Global Airline Profits Rising, But Margins Shatter

Business travelers are returning to the world’s airlines, and coupled with this boost in passengers is continued growth in cargo revenues. As a result, the International Air Transport Association (IATA) has raised its profit estimates for 2010 to a record $15.1 billion.


That’s the good news. The bad news is that net margins rise only to 2.7% in 2010, or as the IATA puts it, “Margins remain pathetic.”


For 2011, airline profits are forecast to generate $9.1 billion in profit and net margins are expected to be just 1.5%. Pathetic might be an overstatement. And, the price of oil may end up as another negative factor


We noted earlier a report from the US Department of Transportation that showed that US carriers raked in $2.6 billion in baggage fees in the first nine months of 2010. Figuring about another $900 million in the fourth quarter, US airlines could haul in about $3.5 billion in baggage fees alone during 2010. US airlines baggage fees equal about 23% of global airline profits in 2010.


The IATA notes that passenger traffic revenue will grow 8.9% in 2010, falling to growth of 5.2% in 2011. Cargo volume will grow 18.5% in 2010, but fall sharply to 5.5% expected growth in 2011.


The fall in cargo revenue has already begun, with third quarter 2010 cargo volume down from expected growth of 19.8%, and revenue is expected to grow just 7%. Cargo volume was high in the first half of the year, but has fallen 5% since May, and the IATA says, “will only pick-up when consumers have bought the products that are already on the shelves.”


The drop in air cargo volumes is consistent with what happened in seaborne container shipping as well. The busiest month for container shippers in 2010 was July, not the traditional October. Buyers bought early this year, whether to beat rising export taxes in China or to stock up for what they hoped would be a good holiday selling season.


Retail sales have been better in US stores so far this season, but IATA profit estimates for 2011 and lower demand for container ships going into next year, don’t indicate that a strong recovery is underway.


Asia-Pacific airlines will post $7.7 billion in profit in 2010, more than half the total expected global profit. US airlines are expected to post $5.1 billion in profit, and European carriers are expected to show a puny $400 million. For 2011, profits fall to $4.6 billion in Asia-Pacific, $3.2 billion in the US, and just $100 million in Europe.


The blame goes primarily to fuel costs, which IATA estimates will rise from $79/barrel in 2010 to $84/barrel in 2011. Lower GDP growth in 2011 and higher tax rates in some European countries also cut into airline profits in 2011.


A near-doubling of IATA’s previous profit estimates for 2010 is no match for a substantially weaker forecast for 2011. China Southern Airlines Co. (NYSE: ZNH) is up about 2.5% today, while China Eastern Airlines Corp. Ltd. (NYSE: CEA) is up about 0.5%. US carriers Delta Air Lines Inc. (NYSE: DAL), United Continental Holdings (NYSE: UAL), and AMR Corp. (NYSE: AMR) are mixed.


Paul Ausick


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