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Global Aviation Industry Forecast Downgraded Further

The International Air Transport Association (IATA) further downgraded its 2011 airline industry profit forecast to $4 billion. Natural disasters in Japan, unrest in the Middle East and North Africa, coupled with a sharp rise in crude oil prices, have slashed industry profit expectations.

Fuel accounts for a large chunk of an airline’s costs. One of the main reasons for downgrade of the profit forecast has been higher fuel costs. Compared with an estimated price of $96 per barrel (the Brent variety of crude oil), IATA expects crude to average at $110 per barrel for the calendar year 2011. It has been estimated that for every dollar increase in the average annual oil prices, airlines have to incur an additional $1.6 billion in costs.

While costs are expected to rise substantially, demand forecast is marginally downgraded. Improvement in global trade, higher corporate earnings and consequent expectation of global GDP growth of 3.2% is expected to result in 4.7% increase in demand for airline services. Passenger demand is now expected to grow 4.4% and demand for cargo services is expected to increase 5.5%.

The combined capacity of passenger and cargo is expected to expand by 5.8%, which is above the 4.7% increase in demand expected. Since the orders for the aircraft was placed anticipating a surge in demand, delivery of the some of the orders is due during the current year which will result in 5.8% increase in capacity. However, lower demand will lead to lowering of the load factors (a term used to measure capacity utilisation of the industry). Thus, aircraft utilisation is also expected to dip.

A look at the regional performance forecasts reveals that

  • the Asia-Pacific carriers are expected to be the most profitable across regions. Asia-Pacific airlines carry 40% of global air freight volumes. While the Japanese earthquake and tsunami are expected to dent the region’s overall prospects, rising demand from India and China is expected to boost traffic volumes in this region. Also, demand increases (6.4%) are expected to outpace capacity growth (5.9%) in this region.
  • profit of the North American airlines is expected to contract to one-third compared to the 2010 levels. Higher fuel prices, older, a less fuel-efficient aircraft fleet together with a sharp trade link with Japan is expected to dent the region’s profits.
  • The sovereign debt crisis is dampening demand from the European economies. Also, new and increased taxation of passengers is damaging price-sensitive demand.
  • Political unrest in parts of the region is hurting demand in the Middle East. Largest capacity expansion growth of 15.5% is planned in this region.
  • African carriers are forecast to be the only regional operations to post a loss during the year.

 Detailed Report: http://www.iata.org/pressroom/pr/Pages/2011-06-06-01.aspx

Categories: Aviation
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