Almost against all odds, the global airline industry showed surprising robustness in 2011, but the air freight business was a different story.
Global passenger demand was likely to grow by 6.1%, a pace faster than the International Air Transport Association (IATA) had earlier anticipated, while air cargo growth rates started to fall in mid-2011.
By October the air freight sector had contracted by 5% compared to mid-year and the last quarter was no different, with all major routes declining further.
However, traffic is one thing and profits are another. The industry saw its profitability remaining weak with a forecast net profit of US$6.9 billion for a net margin of merely 1.2% on a projected revenue of $596 billion.
Given unresolved concerns about the euro-zone debt crisis, and widespread uncertainty about the global economic outlook for 2012, airlines are bracing themselves for another tough year ahead.
Indeed, the bleak outlook has prompted IATA to warn that if the euro-zone debt crisis developed into a full-blown banking crisis and European recession, it would have severe consequences for the world's airline industry with losses running in excess of US$8 billion.
"The biggest risk facing airline profitability over the next year is the economic turmoil that would result from a failure of governments to resolve the euro-zone sovereign debt crisis. Such an outcome could lead to the biggest losses since the 2008 financial crisis," said IATA director general Tony Tyler.
A more optimistic view is for a $3.5 billion profit next year, a margin of 0.6% on revenues of $618 billion, said the industry body representing 240 airlines handling 84% of world's air traffic.
But even the $3.5 billion profit outlook was a downgrade from IATA's previous projection of $4.9 billion.
Even if government intervention averts a banking crisis, it is unlikely Europe will avoid a brief recession. Business and consumer confidence have fallen too far, said Mr Tyler, formerly chief executive of Cathay Pacific.
Global GDP forecasts for 2012 have been cut to 2.1%, and historically the airline industry records losses whenever global GDP growth falls below 2%.
In the worst case scenario, Europe is expected to post the deepest losses next year at $4.4 billion, followed by North America at $1.8 billion and Asia-Pacific at $1.1 billion.
The Middle East and Latin America would both be expected to post $400 million in losses, while Africa would be $200 million in the red.
"This is by no means an unimaginable scenario, which should serve as a wake-up call to governments around the world," he said.
Highlights of regional performance in 2011:
- European carriers are in the most challenging position by far. Higher passenger taxes and weak domestic market economies have limited profitability in Europe.
The region's carriers are forecast to generate a collective profit of just $1 billion, down from the previously forecast $1.4 billion, and an EBIT margin of 1.2%.
Profitability has been low despite European airlines being one of the fastest growing in terms of traffic last 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 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%. Nonetheless, the bankruptcy filing of American Airlines indicates that the region faces intense competitive challenges as well.
- Asia-Pacific airlines also saw stronger though varied trading conditions. Japan's domestic market has still 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.
The IATA has upgraded its forecast for the region by $800 million to a $3.3 billion profit. This is the largest absolute profit among all regions.
- Middle Eastern carriers are expected to see profits of $400 million, down from the previously forecast $800 million, as high fuel costs squeeze profit margins on the more price-sensitive long-haul traffic connecting via Middle Eastern hubs.
- Latin American profits, in a similar pattern, 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 in 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 improvements in economic development in many African nations.
However, competition has been fierce and the region's airlines have struggled to keep load factors at profitable levels.
Outlook for Asian airlines:
Despite concerns about the euro-zone debt crisis and uncertain global economic outlook for 2012, the region's carriers could be better off, according to the Association of Asia-Pacific Airlines (AAPA).
The region is still relatively well placed to benefit from future growth opportunities and the outlook for the longer term remains positive, as evidenced by fleet expansion plans and the establishment of new business ventures, according to AAPA secretary-general Andrew Herdman.
In spite of growing concerns about a further slowdown in the global economy, passenger travel markets have held up reasonably well so far, with Asian airlines seeing a 3.6% increase in international air passenger numbers for the first 11 months of 2011.
Less encouragingly, Asian carriers registered a 4.8% decline in international air cargo demand during the same period, reflecting cautious management of supply chain inventory levels given the prospect of weaker consumer demand in the major developed economies.
Collectively, the region's airlines carry 620 million passengers and 18 million tonnes of cargo, representing a quarter of global passenger traffic and two-fifths of global air cargo traffic, respectively.
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