The International Air Transport Association (IATA) said on Tuesday its revised financial outlook for 2010 projects a US$5.6 billion global net loss, because of low yields and rising costs.

“The world’s airlines will lose US$11.0 billion in 2009. We are ending an Annus Horribilis that brings to a close the 10 challenging years of an aviation Decennis Horribilis. Between 2000 and 2009, airlines lost US$49.1 billion, which is an average of US$5.0 billion per year,” said Giovanni Bisignani, IATA’s Director General and Chief Executive, adding however: “The worst is likely behind us. For 2010, some key statistics are moving in the right direction.”

IATA believes demand will likely continue to improve and airlines are expected to drive down non-fuel unit costs by 1.3%: “But fuel costs are rising and yields are a continuing disaster. Airlines will remain firmly in the red in 2010 with US$5.6 billion in losses,” said Bisignani.

Although industry revenues are expected to rise by US$22 billion (4.9%) to US$478 billion in 2010, compared to 2009, they remain US$57 billion (-11%) below the peak of US$535 billion in 2008 and US$30 billion below 2007 when passenger traffic was at similar levels to what IATA expects in 2010.

Following a decline of 4.1% in 2009, passenger traffic is expected to grow by 4.5% in 2010 (stronger than the previously forecast 3.2% in September). A total of 2.28 billion people are expected to fly in 2010, bringing total passenger numbers back in line with the peak recorded in 2007.

Cargo growth

Cargo demand is expected to grow by 7% to 37.7 million tonnes in 2010 (stronger than the previously forecast 5% in September), following a 13% decline in 2009. Total freight volumes will remain 10% below the 41.8 million tonne peak recorded in 2007. Cargo demand is rising faster than world trade as depleted inventories are rebuilt. Once the inventory cycle completes, growth is expected to fall back in line with world trade.

In 2009, passenger and cargo yields plummeted by 12% and 15% respectively. Cargo yields are expected to improve by 0.9% in 2010. But passenger yields are not expected to improve from their extraordinary low level: “This is being driven by two factors: excess capacity in the market and reduced corporate travel budgets. Capacity adjustments in 2009 were made at the expense of lower aircraft utilisation (down 6%). An additional 1300 aircraft due for delivery in 2010 will contribute to 2.8% global capacity growth, putting continuing pressure on yields. On top of this, corporate travel buyers have adjusted their budgets to reflect lower premium fare levels.”

Estimates are based on an average oil price of US$75.0 per barrel in 2010, up considerably from the US$61.8 average expected for 2009. As a percentage of operating costs, fuel will be 26% in 2010. This is considerably lower than the 32% of operating costs that fuel comprised in 2008, but twice the 13% of operating costs that fuel represented in 2001-2002.

Regional variations

While all regions except Africa will see an improvement in 2010 compared to 2009, performance will vary greatly, according to IATA:

• North American carriers will see losses reduced from US$2.9 billion in 2009 to US$2.0 billion in 2010, largely through of pricing power and cost reductions gained through capacity adjustments.
• European carriers will generate the largest losses of any region at US$2.5 billion, due to slow economic recovery in the region combined with limited ability to adjust capacity due to airport slot regulations is hindering the region’s airlines.
• Asia-Pacific carriers will post losses of US$700 million. Compared to losses of US$3.4 billion in 2009, this region is showing the most dramatic improvement. This is driven by a recovery in some of the region’s economies. For example, China’s GDP is forecast to grow by 9.0% in 2010.
• Latin American carriers will be the only profitable regional grouping in both 2009 and 2010, with expected profit in each year expected to be US$100 million. This is largely due to the benefit of relatively strong economies in South America and the efficiencies gained through regional airline structures.
• Middle East carriers will see losses shrink from a US$1.2 billion loss in 2009 to a US$300 million deficit in 2010. A strong long-haul connection business over Middle East hubs will provide some insulation against the impacts of Dubai’s financial difficulties.
• African carriers will deliver a loss of US$100 million in 2010—consistent with the US$100 million loss of 2009. Relatively strong economies and increasingly liberal markets are being offset by competitiveness challenges.

A Structural Adjustment

“The industry is structurally out of balance. The precipitous fall in yields will likely never be fully recovered. It is difficult to see how this can be balanced on the cost-side of the equation. After almost a decade of cost cutting, non-fuel unit cost reductions will be incremental at best. And the risk of rising fuel costs will be constant. There will be some individual airline success stories. But without relaying the foundations of the industry to facilitate structural change, covering the cost of capital for this hyper-fragmented industry will remain a dream at best,” said Bisignani.

In November, seven countries (Chile, Malaysia, Panama, Singapore, Switzerland, the UAE and the US) signed a multilateral Statement of Policy Principles that was also endorsed by the European Commission. These principles represent a commitment by the signatories to modernise the industry and make cross border consolidation possible. They are premised on a level playing field which is a responsibility of governments.

“Consolidation is the great hope for the industry. The round of consolidation experienced since this horrible decade began is a step in the right direction. But it has been confined within political borders as a result of ownership restrictions in the archaic bilateral system. The industry cannot afford the mounting losses of the status quo. The next decade must facilitate consolidation,” said Bisignani.

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