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Why U.S. airline profits will beat carrier profits in the rest of the world

@denschaal

Oct 01, 2012 9:20 am

Skift Take

Passenger demand growth in North America is projected to be tepid, at 1.3% in 2012, but tight controls on capacity have improved the profit picture.

— Dennis Schaal

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IATA’s revised global aviation outlook forecasts that airlines in North America will produce the largest improvement in profits in 2012 of any region of the world.

Carriers in North America are expected to see profits rise 46.1% to $1.9 billion in 2012, IATA says, and that’s a half a billion dollar increase from the previous IATA forecast in June.

IATA attributes the improvement in large part to “tight capacity management,” which means that passenger demand outpaced growth in available airline seats.

Photo courtesy Delta Air Lines

“Over the first eight months of the year, passenger demand grew by 1.3% while capacity expanded by just 0.2%,” IATA says of North America. “As a result, the region has also maintained consistently high load factors –averaging 83.2% for the January to August period.”

In fact, North America and Latin America are the only two regions expected to see profit improvements in 2012, compared with 2011. Carriers in Latin America are expected to see profits rise 33.3% to $400 million in 2012, IATA states.

Overall, global airline profits are projected to be cut in half — falling 51.1% — to $4.1 billion in 2012, although that’s an improvement from $3 billion in profits projected in June.

The world’s airlines are expected to see profit margins of 0.6% for the year, down from 2011’s 1.4%, IATA projects.

“The European sovereign debt crisis lingers on,” says Tony Tyler, IATA’s CEO. “China continues to moderate its growth. And the impact of recent quantitative easing in Japan and the US will take time to yield growth. While some of these risks have diminished slightly over recent months, they continue to take their toll on business confidence. The outlook improvement is due to airlines performing better in a difficult environment.”

Improved profits tied to better performance and consolidation

Despite the tough going, IATA states that airlines globally have improved performance by managing load factors and keeping aircraft utilization high.

And, all of those airline mergers that have dominated headlines are also helping to improve performance, too, IATA states.

“The evidence is showing that consolidation is producing positive results,” IATA states.

In addition to North America and Latin America, the following is IATA’s take on other regions:

Europe was the only region to be forecast to be in the red in 2012. Its airlines were projected to show a $1.2 billion loss in 2012, and it would be $100 million worse than in the June estimate. Premium travel within the North America and European markets is projected to be down 2.4% and 3.5%, respectively, compared with 2011.

Asia-Pacific airlines are forecast to net $2.3 billion in profits in 2012, and that’s a $300 million improvement from the June forecast. The region controls 40% of the world’s cargo market, and demand has been soft. However, strength in passenger markets offset a 6.6% drop in cargo demand in the first eight months of 2012.

Middle East airlines are projected to notch $700 million in profits in 2012, and that’s an improvement from the $300 million forecast in June. The region has captured increased cargo demand, and its passenger demand growth of 17.1%, which outstripped capacity, was the world’s largest. Carriers in the Middle East have seen their share of international passenger traffic grow from 4.8% a decade ago to 11.5% in August.

African airlines are forecast to “break even” in 2012, IATA states, although the June forecast looked to a loss of $100 million. Trade links with China, and growth in the economies of many African countries have benefited the region’s airlines. However, load factors in Africa on average are the lowest on the planet, IATA states.

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