Currently, Europe is facing a stern economic and political crisis. This has affected several domains of the economic activities of the continent and of the world in general. Airlines are amongst the domains that have been affected. According to the International Air Transport Association (IATA) profitability of airlines for 2011 remains weak but unchanged at $6.9 billion for a net margin of 1.2%. Looking ahead to 2012, IATA downgraded its central forecast for airline profits from $4.9 billion to $3.5 billion for a net margin of 0.6%. Nevertheless, if the Eurozone crisis evolves into a full-blown banking crisis and European recession, IATA estimates that global aviation industry may suffer losses exceeding $8 billion in 2012.
This is further highlighted in the statement of Tony Tyler, IATA’s Director General and CEO who said that: “The biggest risk facing airline profitability over the next year is the economic turmoil that would result from a failure of governments to resolve the Eurozone sovereign debt crisis. Such an outcome could lead to losses of over $8 billion-the largest since the 2008 financial crisis.”
As it is clearly shown from the abovementioned ascertainment European airlines predicted to be hit harder from the crisis that European Union is currently facing. According to IATA’s estimations European airlines are expected to experience small losses. Regarding North American Airlines capacity cuts are expected to provide some protection to profitability, whereas in Asia IATA’s estimations predict significant profits generated by high load factors on China’s expanding domestic market.
During the 3rd quarter of 2011 air travel demand provided an important support to airline cash flows and profitability. On the other hand freight markets had already begun to decline by the middle of the year. It is indicative that between May and October worldwide air freight markets shrank by 5%. The explanation to this trend is that the bend in world trade and business confidence has led shippers to switch to cheaper methods of transportation. This trend is expected to continue in 2012. The main reason is that even if the European governments avert a banking crisis it is highly unlikely that Europe will avoid a brief economic recession. As a result business and consumer confidence will further fall driving the downgrade in the 2012 outlook.
Epicos Newsletter Head Editor