more than most sectors.

Over the next year, airline profitability is threatened by the Eurozone debt crisis

• At the time of writing, actions were being taken by central banks to avert a credit crunch.  Our central forecast for the airline industry is based on further measures being taken to avert the financing problems now facing several governments in the Eurozone, which may include support from the IMF.
• Even this relatively benign outcome will fail to prevent a short-lived recession in Europe, and we have revised down our forecast for industry profits in 2012 from $4.9 billion to $3.5 billion.
• Our forecast for 2012 also shows a marked divergence of financial performance between regions.  European airlines are likely to be hardest hit by recession in their home markets, and we now expect to see small losses in this region. Contrasting performances are shown by North American airlines, where capacity cuts are providing some protection to profitability, and in Asia where, in particular, we expect significant profits generated by high load factors in China’s expanding domestic market.
  
  

• There remains a significant risk that the sovereign debt crisis in the Eurozone could spiral out of control, generating a banking crisis and more widespread economic weakness. The OECD has recently published an assessment of this risk. Based on the OECD’s analysis we estimate that industry wide losses could reach $8.3 billion. Europe would be worst affected but we doubt any region will be able to escape losses.

Full Financial Forecast (pdf)