IATA downgrades industry outlook on rising oil prices

The International Air Transport Association (IATA) has downgraded its industry outlook for 2012 due largely to rising oil prices.

IATA expects airlines to report a global profit of $3.0 billion in 2012 with a 0.5 per cent margin. This $500-million downgrade from the December forecast comes due to a rise in expected average price of oil to $115 per barrel, up from the earlier projected $99. A more drastic downgrade was prevented due to several factors including: (1) the avoidance of a significant worsening of the eurozone crisis, (2) improvement in the US economy, (3) cargo market stabilisation and (4) slower than expected capacity expansion.

According to Tony Tyler, IATA's director general and CEO, 2012 continued to be a challenging year for airlines. He added, the risk of a worsening Eurozone crisis had been replaced by an equally toxic risk - rising oil prices. He said the damage was being felt already with a downgrade in industry profits to $3.0 billion.

Airline performance is closely associated with global GDP growth and from patterns of trends recorded, GDP growth dropped below 2.0 per cent, the global airline industry returned a collective loss. With GDP growth projections now at 2.0 per cent and an anaemic margin of 0.5 per cent, it would not take much of a shock to push the industry into the red for 2012, according to Tyler.

IATA revised its estimated profits upwards for 2011 to $7.9 billion from the earlier forecast $6.9 billion largely due to the much better than expected performance of Chinese carriers.

The major driver of reduced profitability was rising oil prices and in December 2011, the consensus forecast for 2012 stood at $99 / barrel for Brent crude. The average price year-to-date was approaching $120 and the consensus forecast for the year had been revised to $115 (from the $99 forecast earlier).