Mideast carriers seen making $700m profit in 2011

The International Air Transport Association (IATA) has upgraded its airline industry outlook for the Middle East in 2011 despite a global downgrade.

Middle East carriers are expected to return a profit of $700 million, considerably better than the $400 million previously forecast, but down from the $1.1 billion profit that the region posted in 2010.

Political instability in the region is expected to take its toll in Egypt, Tunisia and Libya which combined account for about 20 percent of the region’s international passenger traffic.

But the Gulf area is expected to perform strongly, buoyed by economic activity related to high oil prices and whose hubs continue to win long-haul market share. 

Load factors have also improved significantly for these airlines, as new capacity is being added at a slower pace than demand increases, IATA said in a statement.

Globally, IATA downgraded its airline industry outlook for 2011 to $8.6 billion from the $9.1 billion it estimated in December 2010. 

This is a 46 percent fall in net profits compared to the $16 billion (revised from $15.1 billion) earned by the industry in 2010. 

On expected industry revenues of $594 billion, the $8.6 billion 2011 profit equates to a net profit margin of 1.4 percent.

“Political unrest in the Middle East has sent oil over $100 per barrel. That is significantly higher than the $84 per barrel that was the assumption in December," said Giovanni Bisignani, IATA’s Director General and CEO.

"At the same time the global economy is now forecast to grow by 3.1 percent this year—a full 0.5 percentage point better than predicted just three months ago. But stronger revenues will provide only a partial offset to higher costs. Profits will be cut in half compared to last year and margins are a pathetic 1.4 percent.”

IATA raised its 2011 average oil price assumption to $96 per barrel of Brent crude (up from $84 in December), in line with market forecasts.

Including the impact of fuel hedging, which is roughly 50 percent of expected consumption, this will increase the industry fuel bill by $10 billion to a total of $166 billion.

Compared to levels in 2010, oil prices are now expected to be 20 percent higher in 2011.  Fuel is now estimated to represent 29 percent of total operating costs (up from 26 percent in 2010).

IATA added that an increase in global GDP forecasts to 3.1 percent (from 2.6 percent in December) boded well for continuing strong demand for air transport.

In line with this, IATA revised its passenger demand growth forecast to 5.6 percent (from 5.2 percent) and its cargo growth forecast to 6.1 percent (up from 5.5 percent).

Bisignani added: “This year the industry is performing a balancing act on a very thin tight-rope of a 1.4 percent margin. It is a structural problem that the industry has faced with an average margin of just 0.1 percent over the last four decades.

"There is very little buffer for the industry to keep its balance as it absorbs shocks. Today oil is the biggest risk. If its rise stalls the global economic expansion, the outlook will deteriorate very quickly.”