But airlines face challenge to turn demand into sustainable profits, says IATA

PETALING JAYA: The International Air Transport Association (IATA) said passenger air traffic for last year was up 8.2% against the previous year while freight grew 20.6%.

“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,” IATA director-general and chief executive officer Giovanni Bisignani said in a media statement issued on Wednesday.

While this year would likely be the second consecutive year of profits for the airline industry, IATA said profits would fall by 40% to US$9.1bil.

“This is based on an oil price of US$84 per barrel (Brent) as fuel accounts for 27% of operating costs and a sustained rise in oil price could spoil the party,” said Bisignani.

American Airlines plane lands at O’Hare International airport in Chicago, Illinois. Severe weather experienced in Europe and North America in December put a dent in the industry’s recovery— EPA

He added that oil prices were now hovering near US$100 per barrel given the uncertainties in the Middle East.

“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 US$1.6bil in costs,” said Bisignani.

Demand clearly outstripped capacity increases of 4.4% for passenger and 8.9% for cargo last year.

IATA added that the average passenger load factor for the year was 78.4%, which was up 2.7% improvement from 2009 while freight-load factor for the year was up 5.2 per centage points to 53.8%.

Asia-Pacific carriers saw passenger demand last year grow 9% from the year before while European carriers posted an increase of 5.1% year-on-year. North American carriers recorded a full-year growth of 17.8% against 2009 and Middle Eastern airlines reported the strongest full-year growth of 17.8%.

IATA said that freight demand growth varied wildly over the year from a high of 35.2% in May to a low of 5.8% in November. The regional variation in growth was obvious with Latin American carriers recording the highest full-year growth rate of 29.1%, followed by Middle Eastern carriers (accounting for 11% of the market) at 26.7%, Asia-Pacific airlines (with a 45% market share) grew by 24%, African airlines at 23.8%, North American airlines by 21.8% and European airlines at 10.8%.

Severe weather experienced in Europe and North America in December put a dent in the industry's recovery and was estimated to have shaved off 1% of total traffic demand for the month. As a result, passenger demand dipped to 4.9% growth for December 2010 from a year earlier, significantly lower than the 8.2% year-on-year growth recorded in November 2010.

Meanwhile, local analysts expect stellar fourth-quarter performance by budget carrier AirAsia Bhd, based on its preliminary operating statistics for the quarter ended Dec 31, 2010.

On the back of better demand, ECM Libra Investment Research expects AirAsia to turn in revenue of RM1.1bil and core net profit of RM330mil for its fourth quarter.

“On operations, we forecast passenger yield to be 20.5 sen per revenue passenger kilometre (RPK). Although average jet fuel prices shot up by 13.7% to US$98.5 per barrel in the quarter, we estimated cost per average seat kilometre to be lower at 10.8 sen, due to translation gains from a stronger ringgit,” the research house said in a report on Friday last week.

The AirAsia group carried 25.68 million passengers for the whole of last year, representing 13.1% growth from 2009.

AmResearch Sdn Bhd said in a recent report that AirAsia was its top pick for the aviation sector as it is one of the cheapest low-cost carriers, trading at 10 times financial year 2011 forecasted earnings.

“Key catalysts in the near term include strong fourth-quarter results to be announced this month, the listing of its associates and a stronger ringgit,” it said.