Picture: THINKSTOCK
Picture: THINKSTOCK

THE International Air Travel Association (Iata), which represents 243 airlines globally, has revised upwards its outlook for the industry’s profitability for this year by 63.4% to $6.7bn.

Iata CEO Tony Tyler said on Thursday that the association had also increased its profit forecast for airlines next year, when the industry’s total profit is now expected to rise to $8.4bn from a previous estimate of $7.5bn.

The improved outlook is a result of the implementation of cost-cutting programmes within airlines and a better industry structure as a result of consolidation, particularly in the US domestic market and Europe.

Reflecting on the state of the industry, Iata chief economist Brian Pearce said activity in the sector had broken with past patterns, with a divergence between a "robust expansion in air travel and the shrinkage of air freight since peaking in early 2010, after rebounding in sharply from the recession".

"In past cycles, weakness in air freight has been a leading indicator of weakness in air travel. That has not been the case this time," Mr Pearce said.

This is because of the shift in trade away from the traditional economic powerhouses of the West to those of emerging Asia.

The change in the share of trade has also driven a change in transport needs, Mr Pearce said.

China accounted for 35% of world gross domestic product between 2008 and 2011, followed by India with a 12% share and Latin America with 9%. This meant "more demand for bulk commodities rather than the high-value, low-volume consumer goods that usually travel by air", Mr Pearce said.

It has "favoured sea over air transport for freight, but air travel continued to be supported by economic growth", he added.

"The freight market won’t change until there is a recovery in the US and Europe, which were the traditional engines of growth," he said.

Air freight markets have declined over the past two years despite the expansion in overall global trade.

Mr Pearce said travel markets had improved in response to higher business confidence levels than those of 2009, and would support passenger travel growth of 3%-4%.

"We expect to break the 3-billion mark in 2013. We see an average of 3.1-billion passengers travelling in 2013," he said. That could reach 3.6-billion in 2016.

The aviation industry’s performance closely tracks that of the overall global economy. In the past, when global gross domestic product growth rates have fallen below 2%, airlines have often recorded losses.

"Two percent has been the stall speed for the industry. (Looking at) forecasts for this year and next year, we are perilously close to the stall speed," Mr Pearce said. Other challenges he noted were high fuel prices and regulatory uncertainty.

Air freight has been in decline for the past two years and an improvement in the US consumer markets would put a "floor under the air cargo market".

The biggest risks facing the industry in the coming year are the continuing European debt crisis and a failure of the US government to reach consensus on its fiscal cliff.

The net profit margin for the industry is expected to rise to 1.3% for 2012, up from a previous forecast of 0.6%.

The weakest markets in terms of profitability are Europe and Africa, which are predicted to break even this year and next year, while North America and Asia Pacific operators are expected to perform the best, according to Iata’s statistics.

"The industry is keeping its head above water. But only just," Mr Tyler said.