Divergent Trends - September Passenger Traffic Rises but Freight Declines

The International Air Transport Association (IATA) announced traffic results for September showing diverging trends for cargo and passenger traffic. Passenger traffic was 5.6% higher than the same month last year and stronger than the 4.6% year-on-year growth recorded in August. Air freight on the other hand posted a 2.7% contraction for September compared to September 2010. This is a further deterioration from the 2.4% decline recorded in August.

“September’s strength in passenger demand was a pleasant surprise. Freight demand contracted for a fifth consecutive month and this trend is in line with falling business and consumer confidence. We are still expecting a general weakening in passenger traffic as we head towards the year-end,” said Tony Tyler, IATA’s Director General and CEO.

International Passenger Markets

International air travel volumes rebounded to levels reached in July, following a dip in August. The sharp decline in business confidence in most economies, and the weakness in US and European consumer confidence, suggest reluctance for both business and leisure travel. Continuing strong air travel markets may reflect the robust conditions in emerging markets and travel booked earlier in the year when there was more economic optimism.

Passenger load factors stood at 79.5% in September, slightly below the 80.1% recorded for the same month last year. Highest load factors were recorded in North America (82.6%) and Europe (82.4%). The load factor for Asia-Pacific airlines slipped to 76.0% as the region absorbs the largest number of new aircraft deliveries.
Latin America carriers reported the largest increase in demand at 10.6% (up from a 6.4% increase in August), supported by robust economic conditions.
European carriers saw a 9.2% increase, slightly behind the 9.5% increase in capacity. This comes despite the continuing Eurozone crisis. The weak Euro is enhancing Europe’s attractiveness to tourists and creating export opportunities for business.
Traffic carried by Middle East carriers rose by 9.1%, ahead of a capacity increase of 8.5%--a step change from the 15% capacity increases seen in recent years.
Asia-Pacific carriers saw a 4.3% increase in demand, well below the 6.3% increase in capacity. Despite strong domestic growth in India and China, growth rates for international markets slowed.
North American carriers recorded a 1.2% increase in demand, the weakest among the regions. It lagged behind a 2.9% increase in capacity.
African carriers experienced a 5.0% increase in demand, closely matching the 5.2% increase in capacity.

Domestic Passenger Markets

Domestic markets rose strongly in September at 3.8% (up from 2.2% in August). This was also significantly stronger than the 2.8% increase in domestic capacity.
India led the way with 18.4% growth, although slightly below the 20.1% increase in capacity. This was followed by China at 9.7% (more robust than the 8.1% increase in capacity) and Brazil where a 7.5% increase in demand was well below the 14.6% increase in capacity.
The recovery in Japan’s domestic market following March’s earthquake and tsunami stalled in September with traffic 14.5% below previous year levels. This is a step back from the 12.3% decline recorded in August.
Carriers in the US domestic market cut capacity by 0.7% but recorded an increase in demand of 1.6%.

Air Freight (Domestic + International)

Freight volumes have fallen significantly during the third quarter. By September, freight volumes were 5% below those carried at the end of the first quarter. This represents a deterioration in trade and economic conditions. Inventory to expected sales ratios have risen and shipments by air are being cut.
Asia-Pacific carriers are the largest players in air cargo and have been the hardest hit with a 6.3% decline in demand compared to September 2010. This is despite robust economic growth in many countries in the region. The disruptions to supply chains as a result of the Japanese tsunami and earthquake continue to dampen air freight in the region.
European carriers also recorded a contraction in demand of 2.4% while North American carriers reported that September freight traffic was flat compared to the previous year.

The Bottom Line

Despite stronger than expected growth in passenger markets during September, the industry is bracing for more difficult times ahead. IATA’s recent Airline Business Confidence survey reported a significant decline in profitability expectations over the next 12 months. More worrying is the expectation that unit costs will increase with little optimism for yields. The majority expected no change in passenger yields while 90% of respondents were split equally among those expecting cargo yields to remain the same or decline. IATA is expecting profitability to decline from $6.9 billion in 2011 to $4.9 billion in 2012 for a margin of just 0.8%.

“Airlines play a key role in connecting global business. At this time of economic uncertainty in many parts of the world, US plans to raise an additional $36 billion in aviation taxes over the next decade could not be more misguided. Last month the UK recognized the harm that its GBP2.5 billion Air Passenger Duty was doing in Northern Ireland and announced a major cut. It’s time to apply that lesson at a more global level. Increasing the cost of doing business by making air transport more expensive destroys competitiveness. Governments should protect the 33 million jobs and $3.5 trillion in economic activity supported by aviation with a sound policy framework—not by suffocating the industry with taxes,” said Tyler.

