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Middle East airlines’ profit forecast revised downwards by $800m

The International Air Transport Association (IATA) has sharply lowered its profit forecast for Middle East carriers in 2011 as unrest in the region, high oil prices, and natural disasters continue to impact negatively on the sector.

In its latest economic forecast, the global body lowered its Middle East airline industry profit forecast for this year to $100m, down 89% from its earlier forecast of $900m. The IATA said that although major airlines in the region are expected to continue to win market share on long-haul markets, political unrest in parts of the region is curbing demand.

High fuel costs are also taking a toll, as they are weakening demand from key passenger segments. The global body also warned that asset utilisation will be under downward pressure, and regional capacity growth of 15.5% will outstrip demand expansion of 14.6%.

Global profit to fall by $14bn

The IATA had predicted in March that the global airline industry would earn $8.6bn of profits this year, but it has now reduced the earnings forecast by more than half, to $4bn. The revised figure is 78% below the $18bn net profit that the sector earned globally in 2010.

On expected global revenues of $598bn, the $4bn profit forecast equates to a narrow 0.7% margin. “That we are making any money at all in a year with this combination of unprecedented shocks is a result of a very fragile balance,” said IATA director general and CEO Giovanni Bisignani. “The efficiency gains of the last decade and the strengthening global economic environment are balancing the high price of fuel.”

The IATA expects the average price of Brent crude to be $110 a barrel this year – 15% more than its previous forecast of $96. For each dollar increase in the average annual oil price, airlines face an additional $1.6bn in costs.

Fuel price unrest narrows profit margins

“With estimates that 50% of the industry’s fuel requirement is hedged at 2010 price levels, the industry 2011 fuel bill will rise by $10bn to $176bn. Fuel is now estimated to comprise 30% of airline costs-more than double the 13% of 2001.”

“We have built enormous efficiencies over the last decade. In 2001, we needed oil below $25 per barrel to be profitable. Today, we are looking at a small profit with oil at $110 per barrel,” said Bisignani.

The IATA noted that the current fuel price spike is substantially different from the one that occurred in 2008. “First, while oil inventories are low, there is substantial spare OPEC and refinery capacity, which was not the case three years ago. Second, the monetary expansion that fuelled a surge in financial investments in commodities is ending, which will remove a major upward pressure on fuel prices. Nonetheless, volatility in the fuel prices remains one of the industry’s major challenges,” IATA said.

IATA revised downward the growth rates for both cargo and passenger markets due to the impact of higher fuel costs. While passenger demand is now expected to grow 4.4% over the year, against the previous forecast of 5.6% in March, cargo demand is expected to increase 5.5% and not 6.1% as predicted earlier.

Meanwhile, premium passenger growth has dipped from 9% in 2010, but is expected to be close to the historical trend this year at a 5%-6% rate.