Airlines expected to see a slash in profits

Airline profits expected to fall 78 per cent IATA says

Oil prices, Japan’s nuclear disaster, and unrest in the Middle East and North Africa are expected to hit Airline profits.

The International Air Transport Association (IATA) forecasts that airlines will make profits of $4 billion in 2011, a 78 per cent drop from the $18 billion in 2010. This represents a significant deterioration from its forecast in March when it thought profits would fall by almost a half to $8.6 billion.

The downgrade to the profits forecast has mainly been caused by higher oil prices, which have risen 15 per cent to 110 US dollars a barrel since March, driven by the crisis in the Middle East.

Higher air fares are putting off value-sensitive leisure customers, with passenger numbers falling by between three per cent and four per cent over the past five months, making it harder for airlines to increase revenues.

As a result, passenger demand is now expected to grow 4.4 per cent in 2011, whereas it had been expected to grow by 5.6 per cent previously in March.

Cargo demand is expected to increase by 5.5 per cent, down from the previous prediction of 6.1 per cent as the cost of transporting goods by plane rises.

The Japanese earthquake and tsunami, which triggered the Fukushima nuclear disaster, will also dent global passenger numbers by about one per cent, it said. And in Europe, airlines are being hit by higher taxes, such as Air Passenger Duty in the UK.

Airlines are expected to increase their capacity by 5.8 per cent this year but profitability will be hit as the “load factor” decreases.

IATA director-general and chief executive Giovanni Bisignani said: “Natural disasters in Japan, unrest in the Middle East and North Africa, plus the sharp rise in oil prices have slashed industry profit expectations to 4 billion US dollars this year.

“That we are making any money at all in a year with this combination of unprecedented shocks is a result of a very fragile balance. But with a dismal 0.7 per cent margin, there is little buffer left against further shocks.”

In Europe, profits are expected to hit $500 million down from $1.9 billion the previous year as demand is dampened by weak economic growth and passenger duties.

Carriers in the Asia-Pacific region are expected to be the most profitable, with earnings of $2.1 billion. But this is “dramatically” down on the $10 billion in the previous year, as a result of increased fuel costs and the disaster in Japan.

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