IATA

IATA warns of weakening markets amid continued economic weakness

A further weakening of air travel and freight markets in the months ahead looks likely, according to IATA, which reported a further softening of global air traffic demand in Nov-2011 amid continued weakness in the global economy. IATA, in its Nov-2011 Air Transportation Market Analysis, added that air cargo markets have contracted by around 4% from Jan-2010 levels, compared to growth of around 2% in passenger markets.

However, IATA director general and CEO Tony Tyler noted that despite this relative growth in the passenger markets, “the trend has been both soft and volatile” and “continuing economic uncertainty will likely mean market shortcomings deepening as we enter 2012”. Business confidence, as represented by the Purchasing Managers’ Index, is also persisting at levels that signal contraction, indicating further weakness ahead.

Jade Cargo suspension reflects trend of slowing air freight demand & pressured freight profitability

The business environment for air cargo has continued to weaken in 4Q2011, with IATA in its 4Q2011 Cargo E-Chartbook labelling the outlook for freight profitability as “pessimistic” and the revenue outlook as “weak”. This has occurred amid declining cargo rates, which has placed downward pressure on yields and revenues, while costs have remained high, despite some recent relief from declining jet fuel prices in Dec-2011 and reduced labour costs.

Reflecting pressures in the cargo market, Jade Cargo International on 31-Dec-2011 announced the temporary suspension of its services "due to overall weak air cargo demand". The carrier added the suspension of service will "provide the shareholders with an opportunity to coordinate with stakeholders to continue with the restructuring of the company’s financial structure". As a result of the suspension, the carrier's six Boeing 747-400ERFs aircraft have temporarily been grounded. According to reports in Boersen Zeitung, Jade Cargo no longer has the funds to purchase fuel for its six 747 aircraft. Lufthansa Cargo stated the company "believes in the future" of Jade and "hopes to find a solution in the next few weeks".

2012 marks beginning of next chapter in US airline industry

While downturn is rife in the airline industry, the US industry will do relatively well, with IATA expecting the US industry to post USD2 billion in earnings in 2011 and USD2.9 billion in 2012 as US carriers limit capacity growth, keeping load factors high.

Within the US there was a higher than expected consumer retailing at the end of the year, and while unemployment is still high it has shown a steady decrease since the last half of 2011.

IATA notes contracting premium travel demand while Cathay Pacific outlines premium economy product

The share of premium seats as a portion of total travel is contracting, with premium seat share falling back towards the lows of early 2009 when it touched 7.5% of total traffic, according to airline industry body IATA. Given the continued growth in economy travel, IATA believes it is probable there has been a degree of substitution away from premium travel to economy, as businesses seek to cut cost in difficult economic conditions.

This changing seat class mix will undermine yields, and hence profitability, with IATA also warning that stagnant international trade and declining business confidence points to further weakness in business travel and a challenging profitability environment for airlines in 4Q2011. IATA has previously commented on the increasing movement towards premium economy travel, which IATA includes as part of the ‘economy’ category. “In recent months, that structural downshift has been joined by the start of a new cyclical downturn,” IATA said last month.

Bad and worse – IATA’s two-case scenario for 2012

IATA has unusually provided two forecast scenarios for 2012 – a ‘central forecast’ and ‘banking crisis’ forecast – or perhaps more accurately, the ‘bad’ and ‘worse’ forecasts. Both show that global airline profitability is expected to be sharply lower than previously forecast. IATA is downgrading its ‘best case’ 2012 profit by 29% from USD4.9 billion, as forecast in Sep-2011, to USD3.5 billion for a net profit margin of just 0.6%, down from the previous forecast of 1.2%. The USD1.4 billion downgrade, which highlights the continued profitability challenge facing the world’s airline industry, will see global airlines report at best a 49% year-on-year reduction in net profitability from forecast profit levels of USD6.9 billion in 2011.

The reduction reflects the risk of recession in Europe and slower global economic growth, with IATA warning the industry could face a loss of USD8.3 billion if the euro zone crisis becomes a full-blown banking crisis. This ‘banking crisis’ forecast foresees every region having a net loss in 2012 while the ‘central forecast’ sees only Europe and Africa reporting net losses in the year. Meanwhile, the profitability forecast for 2011 remains unchanged, at USD6.9 billion for a weak net margin of 1.2%.

Sharper downturn in air travel expected in months ahead but upward trend in Oct-2011: IATA

In stark contrast to the decline in airfreight growth in Oct-2011, the trend for passenger air travel remained upwards in Oct-2011, but with very strong regional differences and weakening growth rates, IATA stated this week. IATA also cautioned that a “sharper slowdown in air travel is likely in the months ahead”, amid continued weakness in freight and economic markets and consumer confidence levels.

Global passenger traffic (RPKs) growth slowed to 3.6% in Oct-2011, with traffic growth rates weakening from the 6% average in the first 10 months of the year and a growth rate of 5.6% in Sep-2011. However, this decline in the year-to-year comparison was partly due to a spike in travel in Oct-2010, IATA said. International traffic, at 4.6% growth, was stronger than the 2.0% increase in domestic traffic in the month. Meanwhile, load factors weakened by 1.9 ppts to 77.6%.

Airlines and airports feeling impact of global economic weakness with continued freight pressures

Airlines and airports are feeling the impact of the current global economic weakness and declining consumer spending in Europe, which is having a noticeable impact on air cargo volumes. Cargo traffic, which generated USD66 billion in revenue in 2010, has declined every month since May-2011, according to IATA upon the release of its Oct-2011 traffic results, with a 4.7% year-on-year reduction in cargo demand in Oct-2011 amid reduced manufacturing confidence and businesses switching to slower modes of transport.

“Cargo is the story of the month. Since mid-year the market has shrunk by almost 5% and this is far greater than the 1% fall in world trade. Air freight is among the first sectors to suffer when businesses confidence declines,” IATA director general and CEO Tony Tyler said. Meanwhile, Boeing CEO Jim McNerney separately stated the company has seen a softening of freight demand in recent months, describing the freight market as a “watch item”.

Latin America, a bright spot for aviation, with continued growth and robust aircraft requirements

IATA, Boeing and Airbus have again noted the potential of the Latin American market, with IATA describing the region as a “bright spot in the aviation world” and Airbus commenting that Latin America’s aviation sector “has never been stronger”, following a boom in the sector over the past five years. Boeing has similarly noted the large potential in the Latin America market in its market forecast.

Latin America is “the only region generating aggregate profits for three consecutive years," IATA CEO and director general Tony Tyler noted at ALTA this month. On the outlook for the region, he commented: “Taking a long-term view of Latin American aviation, one can only be optimistic. The economic potential of this vast and varied geography can only be realised with a successful aviation industry”.

Stronger than expected premium traffic in Sept but structural shift in premium demand evident: IATA

International demand for premium-class travel again rebounded in Sep-2011 despite declining business confidence and economic uncertainty and early signals of a decline, IATA said. "We have pointed to the lack of further growth in international trade and the sharp declines in business confidence as reasons for expecting a decline in business travel and premium seat sales. So far, this has not happened," IATA said, while noting: "It still looks a matter of time before the deteriorating economic conditions pull premium travel lower."

This stronger-than-expected growth in premium and overall passenger levels in Sep-2011 has had a positive impact on airline yields and profits in 3Q2011. Correlating with the improvement in premium traffic volumes in Sep-2011, there was an improvement in premium revenues in Sep-2011, following a marked decline in Aug-2011, with declines in premium revenues to the lowest levels in 16 months. IATA noted that it “had not expected the strength to continue this long” although, given deteriorating business confidence, weakening international trade and strained economic conditions, IATA expects the situation to deteriorate and slow in the months ahead. 

Economic uncertainty, freight weakness and financing requirements weigh on the airlines: IATA

Weakening consumer confidence and economic uncertainty is placing further pressure on the world’s airlines and their investors. Airline share prices have taken a battering amid renewed economic concerns and representing a large downward revision in financial market expectations for airline profits. Jet fuel prices, while down from their Apr-2011 peak, continue to pressure the sector, according to IATA, while a slowing in travel volumes and slumping freight demand are also of concern. A continued influx of new aircraft is also driving continued capacity expansion, potentially impacting yields and load factors, and creating significant financing yields in an economically-weak environment.

Surprising passenger growth in Sep-2011 but weakness expected in the months ahead: IATA

Passenger traffic rose 5.6% year-on-year in Sep-2011, according to IATA, which described the result as a "pleasant surprise". However, despite the better-than-expected figures in the month, IATA stated it was preparing itself for weakness in the months ahead amid deteriorating business and consumer confidence and collapsing freight demand, the precursors for a slowdown in passenger growth: “We are still expecting a general weakening in passenger traffic as we head toward the year-end”. Meanwhile, there was a further deterioration of cargo volumes in Sep-2011, with a 2.7% contraction in the month, for the fifth consecutive month of declines, in line with falling business and consumer confidence. 

Despite stronger than expected growth in passenger markets during Sep-2011, the industry is expecting “more difficult times ahead” according to IATA.