Finance: Looking at the Numbers

Our forecast for airline industry profits is unchanged in this quarterly update.  We continue to expect net post-tax profits for the whole industry to fall from $7.9 billion in 2011 to $3 billion in 2012, which is just 0.5% of revenues. However, both the regional composition and the risks to the central forecast have altered.

Oil prices and debt crisis

• Since the last forecast air travel volumes continued to expand strongly, at an above-trend pace, while air freight volumes have shown tentative signs of turning up from the lows of late last year. 
•  Jet fuel and oil prices have fallen.  We have revised our Brent crude oil price forecast in line with the consensus forecast to an average of $110/b for 2012, down from the previous forecast of $115/b.  
• However, this is not entirely good news.  Oil prices are weaker because of concerns about the Eurozone.  We now base our forecast on the market’s view that the Eurozone sovereign debt crisis will intensify, weakening economic growth in the region further in the second half of this year.  

Airline Profitability EBIT Margin

Regional variations

• The regional composition of the forecast has changed significantly, with US and Latin American airlines expected to generate more profit this year, offset by larger losses in Europe and smaller profits in Asia-Pacific.  
• Moreover, risks to our central forecast have risen with turmoil in the Eurozone threatening a banking crisis, of a much larger scale than assumed in the central forecast. Neither can risks to oil prices, from supply disruptions in the Middle East, be dismissed.  These risks to airline profits remain skewed to the downside. 
• A strong economy in 2010 allowed airlines to offset the impact of rising fuel costs with firmer yields. Airline profit margins and cash flows were squeezed sharply by rising fuel prices in the first quarter of 2011 and then again in the first quarter of 2012.  US airlines have continued to improve yields, but there has been downward pressure elsewhere, leading to stronger US profits in 2012-Q1 but weaker profits elsewhere.

Asset Utilization and Profitability 

• Asset utilization in passenger markets has been good, so far.  Through 2011 airlines sustained high load factors and aircraft utilization on passenger markets.  This supported cash flow and profitability, in the face of high fuel costs and weakening economic growth.  
• Keeping asset utilization high without undermining yields will be increasingly challenging on passenger markets this year.  Freight already felt this pressure last year, with a fall in load factors. 

Asset Utilization on Passenger Markets

• Aircraft deliveries have been relatively flat during recent years, partly due to production difficulties.  This year there is an acceleration of new capacity being delivered.  
• At the same time the economic environment is likely to cause growth in traffic volumes to slow.  Air travel markets have not yet slowed, but we expect a weaker second half to the year as a result of further problems in the Eurozone.  Air freight markets are showing signs of bottoming out, but the upturn is narrowly based around the Middle Eastern airlines.   
• Capacity will also be largely determined by the regional contexts.  In the US, it will grow very little in 2012. Despite a sluggish and mature US market this will allow a further improvement in load factors, supporting improved profitability.  
• By contrast growth for European airlines is expected to slow to one-third of the 2011 pace, as many of Europe’s economies fall deeper into recession.  We have increased our forecast for losses in this region.