(UAL) International Air Transport Association Ups 2012 Profit Outlook

The outlook for global airline industry is improving on the back of strong performances of the air carriers even amidst the global economic uncertainties. The global industry is set to benefit from the ongoing new investments in fleet, efficient cost control measures, capacity management and consolidation through the remainder of this year and the next.

Based on the improving conditions and the efforts taken by the global carriers, the International Air Transport Association (IATA) raised the airline profit outlook to $4.1 billion from the previous expectation of $3.0 billion for this year. However, the profit outlook is still half the $8.4 billion earned in 2011. This steep annual decline in the industry’s profitability was due to the intensifying European problems, weak cargo demand, rising fuel prices and low business confidence.

The global airline industry is expected to generate $636 billion in revenues and net margin of 0.6% for this year. Passenger demand would grow by 5.3% for the year, up 70 bps from the previous expectation owing to improving demand in Western economies. Cargo however is expected to be in the negative territory, with decline of 0.4% from 2011 levels.

The strong boost to 2012 profit outlook comes from the Asian-Pacific region. The carriers in this region such as Cathay Pacific Airways, Australia’s Qantas Airways, Singapore Airlines, are expected to record a profit of $2.3 billion, up from the previous forecast of $2.0 billion. Despite the modest slowdown in Chinese economy, domestic travel demand is growing at about 10%, and regional and long haul travel demand is trending up better than expected.

North American airlines like United Continental Holdings Inc. (UAL), Delta Air Lines (DAL), Southwest Airlines Co. (LUV), JetBlue Airways Corporation (JBLU), Alaska Air Group Inc. (ALK) and US Airways Group Inc. (LCC), are seeing improving growth prospects thanks to tight capacity, rising travel demand, cost-cutting measures, a number of new and enhanced ancillary revenues, and fleet rightsizing. These carriers are expected to generate $1.9 billion in profits this year, up from the previous expectation of $1.4 billion.

As for the European airlines, the IATA expects this year’s loss to widen to $1.2 billion from $1.1 billion previously forecasted given ongoing debt crisis, continued weakness in cargo and passenger businesses, and higher taxes.

As per IATA, profits from the Middle East carriers would grow from the previous expectation of $0.3 billion to $0.7 billion. Profit projection for Latin American carriers remains unchanged at $0.4 billion. African airlines would break even in 2012, which is an improvement from the $0.1 billion loss forecasted previously.

For 2013, IATA projects profits would increase further to $7.5 billion owing to 4.5% and 2.4% rise in traffic and cargo, respectively, while profit margin would remain thin at 1.1%.

Both United Continental and Delta currently hold a Zacks #5 (Strong Sell) Rank, while US Airways retains Zacks # 4 (Sell) Rank for the short term (1-3 months). The other airlines – Southwest, JetBlue and Alaska and retain a Zacks #3 (Hold) Rank.

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