industry-outlook-dec-10

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IATA Economicswww.iata.org/economics 1

December 2010FINANCIAL FORECAST

STRONG BUT CYCLICAL RECOVERY IN PROFITS

We are upgrading our forecast for airline industry profits in response to a strong cyclical upswing in revenuesand much better utilization of capacity by airlines. Our forecast for net post-tax profits in 2010 has beenraised to US$15.1 billion, up from our previous forecast of US$8.9 billion. Better economic conditions,despite the European crisis, have supported stronger market growth and better aircraft utilization has drivena sharp upswing in profitability in all regions. Operating margins are now expected to exceed 5% this year,not as good as the late-1990s but better than the previous cycle peak in 2007.

Global commercial airline profitability

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010F

2011F

%r

evenues

-20

-15

-10

-5

0

5

10

15

20

US$billion

Net post-tax losses(right scale)

EBIT margin(left scale)

Airline profit cycles usually last 7-10 years, from peak to peak, implying that there are 4-5 more years to gobefore this cycle peaks. Nonetheless next year, 2011, may see smooth upward progression being

interrupted as oil and jet fuel prices rise and some economies in Europe look set to be driven back intorecession by debt crises. Emerging markets such as Asia-Pacific look set to continue to grow strongly but aweak Europe is expected to make the business environment for airlines more challenging than it was in2010. With a stronger 2010 the starting point for industry profits is higher than we expected in our previousforecast. But we are still forecasting some slippage in net profits to US$9.1 billion in 2011.

System-wide global commercial airlines 2007 2008 2009 2010F 2011F 2007 2008 2009 2010F 2011F

Global 3.9% -1.6% -0.2% 5.1% 3.4% 12.9 -16.0 -9.9 15.1 9.1

including exceptional items 14.7 -36.1 -9.8 15.1 9.1

Regions

North America 5.5% -1.8% 1.2% 5.2% 3.9% 3.7 -9.6 -2.7 5.1 3.2


Europe 4.0% 0.1% -2.2% 1.0% 0.9% 6.4 0.0 -4.3 0.4 0.1


Asia-Pacific 2.9% -4.7% 0.0% 10.2% 6.1% 3.0 -4.7 -2.7 7.7 4.6


Middle East 0.0% 1.0% -1.5% 3.2% 2.5% -0.1 -0.3 -0.6 0.7 0.4

Latin America 2.0% 2.3% 2.9% 5.3% 3.6% 0.1 -1.4 0.5 1.2 0.7

including exceptional items 0.1 -1.7 0.5 1.2 0.7

Africa 1.0% -0.9% -0.8% 0.9% 0.1% -0.2 -0.1 -0.1 0.1 0.0

Source: ICAO data to 2007-8. IATA estimates for 2009 and forecasts for 2010 and 2011.

Exceptional items include revaluations of goodwill associated with restructuring and of 'mark to market' fuel hedging.

EBIT margin, % revenues Net profits, $ billion

Source:ICAO, IATA


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December 2010Industry Financial Forecast

BUT AIRLINE RETURNS REMAIN INADEQUATE

There has been a stronger-than-expected cyclical rebound in airline profits, but that rebound and the

upgrades we are making to these forecasts need to be put into perspective. First, the US$6.2 billion upgradeto raise forecast net profits in 2010 to US$15.1 billion is just 1.1% of revenues. Because profits are so small,relatively minor improvements in revenues or costs can generate large changes in profits. Second, andmore important, the cyclical rise in profits represents a rise to just over 4% in returns on invested capital. Asthe chart below shows this is still very inadequate. It shows that the industry can pay its bills, renew its fleetand service its debt. However, it still cannot offer any return to its owners and shareholders for the risk theyundertake. Despite the cyclical rebound in profits, the structural challenges that keep profitability in theindustry inadequate, remain.

Return on invested capital in the airline industry vs the cost of capital

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010F

2011F

%o

finvestedcapital

Return oncapital(ROIC)

Cost of capital

(WACC)

Loss ofshareholdervalue

CASH FLOWS BACK TO PRE-CRISIS LEVEL BY Q3

During the first half of 2010 the recovery of operating cash flows had been concentrated in Asia-Pacific andthe Americas, but by the third quarter a widespread cyclical recovery in cash flows was underway. Even theEuropean airlines, hampered by weak home markets, saw their cash flows rise sharply in Q3 to just belowthe previous peak of 2007.

