Airline Industry Profits Driven by Asian Carriers, Europe still in Crisis

2012 will be a tough year for airlines globally. With fuel prices at unsustainable levels and the threat of a major breakdown in the Eurozone area looming, airlines need to take action. Yet the most pressing issue is the lack of sustainable profitability in an industry used to negative results.

The 68^th International Air Transport Association (IATA) Annual General Meeting (AGM) took place in Beijing this year, with discussions focusing on the key factors that impact airline profitability and operating costs. This is nothing new. In the 68 years of the AGM net profit margins have rarely exceeded 3%, making airlines the worst performers in the air transport value chain.

For a third year in a row IATA members witnessed modest profit margins, albeit driven by the Asian carriers. Overall airline profits, in all regions apart from the Middle East, are expected to fall in comparison to 2011, falling from $8bn to $3bn in total. However Global GDP, a key driver of air traffic growth, and passenger numbers are expected to grow, while average jet fuel prices for the year are expected to be lower.

The industry is witnessing a paradox: even though demand is on a constant rise and airlines become more sophisticated in delivering value to passengers, profits are elusive. This is due to the impact of external factors, over which airlines have very little control, such as the global economic crisis and physical disasters. Operating costs are heavily dependent on jet fuel price fluctuations, with fuel currently representing 35% of total operating costs which is up from 15% a decade ago.

Even though its impact is still limited, the European Emissions Trading Scheme (ETS) has also been a major topic of discussion at this year’s AGM, as it is expected to add 1% to an average return ticket price. Fears of a full blown trade war between foreign and EU aviation authorities are exaggerated, with the EC expected to back down and postpone implementation to 2013, when ICAO will take control of the issue during its assembly.

As the industry is still very inefficient, consolidation will intensify in the next few years. Consolidation in the form of mergers and acquisitions, as well as strategic partnerships, allow the creation of synergies, cost efficiencies and economies of scale. The implementation of major restructuring programmes is also key in raising profitability. Unification of revenue management processes across an airline group’s global locations, co-ordination of flight schedules and redeployment of aircraft are some of the steps airline groups have to take for sustainable profit generation.