The International Air Transport Association (IATA) further downgraded its 2011 airline industry profit forecast to US$4 billion. This would be a 54 percent fall compared with the $8.6 billion profit forecast in March and a 78 percent drop compared with 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 percent margin.

“Natural disasters in Japan, unrest in the Middle East and North Africa, plus the sharp rise in oil prices have slashed industry profit expectations to $4 billion this year," said Giovanni Bisignani, IATA’s director general and CEO. "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. 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 percent margin, there is little buffer left against further shocks.” 

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, a 15 percent 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 percent 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 percent of airline costs—more than double the 13 percent of 2001.

“We have built enormous efficiencies over the last decade," Bisignani said. "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."

Robust economic conditions have given airlines some scope to partially recover higher fuel prices. This is reflected in an increased yield growth forecast of 3 percent for passenger traffic (double the previously forecast 1.5 percent) and 4 percent for cargo (up from the previously forecast 1.9 percent). The problem is that higher travel costs are now weakening price-sensitive demand, and airlines are not expected to be able to offset higher costs with increased revenues.

The key risk to this outlook is a weakening of global economic growth. High energy prices will certainly have a slowing impact on this growth. However, the impact will be mitigated by two factors. First, while high oil prices previously triggered recessions, today’s economies (which generate a unit of GDP using just half the energy required in the mid-1970s) are less sensitive. Second, the corporate sector is cash-rich, business confidence is high and world trade continues to expand at around 9 percent annually. The International Monetary Fund and others have raised global growth projections, which would indicate a recovery in demand growth to the historical 5.6 percent level for the second half of 2011. IATA’s forecast for continued, albeit lower, airline profits despite $110 a barrel oil prices, is dependent on a strong economy to generate sufficient revenues to partially offset higher fuel costs.