International airline association said Middle East airlines are expected to post profits of $400 million this year, down from the March projection of $0.5 billion.
Speaking at the International Air Transport Association (IATA) annual general meeting in Beijing, executives said projections are expected to register a significant drop compared with 2011, when the region’s carriers returned a profit of $1 billion.
“The weakness of European originating traffic will damage long-haul markets, but Middle East airlines continue to lead the industry on growth. Along with capturing long-haul passenger traffic through the Gulf hubs, they have been the beneficiary of 80% of the improvement in cargo markets during the past six months. Overall, capacity by the region’s carriers is expected to expand by 13.3%, behind the 14.1% growth in demand,” IATA said in its industry forecast.
Global aviation profits are expected to be around $3 billion, unchanged from the last IATA update in March. Experts believe falling oil prices, stronger than expected passenger traffic growth and a bottoming out of the freight market are some of the driving forces behind the profitable outlook.
“The industry’s profitability is balancing on a knife edge,” said the IATA’s executive director, Tony Tyler.
The deepening of European sovereign debt crisis is set to further deteriorate economic growth and have an adverse impact on the airline industry which is witnessing a second year of declining returns since airline profits peaked in 2010 at $15.8 billion with a net profit margin of 2.9%. Industry profits dropped to $7.9 billion for a 1.3% net profit margin in 2011. This year’s projected $3 billion industry profit would yield a net profit margin of just 0.5%.
Cargo demand has bottomed out, following a sharp fall in 2011, in line with the moderate improvement of business confidence in a number of economies outside Europe.
However, IATA said the upturn is weak and narrowly based, with only Middle Eastern airlines seeing significant volume gains. Overall, 47.8 million tonnes of freight are expected to be shipped by air in 2012, unchanged from the 47.7 million tonnes carried in 2011.
“There has been no let-up in the volatility of the economic environment. A few months ago, an oil price crisis was the biggest risk. Now all eyes are back on Europe. Markets are expecting the Eurozone sovereign debt crisis to intensify and economic damage to follow. But with little clarity on how European governments will manage the situation beyond providing further liquidity, the risk of a major downward shift in economic prospects is very real. The next months are critical and the implications are big,” said director general Tony Tyler.