Every quarter IATA updates its forecast for the airline industry’s financial performance over the year ahead. The focus of these financial forecasts is on the drivers of profitability, both cyclical and structural, with a view to highlighting the change required for long-term financial sustainability.
The latest forecast shows:
- The financial outlook for 2008 has weakened further since the start of the year. IATA has cut its forecasts for industry net profit in 2008 from $5 billion to $4.5 billion. However, this is a conservative view, with the next forecast in June likely to have a clearer picture of the full impact of the current economic difficulties. The risks are concentrated on the downside.
- The economic uncertainties facing the airline industry have significantly increased. The global credit crunch, a further rise in the oil price and the deterioration in the US economy increase the risk of “stagflation” – a damaging combination of rising costs and slower demand. The offset to rising oil prices provided by rising US demand in 2004-07 has come to an abrupt end in 2008.
- However, unlike in previous downturns in 1991 and 2001, not all air travel markets are slowing. Indeed, strong growth in developing economies in Asia, Middle East and Latin America continue to provide a boost to air travel demand to and from these regions.
- But competition is set to intensify further, both with deregulation on some routes (e.g. North Atlantic) and as the rate of new aircraft deliveries increases in 2008. With record high oil prices, a significant proportion of these new deliveries will be used to replace older, less fuel-efficient aircraft.
- Nevertheless, there are signs that the delivery cycle could diverge from the traffic growth cycle, leading to the risk of excess capacity and further downward pressure on prices on some routes.
- With fuel costs rising, the US market slowing and competition intensifying, the focus on capacity management and non-fuel cost efficiencies will become more critical. Airlines have also received a boost in recent years from non-core (i.e. non-airline) assets and businesses. However, this source of cash may also diminish as the economic environment becomes tougher.