Airlines cut ’11 profit forecast by more than half

By Saeed Azhar and David Fogarty

SINGAPORE (Reuters) – Global airlines have cut their 2011 profit forecast by more than half to $4 billion as high oil prices and turmoil in Japan, North Africa and the Middle East weigh on the industry’s recovery.

The International Air Transport Association (IATA), which represents most global carriers, disclosed the new forecast on Monday and also warned of a looming trade war if Europe moves ahead with plans to force airlines to join an emissions trading scheme next year. China said it would support legal action.

Airlines say the scheme, designed to tackle growing emissions from the aviation industry, will only increase costs and add to pressures already caused by the sluggish global economy.

“The efficiency gains of the last decade and the strengthening global economic environment are balancing the high price of fuel,” IATA’s director general, Giovanni Bisignani, told the group’s annual general meeting in Singapore.

“But with a dismal 0.7 percent margin, there is little buffer left against further shocks,” he said.

The IATA $4 billion profit forecast compares with an $8.6 billion forecast on March 2, just before the Japan earthquake and tsunami triggered a nuclear meltdown at a power station. Since then, the Arab uprisings have spread and oil has been well above $100 a barrel.

The forecast would mark a drop of more than three-quarters from the industry’s estimated 2010 profit, which was raised to $18 billion from $16 billion.

Economists say the industry’s outlook is a guide to the strength of cyclical recovery in developed markets and growth in emerging economies, which rely heavily on air transport.

Airlines rebounded faster than expected from recession last year, helped by higher traffic and a drive to keep a lid on spare capacity. But far too rapid expansion in capacity, a series of external shocks and higher oil prices have hit the industry hard this year.

Airlines had been bracing for lower 2011 forecasts at this week’s major conference as fears grow over the global economy.

On Monday, shares of major U.S. airlines slumped following the revised profit forecast. Industry leader United Continental Holdings was down 2.8 percent to $22.10 in New York, and Delta Air Lines was off 1.6 percent to $9.47. The Arca Airline index fell 1.5 percent.

IATA is forecasting an average oil price of $110 per barrel in 2011, up 15 percent from $96 last year, adding to the case for airlines to raise air fares or fuel surcharges to cover the rising cost of doing business.

Qantas Airways was “looking at more increases going forward,” its chief executive, Alan Joyce, told Reuters. ”Hedging just gives you time.”

IATA warned that capacity was set to expand 5.8 percent in 2011, outstripping a 4.7 percent increase in demand. The 1.1 percentage point gap is sharply higher than the 0.3 point previously forecast.

Helane Becker, an airline analyst with Dahlman Rose & Co in the United States, said fare sales announced recently by some U.S. carriers could stoke worries about post-summer travel.

“I think there is concern about traffic after the summer and the fact both JetBlue and AirTran Airways already announced fare promotion programs for travel, through mid-November in the first case and mid-October in the second,” she said. “Airlines usually announce fall promotions in late July or early August.”



In a move with major cost implications for the industry, Rolls-Royce is set to build a new engine to beef up the A350 jetliner being developed by Airbus, industry sources said.

Until now, Airbus and Rolls had defended the engine as an all-rounder capable of powering three separate models of the mid-sized A350, which is designed to carry 270 to 350 people.

In Europe, the EU’s planned Emissions Trading Scheme (ETS) would force carriers to buy permits for each tonne of carbon dioxide they emit above a certain cap.

The plan is meant to tackle growing emissions from the $500 billion aviation industry, which is responsible for an estimated 2 percent of mankind’s greenhouse gas pollution.

The EU has offered to exempt airlines of countries that can prove they are taking equivalent steps to cut emissions.

Representatives from developing countries slammed the proposed rules and said they were unfair.

“Indian airlines which fly overseas, such as Kingfisher, have already made their views known to the minister of civil aviation,” said Vijay Mallya, chairman of Kingfisher Airlines, which has the second-largest market share of India’s aviation industry.

“We do not have the same level of sophistication or maturity in trading of carbon credits, and therefore any such new policy or levy on Indian carriers flying to Europe would be unfair. Now it’s a government-to-government matter, not an airline specific matter,” he said.

The China Air Transport Association (CATA) says the scheme will cost Chinese airlines more than $100 million in the first year and more than triple that by 2020.

“I believe we have to take legal action,” said Wei Zhenzhong, secretary general of CATA, adding that Air China was preparing a legal challenge. The U.S. industry group Air Transport Association of America is also challenging the plan in EU courts.

What is needed is a global approach to emissions control, Singapore’s deputy prime minister, Tharman Shanmugaratnam, told IATA delegates.

“In addressing climate change, we should harmonise measures at an international level so as to ensure a level playing field for all, as well as minimise multiple cost layers from unilateral localised emissions trading schemes and environmental taxes,” he said. (Additional reporting by Tim Hepher, Raju Gopalakrishnan, Alison Leung, Harry Suhartono, Kevin Lim and Karen Jacobs; Editing by Matt Driskill and John Wallace; +65 6870 3720)