European contagion may hit airlines hard

Iata downgrades its profit forecasts for the airline industry next year and warns the sector could suffer losses exceeding $8 billion in the worst case scenario.

Middle East airlines could fall into losses of US$400 million next year if the euro zone's debt woes escalate into a full-blown banking crisis. Nicole Hill / The National
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Middle Eastern airlines could fall into losses of US$400 million (Dh1.4 billion) next year if the euro-zone's debt woes escalate into a full-blown banking crisis and a European recession.

Global airlines could lose more than $8bn under such a scenario, the International Air Transport Association (Iata) warned yesterday.

"The biggest risk facing airline profitability over the next year is the economic turmoil that would result from a failure of governments to resolve the euro-zone sovereign-debt crisis," said Tony Tyler, Iata's director general and chief executive.

This would push airlines to losses of $8.3bn, the biggest hit since the 2008 global financial crisis, with losses by European carriers accounting for more than half of that total, he said. "There's no doubt even in the best-case scenario we're going to see a tougher 2012."

Iata's central forecasts, based on government intervention averting a banking crisis, show profit revised downwards to $3.5bn next year from its previous prediction of $4.9bn. The new figure represents a net profit margin of just 0.6 per cent.

As long as a full-blown crisis is averted, Middle Eastern carriers are forecast to post a profit of $300m next year, down from a previous forecast of $700m, with long-haul market conditions likely to deteriorate, particularly those linked to weak economies in Europe. Passenger-demand growth next year is expected to slow to 4 per cent from 6.1 per cent this year, Iata said.

European carriers would be the hardest hit, with losses of $600m predicted even in a best-case scenario. "Even if government intervention averts a banking crisis it is unlikely that Europe will avoid a brief recession," Iata said. "Business and consumer confidence has already fallen too far. Global GDP forecasts for 2012 have been revised downwards to 2.1 per cent. Historically the airline industry has seen a profit turn into loss whenever global GDP growth falls below 2 per cent. This is driving the downgrade in the 2012 outlook."

Iata's global forecast for airline profits of $6.9bn this year remains unchanged, but regional differences have widened and the industry body halved its profit forecast for Middle Eastern carriers yesterday.

Expected profit for Middle East airlines this year has been reduced to $400m, from a previously forecast $800m "as high fuel costs squeezed profit margins on the more price-sensitive long-haul traffic connecting over Middle Eastern hubs", Iata said.

Emirates Airline last month reported that its profit in the first half of the financial year had declined 76 per cent on soaring fuel costs. High fuel prices are likely to remain a challenge for the industry as a whole.

"Energy prices have fallen from their peaks earlier this year, but the price of oil is still 30 per cent higher than it was this time last year," said Brian Pearce, the chief economist at Iata.