Last updated: 01:50 AM ET, Mon October 29 2012

European Economic Crisis Threatens Global Aviation Industry

Features & Advice International Air Transport Association (IATA) Kate Rice December 07, 2011

The Eurozone economic crisis is the biggest risk facing airline profitability, according to the International Air Transport Association, which downgraded its 2012 central forecast for airline profits from $4.9 billion to $3.5 billion for a net margin of 0.6 percent.

If the Eurozone crisis turns into a full-blown banking crises and European recession, IATA estimates that the global aviation industry could suffer losses exceeding $8 billion in 2012.

“The biggest risk facing airline profitability over the next year is the economic turmoil that would result from a failure of governments to resolve the Eurozone sovereign debt crisis,” said Tony Tyler, IATA’s director general and CEO. ”Such an outcome could lead to losses of over $8 billion -- the largest since the 2008 financial crisis.”

The global forecast for 2011 is unchanged at $6.9 billion, but regional differences have widened because the economic scenarios airlines face vary according to the part of the world in which they operate. European carriers are by far in the most challenging position. Higher passenger taxes and weak home market economies have limited profitability in Europe. The region’s carriers are forecast to generate a collective profit of $1 billion, down from the previously forecast $1.4 billion.

The picture is somewhat rosier for North American carriers, which have seen yield and load factor improvements as a result of tight capacity management, which has improved profitability to $2 billion (up from the previously forecast $1.5 billion). The U.S. economy has also grown at a faster pace than Europe.

Asia-Pacific carriers also saw stronger though varied trading conditions. Japan’s domestic market still has not fully recovered from the March earthquake and tsunami, and load factors remain under pressure. By contrast, airlines have improved load factors and profitability on China’s expanding domestic market. IATA has upgraded our forecast for the region by $800 million to a $3.3 billion profit. This is the largest absolute profit among the regions.

Middle East carriers are expected to see profits of $400 million (down from the previously forecast $800 million) as high fuel costs squeeze profit margins on the more price sensitive long-haul traffic connecting Middle Eastern hubs.

In a similar pattern, Latin American profits will see a downgrade to $200 million (from the previously forecast $600 million). Performance has been mixed across the region with much of the downgrade due to the impact of intense competition and falling load factors on Brazil’s domestic market.

African carriers are still expected to break even. New trade lanes with Asia are developing and markets within the continent are reflecting the improvement in economic development in many African economies. However, competition has been fierce and the region’s airlines have struggled to keep load factors at profitable levels.

At the global level, passenger demand is expected to expand by 6.1 percent, which is stronger than the 5.9 percent forecast in September. Air travel growth has persisted at a stronger pace than we had expected. This slightly stronger-than-expected passenger performance is offsetting worse-than-expected cargo performance and somewhat-higher-than-anticipated oil prices.

Next year, IATA expects passenger demand to grow by 4 percent, which is down from a previous forecast of 4.6 percent. European carriers are expected to fall into losses of $600 million, hit by the weakness of their home market economies and further increases in passenger taxes.

North American carriers are expected to generate profits of $1.7 billion, maintaining the strongest EBIT margin of 2.4 percent, as limited capacity growth is providing some protection against the downward pressure on profits.