View September traffic results

IATA, Geneva, 31/10/2011

The International Air Transport Association (IATA) announced an upgrading of its industry profit expectations to $6.9 billion (up from $4.0 billion projected in June). IATA emphasized that, despite the improvements, profitability at these levels is still exceptionally weak (1.2% net margin) considering the industry’s total revenues of $594 billion.

In its first look at 2012, IATA is projecting profits to fall to $4.9 billion on revenues of $632 billion for a net margin of just 0.8%.

“Airlines are going to make a little more money in 2011 than we thought. That is good news. Given the strong headwinds of high oil prices and economic uncertainty, remaining in the black is a great achievement,” said Tony Tyler, IATA’s Director General and CEO. “But we should keep the improvement in perspective. The $2.9 billion bottom line improvement is equal to about a half a percent of revenue. And the margin is a paltry 1.2%. Airlines are competing in a very tough environment. And 2012 will be even more difficult,” said Tyler.

IATA’s forecast is built around global projected GDP growth of 2.5% in 2011 falling to 2.4% in 2012. Airline financial performance is closely linked to the health of world economies. Whenever GDP growth has slowed below 2.0% the airline industry has lost money.. “We will be perilously close to that level at least through 2012. The industry is brittle. Any shock has the potential to put us in the red,” said Tyler.

Forecast Highlights for 2011

Passenger: Passenger demand has been stronger than anticipated given the gloomy economic outlook. The forecast for the year stands at 5.9% growth (up from 4.4% projected in June). In the year to July, passenger volumes were up over 6% on previous levels. This would bring total passenger numbers to 2.833 billion (up from the previous forecast of 2.793 billion). World trade basically stopped growing at the end of 2010. The strong travel trend in 2011 is built on residual confidence from economic optimism at the beginning of the year. While some economies may be more durable—China for example—the overall outlook is for a weaker end to 2011.

Freight: Air freight has stagnated since the start of the year. IATA slashed its full-year volume growth projection from 5.5% to 1.4%. Airlines are expected to carry 46.4 million tonnes of cargo in 2011 (down from the previous forecast of 48.2 million). Air freight volumes reached their post-recession peak in May 2010, largely driven by re-stocking. July’s traffic was 4% lower than that level. It appears unlikely that a revival in air freight will begin before 2012.

Asset Utilization: Airlines managed to restore passenger load factors back to the 2010 highs. By July the global passenger load factor stood at 83.1%. Airlines met the better than expected passenger demand with more intense asset utilization. As much of this capacity also came with belly space for cargo, the freight load factor sank to 45.0% by July.

Yields: Tighter supply and demand conditions in passenger markets over the first half of the year are expected to offset the impact of a weaker second half. As a result our passenger yield growth projection is unchanged at 3.0%. However, an oversupply of belly cargo capacity is expected to see no improvement in freight yields in 2011 (down from our previous projection of 4.0% growth).

Revenues: Industry revenue projections are relatively unchanged. Stronger passenger markets will see passenger revenues rise to $464 billion (up $7 billion from the June forecast). Meanwhile, weaker freight markets will see freight revenue projections fall to $67 billion (down $5 billion compared to the June forecast).

Fuel: Oil prices have remained consistent with the previous forecast of $110/barrel (Brent Crude). This is 39% higher than the $79.4 average price of 2010. A total fuel bill of $176 billion is expected to account for 30% of industry costs.
Regional Profiles

North American carriers are expected to deliver a net profit of $1.5 billion (+$300 million compared to the June forecast). The weak US economy continues to put a damper on the potential for profitability improvements. The region’s EBIT margin of 3.0% of revenues ranks second to Latin America (at 3.4%).

European carriers gained the most from the stronger than expected traffic. This is fueled by the weak Euro which has encouraged inbound tourism and provided a boost to export markets. The region’s carriers are expected to deliver a profit of $1.4 billion (+$900 million compared to the June forecast). The region’s continuing challenges are clearly seen in the projected EBIT margin of 1.5%, the weakest outside of Africa.

