Global Airlines Head to Weak 2012 - Analyst Blog

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The International Air Transport Association (IATA) cut its global airline industry profit forecast to $3.5 billion for 2012, with a net profit margin of 0.6%. Previously, in September, the Association had forecast profits of $4.9 billion.

Tougher conditions will likely stem from the government's failure to find any resolution to the Euro-zone sovereign debt crisis that has dwarfed economic growth. The problems in Europe are swelling and spilling over to the rest of the world. In the worst case, if the Euro-zone crisis shapes into a recession, the global airline industry would incur a loss of $8 billion - the worst since the 2008 financial crisis.

A downward revision was also made to the sector's revenue. The Association now expects revenue to grow 3.7% to $618 billion next year, down from $632 billion projected previously. Overall cost is expected to rise 4.5% to $609 billion, with the fuel cost being $198 billion.

For 2011, the IATA has reaffirmed its previous outlook. Although the $178 billion estimated fuel cost for the full year will be a drag on the bottom line, the overall industry profit expectation remains unchanged at $6.9 billion, with a net profit margin of 1.2%. Revenue is still estimated at $596 million.

The IATA however revised its regional forecasts. The latest projections are discussed below:

North America: As stated by IATA, North American airlines like United Continental Holdings Inc. ( UAL ), Delta Air Lines ( DAL ), Southwest Airlines Co. ( LUV ), JetBlue Airways Corporation ( JBLU ) and US Airways GroupInc. ( LCC ) untouched by the Euro-crisis will benefit the most in 2012. These carriers are expected to post profits of $2 billion this year and $1.7 billion in the next.

In fact, the 2011 profit projection for these carriers is up from the previous projection of $1.5 billion. The improvement can be credited to raised ticket prices, capacity cuts and improved ancillary revenues.

Asia-Pacific: The Asia-Pacific carriers are expected to generate profits of $3.3 billion in 2011, up from the previous expectation $2.5 billion. However, the profit amount is projected to slide to $2.1 billion next year. Notably, this is the highest profit-producing region in the industry, outstripping other areas.

Middle East & Latin America: Profits from Middle East and Latin American carriers are expected to plummet by $400 each this year to $400 million and $200 million, respectively. For the next year, the profits will decline to $300 million and $100 million for the Middle East and Latin American carriers, respectively.

Africa: The Association continues to expect that African air carriers will touch the break-even point this year and then slide to a loss of $100 million next year.

Europe: As for the European airlines, the IATA predicts a loss of $600 million for 2012, after earning a profit of $1 billion this year.

We are currently maintaining our long-term Outperform rating on Delta Air Lines with the Zacks #2 Rank (Buy) for the short term. United Continental, Southwest Airlines and JetBlue have long-term Neutral ratings. For the short term (1-3 months), the carriers retain the Zacks #3 (Rank.

DELTA AIR LINES ( DAL ): Free Stock Analysis Report

JETBLUE AIRWAYS ( JBLU ): Free Stock Analysis Report

US AIRWAYS GRP ( LCC ): Free Stock Analysis Report

SOUTHWEST AIR ( LUV ): Free Stock Analysis Report

UNITED CONT HLD ( UAL ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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