EBITDA as % revenuesseasonally adjusted

-5%

0%

5%

10%

15%

20%

25%

2005 2006 2007 2008 2009 2010

%revenues

USairlines

Asia-Pacificairlines

Europeanairlines

Source: IATA

Source: Bloomberg


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A strong post-recession rebound in cargo and travel volumes had already driven the improvement in cashflows for Asia-Pacific airlines in late 2009/early 2010. Capacity cuts in late-2008 had more steadily improvingperformance for US airlines. The change that drove further improvement in Q3 and produced the Europeanupswing was a sharp improvement in aircraft utilization. Airline operations are highly leveraged andimproved asset utilization generates significant financial improvement.

TRAVEL STILL STRONG BUT FREIGHT PAUSING

Asia-Pacific airlines cash flow performance has closely followed the fluctuations in air freight volumes, sincethis is such an important business segment in that region. After a very fast rebound through 2009 and into2010 air freight peaked and has slipped back in recent months. The Q3 slippage in Asia-Pacific cash flowreflects this. The air freight cycle has been shaped by the business inventories as firms sought to rapidlyrestock using air freight but that cycle has now ended. This has caused the recent decline in air freight butcontinued economic expansion outside Europe is expected to generate a further leg to the air freightupswing, albeit at growth rates in single figures rather than the 20%+ growth of the inventory-cycle phase.

International air freight and passenger volumesseasonally adjusted

160

180

200

220

240

260

2005 2006 2007 2008 2009 2010

RPK,billions

9

10

11

12

13

14

FTK,billions

RPK

FTK

During 2011 we expect Europe to generate the weakest flows of passenger traffic. Already governmentshave swung from providing a large fiscal stimulus, to turn economies around from recession to recovery, toimplementing austerity budgets which will remove several percentage points of GDP from spending over thenext few years. In addition the bank and sovereign debt crisis in Europe is forcing further measures that areexpected to drive a number of European economies back into recession. On top of this challengingeconomic environment European governments are placing new or increased taxes on air travel. In the UK,Germany and Austria these amount to additional travel costs representing 3-5% of ticket prices and so arelikely to have a material adverse impact on travel demand.

System-wide global commercial airlines 2007 2008 2009 2010F 2011F 2007 2008 2009 2010F 2011F

Global 6.0 0.7 -4.3 11.6 5.3 5.8 1.1 -4.9 6.0 6.1

Regions

North America 3.5 -2.4 -6.3 10.9 3.7 3.2 -2.8 -6.6 4.2 4.6

Europe 2.1 0.9 -7.7 5.0 3.5 3.5 2.9 -5.6 1.5 4.4

Asia-Pacific 7.8 -0.2 -2.2 15.5 6.9 6.9 0.6 -7.3 8.7 7.8

Middle East 16.4 3.6 9.5 21.5 10.5 14.5 4.7 11.1 15.8 11.4

Latin America 9.9 3.3 0.0 15.3 6.3 6.9 3.2 1.4 9.6 7.2

Africa 4.5 5.1 -5.4 13.8 5.5 5.8 7.2 -1.5 9.5 6.4

Source: ICAO data to 2008. IATA 2009 estimates, 2010-11 forecasts. Dom.and int. traffic. Includes pax and cargo by weight.

Traffic (TKP), % change over year Capacity (ATK), % change over year

European airlines will be able to take advantage of stronger long-haul markets but even so, the weakness of

home markets is expected to produce the weakest traffic growth in this region. The US economy is lookingin better shape but debt is still a problem and below-trend growth is expected from this market. In non-JapanAsia, Latin America and other parts of the so-called developing world, economic growth is much stronger andexpected to stay that way. Airline traffic growth is forecast to be much stronger outside Europe and NorthAmerica as a result during 2011.

Source: IATA


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STRONG YIELD ENVIRONMENT NOW STABILIZING

A substantial rise in yields has been the other element driving improved airline financial performance. Ascapacity lagged the rebound in traffic, supply-demand conditions tightened and yields improved as a result.

This was most notable in US markets as the industry in this region made the most significant cuts incapacity. Now capacity is returning to markets and load factors have peaked. As a result yields appear tobe leveling off. As traffic slows further through 2011, supply-demand conditions may ease further. Yieldslook reasonably well supported at current levels but further improvements look unlikely in 2011.

