Airlines on the Mend, Except in Europe

Europe's aviation industry is facing worsening losses, even as the rest of the world's airlines are expected to return to profit, the International Air Transport Association (IATA) warned yesterday.

Thanks to sharp improvements in the global economic outlook, particularly in the Far East, IATA is now forecasting $2.5bn (£1.7bn) profits for the industry this year, rather than the $2.8bn annual loss it predicted as recently as March.

"The global economy is recovering from the depths of the financial crisis much more quickly than could have been anticipated," IATA's director-general, Giovanni Bisignani, told the organisation's annual conference in Berlin yesterday. "Airlines are benefiting from a strong traffic rebound that is pushing the industry into the black."

Global passenger demand is now expected to grow by 7.1 percent this year, cargo demand by 18.5 percent, and yields by 4.5 percent. And every region except Europe is on track to make money. In Asia-Pacific, profits are expected to hit $2.2bn; in North America $1.9bn; in Latin America $900m. Even in Africa, airlines are looking at $100m profits – their first since 2002.

But in Europe, the industry is lagging so badly that IATA has actually downgraded its forecasts, and is now forecasting $2.8bn losses, even worse than the $2.2bn loss it was forecasting three months ago.

"The recovery is asymmetrical," Mr Bisignani said. "Worsening conditions in Europe are in sharp contrast to improvements in all other regions."

The biggest factor behind Europe's poor performance is the economic situation. With GDP growth expected to be a meagre 0.9 percent this year – compared with the whopping 7 percent expected in Asia (excluding Japan), and as much as 9.9 percent in China – European air travel is simply not seeing the boost in traffic volumes becoming evident elsewhere.

But economics is just one of a litany of difficulties bedeviling the region's airlines. There is also a political dimension. A lack of political leadership is creating immense uncertainty over the Greek sovereign debt crisis and the implications for the euro, weighing down demand for travel and sending consumers hunting extra-hard for bargain, IATA says.

The region's airlines are also struggling with industrial relations problems, including cabin crew strikes at British Airways (BAIRY) and pilot walk-outs at Lufthansa (DLAKY) earlier in the year. And then there was the eruption of Iceland's Eyjafjallajokull volcano, which closed vast swaths of European air space for six consecutive days in April and for various short periods since. Although demand is now returning to normal, the ash cloud crisis cost the global industry some $1.8bn in lost revenues, of which 70 percent was borne by European carriers, according to IATA's latest estimates.

Even the good news for the worldwide industry comes with a warning. Total revenues are now forecast to come in at $545bn this year, compared with $483bn in 2009. But they are still below the $564bn seen the year before. And with profit margins running at a slender 0.5 percent, it would take only a slight dip – such as a shift in the oil price, or a miscalculation in airlines' capacity adjustments – to flip the industry back into the red.

"The industry is fragile," Mr Bisignani said. "The challenge to build a healthy industry requires even greater alignment of governments, labour, and industry partners. They must all understand that this industry needs to continue to reduce costs, gain efficiencies, and be able to restructure itself if it is to be sustainably profitable."

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