Airlines' profit estimate for 2011 downgraded to $4 bn

The International Air Transport Association (IATA) has further downgraded its 2011 airline industry profit forecast to $4 billion.

This would be a 54% fall compared to the $8.6 billion profit forecast in March and a 78% drop from the $18 billion net profit (revised from $16 billion) recorded in 2010.

On expected revenues of $598 billion, a $4 billion profit equates to a 0.7% margin.

"Natural disasters in Japan, unrest in the West Asia and North Africa, plus the sharp rise in oil prices have slashed industry profit expectations to $4 billion this year. That we are making any money at all in a year with this combination of unprecedented shocks is a result of a very fragile balance," said Giovanni Bisignani, the IATA's Director General and CEO.

"The efficiency gains of the last decade and the strengthening global economic environment are balancing the high price of fuel. But with a dismal 0.7% margin, there is little buffer left against further shocks," he said.

According to IATA, West Asian carriers will deliver a $100 million profit, down from $900 million in 2010.

Political unrest in parts of the region is hurting demand. The major airlines in the region are expected to continue to win market share on long-haul markets, flying passengers via Middle Eastern hubs.

However, high fuel costs will weaken demand from key passenger segments and asset utilisation will be under downward pressure.

Capacity growth of 15.5% is expected to outstrip demand expansion of 14.6%. The cost of fuel is the main cause of reduced profitability. The average oil price for 2011 is now expected to be $110 per barrel (Brent), a 15% increase over the previous forecast of $96 per barrel.

For each dollar increase in the average annual oil price, airlines face an additional $1.6 billion in costs. With estimates that 50% of the industry's fuel requirement is hedged at 2010 price levels, the industry 2011 fuel bill will rise by $10 billion to $176 billion.

Fuel is now estimated to comprise 30% of airline costs -- more than double the 13% of 2001.

"We have built enormous efficiencies over the last decade. In 2001, we needed oil below $25 per barrel to be profitable. Today, we are looking at a small profit with oil at $110 per barrel," said Bisignani.

This fuel price spike is substantially different from the one that occurred in 2008.