Average international one-way fare and US passenger yields

(seasonally adjusted)

10.0

10.5

11.0

11.5

12.0

12.5

13.0

13.5

14.0

14.5

15.0

2006 2007 2008 2009 2010

Yiled($/RPM)

290

310

330

350

370

390

410

Fare(US$/pa

ssenger)US airline yield

(left scale)

Average international one-way fare(right scale)

Source: IATA, ATA

Margins look set to be squeezed to some extent in 2011 by stable yields on the one side and rising fuelprices on the other side. We had previously expected oil prices to remain stable at US$79 a barrel.However, central bank liquidity and capital flows are threatening to generate asset and commodity pricebubbles, helped by improved economic sentiment outside of Europe. We have revised up our forecast for oilprices to an average of US$84 a barrel in 2011. Higher oil prices, stable yields and weak traffic volumesoriginating from the developed economies cause some slippage in airline profits next year. Geographicdifferences will remain. Stronger growth in the emerging markets will support stronger performance fromairlines based in those regions. European airlines will continue to be hampered by weak home markets.

System-wide global commercial airlines 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F

REVENUES, $ billion 307 306 322 379 413 465 510 564 482 565 598% change -6.4 -0.5 5.2 17.7 9.1 12.5 9.6 10.5 -14.4 17.2 5.9

Passenger 239 238 249 294 323 365 399 444 374 437 462Cargo 39 38 40 47 48 53 59 63 48 61 6

Traffic volumesPassenger growth, tkp, % -2.7 1.0 2.3 14.9 7.0 5.0 6.4 1.5 -2.1 8.9 5.2

Passenger numbers, millions 1640 1639 1691 1888 2022 2124 2281 2271 2228 2422 2544

Cargo growth, tkp, % -6.0 8.7 3.9 7.9 0.4 4.8 4.8 -1.0 -9.8 18.5 5.5Freight tonnes, millions 28.8 31.4 33.5 36.7 37.6 39.8 41.8 40.5 36.9 43.7 46.0World economic growth, % 2.2 2.7 2.8 4.2 3.4 4.0 3.8 1.7 -2.2 3.5 2.6

Passenger yield, % -4.0 -1.7 2.4 2.6 2.7 7.8 2.7 9.5 -14.0 7.3 0.5Cargo yield % 1.9 -9.5 2.0 7.4 2.4 5.9 5.5 7.4 -14.2 7.0 0.0

EXPENSES, $ billion 319 311 323 376 409 450 490 573 483 537 578% change 0.5 -2.7 4.0 16.2 8.9 10.1 8.8 16.9 -15.6 11.0 7.7

Fuel 43 40 44 65 91 107 134 189 113 139 156% of expenses 13 13 14 17 22 24 27 33 23 26 27Crude oil price, Brent, $/b 24.7 25.1 28.8 38.3 54.5 65.1 73.0 99.0 62.0 79.0 84.0

Non-Fuel 276 270 279 311 318 343 356 384 371 397 422cents per atk (non-fuel unit cost) 39.7 38.8 38.9 39.5 38.6 40.1 39.3 41.9 42.6 43.1 43.1

% change 1.4 -2.3 0.3 1.4 -2.1 3.9 -2.0 6.6 1.6 1.2 0.0

Break-even weight load factor, % 61.3 61.9 61.1 61.9 62.0 61.2 60.9 64.1 63.6 63.4 64.0Weight load factor achieved, % 59.0 60.9 60.8 62.5 62.6 63.3 63.4 63.1 63.5 66.8 66.3

OPERATING PROFIT, $ billion -11.8 -4.8 -1.4 3.3 4.4 15.0 19.9 -8.9 -1.2 28.8 20.5% margin -3.8 -1.6 -0.4 0.9 1.1 3.2 3.9 -1.6 -0.2 5.1 3.4

NET PROFIT, $ billion -13.0 -11.3 -7.5 -5.6 -4.1 3.6 12.9 -16.0 -9.9 15.1 9.1% margin -4.2 -3.7 -2.3 -1.5 -1.0 0.8 2.5 -2.8 -2.1 2.7 1.5

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Source: ICAO data to 2008. IATA 2009 estimates and 2010-11 forecasts. Excludes exceptional accounting items and mark-to-market fuelhedging losses from net profits

industry-outlook-dec-10

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