Geneva – The International Air Transport Association (IATA) halved its loss forecast for 2010 to US$2.8 billion (compared to the US$5.6 billion loss forecast in December 2009). The improvement is largely driven by a much stronger recovery in demand seen by year-end gains that continued into the first months of 2010. Relatively flat capacity translated into some yield improvement and stronger revenues.

IATA also lowered its 2009 loss estimate to US$9.4 billion from the previously forecast US$11.0 billion loss.

Improvements are driven by economic recovery in the emerging markets of Asia-Pacific and Latin America whose carriers posted international passenger demand gains of 6.5% and 11.0% respectively in January. North America and Europe are lagging with international passenger demand gains of 2.1% and 3.1% respectively for the same month.

“We are seeing a definite two-speed industry. Asia and Latin America are driving the recovery. The weakest international markets are North Atlantic and intra-Europe which have continuously contracted since mid-2008,” said Giovanni Bisignani, IATA’s Director General and CEO.

Forecast highlights include:

Improving Demand: Passenger demand (which fell by 2.9% in 2009) is expected to grow by 5.6% in 2010. This is an improvement on the previous forecast in December of 4.5% growth.  Cargo demand (which fell by 11.1% in 2009) is expected to grow by 12.0% in 2010. This is significantly better than the previously forecast 7.0% growth.

Load Factors: Airlines kept capacity relatively in line with demand throughout 2009. A strong year-end recovery pushed load factors to record levels when adjusted for seasonality. By January the international passenger load factor was 75.9% while cargo utilization was at 49.6%.

Yields: Tighter supply and demand conditions are expected to see yields improve—2.0% for passenger and 3.1% for cargo. This is a considerable improvement from the precipitous 14% fall experienced by both in 2009.

Premium Travel: Premium travel, while slower to recover than economy travel, now appears to be following a cyclical recovery in volume terms. But it is still 17% below the early 2008 peak. Premium yields, which are 20% below peak, may be suffering a structural shift.

Fuel: With improved economic conditions, the price of fuel is rising. IATA raised its expected average oil price to US$79 per barrel from the previously forecast US$75. That is an increase of US$17 per barrel on the US$62 average price for 2009. The combined impact of increased capacity and a higher fuel price will add US$19 billion to the industry fuel bill bringing it to an expected US$132 billion in 2010. As a percentage of operating costs, this represents 26%, up from 24% in 2009.

Revenues: Revenues will rise to US$522 billion. That is US$44 billion more than previously forecast and a US$43 billion improvement on 2009.

“Revenues are half-way to recovery—US$42 billion below the 2008 peak and US$43 billion above the 2009 trough. Important fundamentals are moving in the right direction. Demand is improving. The industry has been wise in managing capacity. Prices are beginning to align with the costs—premium travel aside. We can be optimistic but with due caution. Important risks remain. Oil is a wild-card, over-capacity is still a danger, and costs must be kept under control—throughout the value chain and with labor,” said Bisignani.

Regional differences in airlines prospects are sharp:

• Asia-Pacific carriers will see the US$2.7 billion 2009 loss turn to US$900 million in profits on the back of a rapid economic recovery being driven by China. Cargo markets are particularly strong with long-haul cargo capacity for shipments originating in Asia experiencing a capacity shortage. Demand is expected to grow by 12% in 2010.
• Latin American carriers will post an US$800 million profit for the second consecutive year. The region’s economies are less debt-burdened than the US or Europe. Economic ties to Asia helped isolate the region from the worst of the financial crisis. Carriers in parts of the region have benefitted from liberalized markets which have facilitated some cross-border consolidation, giving greater flexibility to deal with changing economic conditions. Demand is expected to grow by 12.2% in 2010.
• European carriers will post a US$2.2 billion loss—the largest among the regions. This reflects the slow pace of economic recovery and faltering consumer confidence. Demand is expected to grow by 4.2% in 2010. Intra-European premium travel is expected to recover more slowly. In December it remained 9.7% below previous year levels.
• North American carriers will post the second largest losses at US$1.8 billion. The jobless economic recovery continues to burden consumer confidence. Demand is expected to improve by 6.2% in 2010. But with intra-North America premium travel still down 13.3% as of December, the region remains in the red.
• Middle East carriers are expected to experience demand growth of 15.2% in 2010, but will see losses of US$400 million. Low yields in long-haul markets connected over Middle East hubs is a burden on profitability.
• African carriers are likely to post a US$100 million loss for 2010, halving 2009 losses. Demand is expected to improve by 7.4%. But this will not be sufficient for profitability as they continue to face strong competition for market share.

Structural Adjustments

“The stark contrast between profitability among Asian and Latin American carriers while losses continue to plague the rest of the industry clearly demonstrates the fact that airlines have not been able to develop into global businesses. The restrictions of the bilateral system prevent the kind of cross border consolidation that we have seen in industries such as pharmaceuticals or telecoms. Airlines are battling the challenges of the financial crisis without the benefit of this important tool. It’s time for change,” said Bisignani.

In November 2009, IATA’s Agenda for Freedom initiative facilitated the signing of a multi-lateral statement of policy principles focused on liberalizing market access, pricing and ownership. Seven governments (Chile, Malaysia, Panama, Singapore, Switzerland, the United Arab Emirates and the United States) and the European Commission signed the document. Kuwait joined the group by endorsing the principles in March.

“The second stage talks between the US and Europe are the big opportunity for 2010. The slow recovery in both regions should be an invitation for change. Liberalizing ownership would boost both markets. Even more importantly, as these markets combined represent about 60% of global aviation it would send a strong signal for global change. Brands, not flags, must guide the industry to sustainable profitability. That cannot happen until governments throw away the outdated restrictions of the bilateral system,” said Bisignani.