Airline Profits to Drop 40% on Taxes, Oil, Group Says

IATA CEO Giovanni Bisignani
International Air Transport Association Chief Executive Officer Giovanni Bisignani said, “Margins remain pathetic.” Photographer: Chris Ratcliffe/Bloomberg

Airlines may post a 40 percent decline in combined profits next year on slower economic growth, higher fuel costs and austerity measures in Europe, a leading industry group said today.

Net income will drop to $9.1 billion in 2011 from $15.1 billion this year, International Air Transport Association Chief Executive Officer Giovanni Bisignani told reporters in Geneva. With revenue set to grow 5.8 percent to $598 billion, the profit margin will fall by almost half to 1.5 percent, he said.

“Margins remain pathetic,” Bisignani said. “The recovery cycle will pause in 2011. Although the $9.1 billion profit projection for 2011 is better than we had previously forecast, next year the industry will face tougher conditions than what we are experiencing today.”

Airlines face an uneven rebound in air-travel demand after the deepest economic slump since World War II. European carriers such as Deutsche Lufthansa AG are struggling to increase fares, while economic growth in Asia and capacity cuts in North America are helping boost profits there.

“The industry is fragile and balancing on a knife edge,” Bisignani said. “Any shock could stunt the recovery, as we are seeing with the results of new or increased taxation on airlines and travelers in Europe.”

Previous Forecasts

IATA’s previous global profit forecasts for 2010 and 2011, made in September, were $8.9 billion and $5.3 billion, respectively.

After losses of $51 billion from 2001 to 2009, the industry isn’t “even close” to recovering half its cost of capital, which is between 7 percent and 8 percent, Bisignani said.

British Airways Plc, Europe’s third-largest carrier, said today that it will increase fuel surcharge on long-haul flights from Dec. 16 by 10 pounds ($16) per passenger per flight, reflecting the recent increase in oil price. That would be the first jump since June 2008, according to Richard Goodfellow, a London-based spokesman.

An increase in the average price of oil to $84 a barrel next year from $79 in 2010 will lead to fuel making up 27 percent of airline costs next year, IATA said. Jet fuel and labor are typically the largest costs at airlines.

German Taxes

Oil traded near $90 a barrel on forecasts that U.S. crude stockpiles are declining as colder weather approaches the nation. The January contract was at $88.37 a barrel at 4:25 p.m. in New York. Prices have risen 27 percent in the past 12 months.

Higher taxes in Germany, Austria and the U.K. will increase travel cost by a range of 3 percent and 5 percent next year, “enough to discourage travel and slow the industry recovery,” IATA said.

“This year profit have been significantly higher than we would have expected coming out of the recession,” said Jonathan Wober, an analyst at Societe Generale SA in London. “Clearly there are always risks, global GDP growth being the most important, but it seems we are still in an upswing.”

The eight-company Bloomberg EMEA Airlines Index climbed 0.6 percent, while the 12-carrier Bloomberg U.S. Airlines Index fell

0.7 percent at 4:15 p.m. in New York. The U.S. gauge has dropped

8.7 percent after reaching a 2010 high on Nov. 5.

Delta, United

Net income for Asia-Pacific carriers, the most profitable group that includes Singapore Airlines Ltd. and Cathay Pacific Airways Ltd., will decline to $4.6 billion next year from $7.7 billion in 2010, IATA said.

North America airlines, led by United Continental Holdings Inc. and Delta Air Lines Inc., are facing a decline in 2011 profit to $3.2 billion from $5.1 billion.

European airlines’ profit will fall to $100 million in 2011 from $400 million this year, IATA said. In September, IATA predicted a $1.3 billion loss for 2010 for Europe, the weakest among the regions in the forecast.

The organization cut its 2010 forecast for growth in air-freight demand to 18.5 percent from 19.8 percent, and fares will probably grow 7 percent instead of 7.9 percent as companies are completing a restocking of inventories. Demand for cargo will grow 5.5 percent next year while average prices will be little changed, IATA said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE