IATA Reports Lagging Airline Profits Heading into Third Quarter
IATA Reports Lagging Airline Profits Heading into Third Quarter
By Kate Rice
The International Air Transport Association (IATA) reported that airline profits are down significantly heading into the third quarter. The airline industry typically earns 80 percent of its profits in the second and third quarters, with seasonal losses in the first quarter and a weaker fourth quarter.
For 2011 so far, second quarter net profits have totaled $1.8 billion, which is almost 60 percent down compared with last year. During the first half of the year the industry broke even, compared with net profits of around $3 billion during the same period last year.
The deterioration in profits is widespread, but European airlines did manage to improve when compared to last year, when the Iceland volcanic ash impacted second quarter profits. Meanwhile, fuel costs have decreased to some degree. Since peaking in April, jet kerosene prices have been trending downwards.
But prices have still been very volatile swinging up or down 10 percent. Moreover, the decline in fuel pricing is slow and jet fuel prices still remain around 50 percent higher than they were a year ago. Japan’s nuclear outages and the absence of Libyan oil could add to the economic pressures pulling oil prices down.
However, most forecasts and the futures market still see oil prices remaining above $100 per barrel next year. Despite the economic gloom, air travel continues to expand close to its trend growth rate in July, which IATA set at 5.9 percent year-on-year growth. At the same time, airlines have been announcing cutbacks to capacity plans, but so far there is little sign of a slowdown.
The expansion in passenger capacity has been close to the trend growth in demand. There has been a minor slowdown in the pace of new aircraft delivered, with 86 in July compared with more than 100 in the previous four months. Overall a little more than 0.5 percent was added to seat capacity.
At an annualized rate of 6-7 percent this means that airlines may have to start cutting utilization rates in order to keep available capacity in line with slowing demand, which would not be good for profitability. Meanwhile, passenger yields are back to pre-recession levels in U.S. but international fares are softer.
U.S. airlines had instituted earlier capacity cuts, which led subsequently to high load factors, allowing them to reflect high fuel costs in improved yields. Outside the U.S. the improvement has not been so strong. This is partly why average fares are rising at a slower pace.
