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IATA boosts profit forecast for 2011 but warns of bumpy road ahead

The International Air Transport Association (IATA) has sharply raised its 2011 profit forecast for the global aviation industry due to higher than expected trade volume in the first seven months of this year. However, the transport agency also predicted that the industry will see sluggish growth and weak profits next year as the global economic outlook worsens.

IATA said stronger than expected demand in the Middle East and Europe were key factors in its revised forecast. Middle East carriers are now on pace to make $700m more than was predicted in June, as traffic has been stronger than expected in the wake of the political unrest in the region.

Passenger traffic in the region climbed 8.3% through the month of July compared to a capacity increase of 9% during the same period, the agency noted.

Ironically, Europe’s profit forecast was raised even higher despite the economic woes sweeping the continent. IATA boosted its forecast for European carriers by $900m from its earlier projection, as the weak Euro has helped to raise traffic volumes in recent months by stimulating more inbound travel and boosting exports.

Overall, IATA said it now expects all regions to be profitable in 2011 except Africa, which is projected to end the year with a breakeven result. In doing so, the transport agency upgraded its global industry profit expectation to $6.9bn from a projection of $4bn in June, a rise of 73%.

“Airlines are going to make a little more money in 2011 than we thought. That is good news,” said Tony Tyler, director general and CEO of IATA. “Given the strong headwinds of high oil prices and economic uncertainty, remaining in the black is a great achievement.”

Passenger traffic worldwide is expected to grow 5.9% compared to the previous year, IATA said, up from 4.4% in its previous forecast.

Profit decline expected in 2012

Despite the improved outlook for the remainder of 2011, IATA sounded a warning about global profits for next year as economic growth slows in debt-laden western nations. “A long, slow struggle lies ahead,” said Tyler, who cautioned that the industry’s profit margin will be “razor thin” in 2011 and even thinner in 2012.

IATA is now projecting a profit margin of only 1.2% this year followed by 0.8% in 2012. “Unfortunately, poor margins seem to be a characteristic of the industry,” Tyler said. He added that even in the peak year of 2010, the industry’s profit margin was only 2.9%. “Airlines put in a lot of effort for very poor results,” he noted.

Global economic outlook is worrying

IATA also warned that the global economic outlook has “deteriorated” since its last forecast in June. “Historically, when economic growth slips below 2%, the airline industry loses money,” he said. “We are just above that threshold.”

Yesterday, the IMF said the world economy would grow by 4% this year and next, lower than June’s forecast of 4.3% for this year and 4.5% for next year.

The IMF also warned that the US and Europe could slip back into recession unless they contained the sovereign-debt crisis. “Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing,” the IMF wrote in its World Economic Outlook.

For its part, IATA cautioned that the fourth quarter of 2011 and the first half of 2012 could be the weakest point for airline industry as business confidence declined. Only Asian Pacific airlines are expected to maintain profits close to 2011 levels, at $2.3bn.