Global Airline profits reduced on increased oil prices

Written by Your VIPTRIP Team on March 20th, 2012

News reports state that The International Air Transport Association (IATA) announced a downgrade to its industry outlook for 2012 primarily due to rising oil prices. IATA expects airlines to turn a global profit of $3.0 billion in 2012 for a 0.5% margin. This $500 million downgrade from the December forecast is primarily driven by a rise in the expected average price of oil to $115 per barrel, up from the previously forecast $99. Several factors prevented a more significant downgrade: (1) the avoidance of a significant worsening of the Euro zone crisis, (2) improvement in the US economy, (3) cargo market stabilization and (4) slower than expected capacity expansion.

“2012 continues to be a challenging year for airlines. The risk of a worsening Euro zone crisis has been replaced by an equally toxic risk—rising oil prices. Already the damage is being felt with a downgrade in industry profits to $3.0 billion,’’ said Tony Tyler, IATA’s Director General and CEO.

Airline performance is closely tied to global GDP growth. Historically, when GDP growth drops below 2.0%, the global airline industry returns a collective loss. “With GDP growth projections now at 2.0% and an anemic margin of 0.5%, it will not take much of a shock to push the industry into the red for 2012,” said Tyler.

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