Asia Pacific carriers are expected to return a $2.5 billion profit in 2011 (+$400 million on the June forecast). While this is the largest absolute profit, the region has also seen the most dramatic downturn compared to 2010 when the region delivered $8 billion profit. The weakness of air cargo markets is disproportionately affecting airlines from this region owing to the larger share of cargo in airline revenues. The shocks from the Japanese earthquake and tsunami continue to affect supply chains and cargo markets (in which Asia Pacific carriers have the largest market share). A strong rebound is expected late in the year continuing into 2012.

Middle East carriers are the second largest beneficiary of the better than expected passenger demand. The region’s carriers are expected to make $800 million, up from the $100 million projected in June. Holding up against potential demand shocks associated with political instability, the region’s carriers grew passenger traffic 8.3% compared to a capacity increase of 9.0% in the first seven months of this year. An EBIT margin of 3.0% is projected.

Latin American carriers are expecting profits of $600 million (up from the $100 million projected in June) and an EBIT margin of 3.4% (the strongest among regions). The continent continues to benefit from very strong economic growth partly due to commodity exports to China and North America.

African carriers are expected to break even, from a $100 million loss previously forecast. While parts of the continent’s economy continue to grow robustly, the challenges of political unrest in North Africa continue to severely dent traffic and overall performance. An EBIT margin of 0.7% is the weakest among the regions.
Looking at 2012

The overall industry outlook grows weaker in 2012. Debt-burdened Western economies look set for an extended period of weak economic growth—or worse. While developing economies look to be in much better shape, the prospects for industry growth are limited because many transport linkages are with developed nations. The fourth quarter of 2011 and the first half of 2012 may well see the weakest point for air transport markets.

The industry forecast of a $4.9 billion profit is based on:

Passenger markets that will grow by 4.6% (slower than the 5.9% projected for 2011), but with yield growth falling to 1.7% (about half the 3.0% growth expected in 2011).
Cargo markets that will grow at 4.2% (three times the 1.4% growth of 2011), but with no growth in yields.
Fuel prices are expected to fall slightly based on a crude oil price of $100 per barrel (less than the $110 price expected for 2011). But due to the effects of fuel hedging delaying the benefits of lower spot prices, the fuel bill will grow to 32% of airline costs (up from 30% in 2011) with a total bill of $201 billion.

“It looks like we are headed for another year in the doldrums. With business confidence declining, it is difficult to see any potential for significant profitable growth. Relatively stronger economic growth and some rebound in cargo will help Asia Pacific airlines to maintain their 2012 profits close to 2011 levels at $2.3 billion. The rest of the industry will see declining profitability. And the worst hit is expected to be Europe where the economic crisis means the industry is only expected to return a combined profit of $300 million. A long slow struggle lies ahead,” said Tyler.

“As governments seek to re-start troubled economies, a strategic approach to aviation policy would deliver broad economic benefits. Every plane that takes off is a catalyst for economic growth and prosperity. Governments must carefully evaluate the negative impact of the current high levels of taxation, absolutely resist increases or new taxes, and develop policies that support aviation’s growth with efficient infrastructure. Time and again aviation has shown its resilience. People need and want to travel. Now is the time to harness the economic possibilities that this presents,” said Tyler.

Read Tony Tyler's full speech
Full Financial Forecast

IATA press release No.42, Singapore, 20 September 2011

RYANAIR CARRIES MORE INTL PAX THAN EASYJET AND BA COMBINED!

Ryanair today (29th June) celebrated IATA confirmation that it is the world’s favourite airline after IATA stats for 2010 showed Ryanair carried more international passengers than any other airline. Ryanair carried 71.2m international passengers last year, almost 30m more than second placed Lufthansa (44.6m) and almost 10m more than easyjet (37m) and British Airways (26m) combined.

Ryanair celebrated being the world’s favourite airline by releasing 1million €9.99 seats on www.ryanair.com, which can be booked until midnight Thursday (30th June) for travel in September on over 1,000 Ryanair routes throughout Europe.

Ryanair’s Stephen McNamara said;

“IATA has once again confirmed Ryanair is the world’s favourite airline with more international scheduled passengers than any other carrier. Even the combined traffic of No 3 easyjet and No 6 BA is still almost 10m passengers fewer than Ryanair, proving that passengers can’t get enough of Ryanair’s guaranteed lowest fares and no fuel surcharges.

To celebrate, Ryanair is releasing 1million €9.99 seats for travel in September on over 1,000 Ryanair routes throughout Europe.”

IATA Intl Sched Passengers 2010

Tables extracted from WATS 55th edition.

