Transport Airlines

Consolidation and capacity cuts help lift airline profit outlook by 63 percent

Dec 15, 2012 1:36 am

Skift Take

Competition in the aviation industry is shrinking as mergers and joint ventures become the norm for airlines looking to cut costs and capacity to battle rising fuel costs and a global recession.

— Samantha Shankman

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Airline earnings this year are likely to be 63 percent higher than previously forecast as capacity cuts and mergers prompted by the economic slump take hold, the International Air Transport Association said.

Industry-wide net income should reach $6.7 billion, versus a forecast of $4.1 billion in October, IATA said. Profit next year may increase to $8.4 billion, $900 million more than last predicted though still short of the $8.8 billion return in 2011.

Sluggish growth and fuel costs have weighed on earnings for the past two years, triggering efforts to reduce capacity, cut costs and accelerate consolidation. The biggest improvement has been in Europe, where airlines that were forecast to lose $1.2 billion will break even in the wake of job cuts and takeovers.

“There are further opportunities for consolidation in Europe,” IATA Chief Executive Officer Tony Tyler said. Smaller airlines may find a home in the big three groups of Air France- KLM Group, Deutsche Lufthansa AG and International Consolidated Airlines Group, though others could also go bust, he added.

The forecast performance for Europe’s airlines would still represent a $400 million decline from a year ago. North American carriers will be among the few to see gains on last year, with a likely collective profit of $2.4 billion, IATA said.

Narrow margins

Asia-Pacific operators may see the largest drop, the trade body said, with a profit of $3 billion, down from $5.4 billion.

Margins remain “perilously close” to the point where the industry turns to a loss, IATA said. Net income is expected to reach 1 percent of revenue this year and 1.3 percent in 2013, when carriers may carry more than 3 billion passengers for the first time.

“Things are moving in the right direction, but the positive shift is not moving airlines anywhere to the 7 percent to 8 percent that would be needed to cover the industry’s cost of capital,” Tyler said at a briefing in Geneva.

European airlines are not expected to return to profit next year, with the region the weakest global performer as the impact of its efficiency measures is offset by a worsening economic outlook, IATA Chief Economist Brian Pearce said in an interview.

North American airlines are likely to continue gains in 2013, with profit reaching $3.4 billion, compared with $3.2 billion in the Asia-Pacific and $1.1 billion in the Middle East.

“We have seen a number of mergers on the U.S. domestic markets and that has achieved economics of scale that have benefited investors and consumers,” Pearce said of the North American revival. Capacity also has been constrained, he said.

Editors: Chris Jasper and Andrew Noel. To contact the reporter on this story: Robert Wall in London at rwall6@bloomberg.net. To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net. 

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