Eurozone Crisis Biggest Risk to Profits

• 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 just $1.0 billion, down from the previously forecast $1.4 billion, and an EBIT margin of 1.2%. Low profitability has been despite European airlines being one of the fastest growing regions in terms of traffic this year. Yields have suffered and the base of strong demand grows more fragile as the sovereign debt crisis escalates.

• North American carriers are in a much more benign environment. They have seen yield and load factor improvements as a result of tight capacity management, which has improved profitability to $2.0 billion (up from the previously forecast $1.5 billion). The US economy has also grown at a faster pace than Europe. This gives the region the strongest EBIT margin of 3.2%. None-the-less, the bankruptcy filing of American Airlines indicates that the region faces intense competitive challenges as well.

• 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. We have 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 squeezed profit margins on the more price sensitive long-haul traffic connecting over 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.

• Demand: Passenger demand is expected to grow by 4.0% (down from previously forecast 4.6%), while cargo is expected to show flat growth (down from the previously forecast 4.2% expansion).

• Yields: Passenger and cargo yields are expected to remain flat in 2012. While this is unchanged for cargo, passenger yields were previously forecast to grow by 1.7%.

• Fuel: Fuel costs are relatively unchanged from the previous forecast at $198 billion. That is based on oil at $99 per barrel (against a previous forecast of $100 per barrel).

• Revenues and Costs: Industry revenues are expected to grow by 3.7% to $618 billion. This will be outstripped by cost increases of 4.5% to $609 billion.

• 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%, as limited capacity growth is providing some protection against the downward pressure on profits.

• Asia-Pacific carriers are expected to deliver the largest absolute profit at $2.1 billion. This is weaker than 2011’s performance but the deterioration is limited by high load factors on markets such as China, where the increases in demand are structural and to some extent shielded from the cycle.

• Middle East carriers are expected to post a $300 million profit, less than half the previously forecast $700 million profit, as long-haul market conditions deteriorate, in particular those linked to the weak European economies.

• Latin American carriers will see profits decline to $100 million—a $400 million negative swing from the previous forecast, partly a carry-over from the recent weakness of profitability in the large Brazil market.

• African carriers will fall into losses of $100 million, unchanged from the previous forecast. Economies and air transport markets continue to grow in the region, but load factors are not expected to be strong enough to offset the impact of weaker yields on profitability.