Ryanair press release 29/06/2011

Strong 2010 but Uncertainties in 2011 - Severe Weather Dents Recovery

The International Air Transport Association (IATA) reported full-year 2010 demand statistics for international scheduled air traffic that showed an 8.2% increase in the passenger business and a 20.6% increase in freight. Demand growth outstripped capacity increases of 4.4% for passenger and 8.9% for cargo. Average passenger load factor for the year was 78.4% which is a 2.7 percentage point improvement on 2009. The freight load factor saw a 5.2 percentage point improvement to 53.8%.

Compared to the pre-recession levels of early 2008, December air travel volumes were 4% higher. Air freight was 1% higher than pre-recession levels; however volumes have fallen 5% since the peak of the post-recession inventory re-stocking boom in early 2010.

“The world is moving again. After the biggest demand decline in the history of aviation in 2009, people started to travel and do business again in 2010. Airlines ended the year slightly ahead of early 2008 volumes, but with a pathetic 2.7% profit margin. The challenge is to turn the demand for mobility into sustainable profits,” said Giovanni Bisignani, IATA’s Director General and CEO.

Severe weather Europe and North America in December put a dent in the industry’s recovery. It is estimated that this shaved 1% off of total traffic demand for the month. As a result passenger demand dipped to 4.9% growth on December 2009 levels, significantly lower than the 8.2% growth recorded in November. Hardest hit was Europe which saw December growth slow to 3.3%.

International Passenger Demand

Asia-Pacific carriers recorded a 9% year-on-year increase in passenger demand in 2010. While December 2010 passenger demand growth slowed to 2.9%, it is 11% higher when compared to December 2008, just ahead of the industry’s 9-10% improvement over the same period. The economies of China and India continue to lead the region’s recovery.

European carriers saw year-on-year passenger demand increase 5.1%. This is double the capacity increase of 2.6%, which shored-up the passenger load factor at 79.4%. But the continent’s economic uncertainty and continuing debt crisis limited yield improvements. Moreover, Europe was the hardest hit by December’s severe weather which slowed demand growth to 3.3%, less than half the 7.8% growth recorded in November.

North American carriers recorded year-on-year increases in passenger demand of 7.4% in 2010. A key feature in 2010 was the capacity discipline, where full-year capacity was up by just 3.9% (leading to a sharp recovery in profits). The passenger load factor at 82.2% for the full year (up from 79.6% in 2009) may prove difficult to maintain if capacity additions accelerate over the period ahead. Passenger demand in December increased 6.7%.

Middle Eastern carriers reported the strongest full year growth at 17.8% on the back of a 13.2% capacity increase fueled largely by aircraft deliveries to Gulf-based airlines. Load factors for the region showed a 3 percentage point increase to 76.0%. December demand was 14.1% above previous year levels and 35% higher than in December 2008, illustrating the structural shift that is taking place in the industry as a result of the region’s expansion.

Latin American carriers saw the whole year demand grow 8.2% despite a 1.1% decrease in December, a reflection of the demise of Mexicana. But the reality is that for 2010 overall, the total is almost 8% more than 2008.

African carriers experienced a sharp rebound of nearly 12.9% in 2010, although load factors remained well below the industry average, at 69.1%. Their year ended with December demand at 11.7% above previous year levels.

International Freight Demand

Freight demand growth varied wildly over the year from a high of 35.2% in May to a low of 5.8% in November. Overall the industry is trending towards normal growth pattern in line with the historical growth rate of 5-6%.
The regional variation in growth remains particularly marked. Latin American carriers recorded the highest full-year growth rate of 29.1%, followed by Middle East carriers (accounting for 11% of the market) at 26.7%, Asia Pacific airlines (with a 45% market share) grew by 24.0%, Africa at 23.8% and North America by 21.8%. Against these industry gains, Europe’s 10.8% growth stands out as exceptionally weak.

Oil Prices

“The story this month is the sharp rise in oil prices. We predicted that 2011 would see a consecutive second year of profitability but with industry profits falling by 40% to $9.1 billion. This was based on an oil price of $84 per barrel (Brent). Fuel accounts for 27% of operating costs and a sustained rise in the oil price could spoil the party. With uncertainties in the Middle East, oil prices are now hovering near the $100 per barrel mark. For every dollar increase in the average price of a barrel of oil over the year, airlines face the difficult task of recovering an additional $1.6 billion in costs,” said Bisignani.

View full December traffic results

IATA press release No. 4, Geneva, 2 February 2011