2011 ends on a positive note – capacity, economy loom as issues in 2012

The International Air Transport Association (IATA) reported that full year 2011 passenger demand rose 5.9% compared to 2010, in line with long-term growth trends. In contrast, cargo markets contracted by 0.7% for the year; but recorded positive demand growth in December of 0.2%. Growth in demand lagged capacity increases at 6.3% (passenger) and 4.1% (cargo) putting downward pressure on load factors. The average passenger load factor for 2011 was 78.1%, down from 78.3% in 2010, while the freight load factor was just 45.9%, down from 48.1% in 2010.

“Given the weak conditions in Western economies the passenger market held up well in 2011. But overall 2011 was a year of contrasts. Healthy passenger growth, primarily in the first half of the year, was offset by a declining cargo market. Optimism in China contrasted with gloom in Europe. Ironically, the weak euro supported business travel demand. But Europe’s primarily tax and restrict approach to aviation policy left the continent’s carriers with the weakest profitability among the industry’s major regions. Cautious improving business confidence is good news. But 2012 is still going to be a tough year,” said Tony Tyler, IATA’s Director General and CEO.

Passenger demand for December rose 5.4% compared to the same month in 2010. But the trend since mid-year has clearly slowed, as travel markets react with a lag to the declines in confidence that weakened cargo in the second half of 2011. Comparisons with December 2010 are also distorted as severe winter weather in Europe and North America as well as strikes in Europe suppressed demand. December 2011 passenger demand was up just 0.7% over November while the load factor declined 0.2 percentage points. Freight capacity climbed 4.4% in December compared to December 2010. The freight load factor was just 46.1% for the month.

International Passenger Markets

International air travel rose 6.9% last year, though the majority of this growth occurred in the first half of the year. International capacity climbed 8.2%, pushing the passenger load factor down to 77.4%. For December, international traffic climbed 6.4% year over year, in part owing to depressed traffic levels in 2010 in North American and Europe, and rose 1.4% compared to November.

European carriers posted the second highest growth rates, behind Latin American carriers. Demand rose 9.5% last year while capacity climbed 10.2%, resulting in a load factor of 78.9%. December traffic rose 9.8% but this was surpassed by a 10.3% rise in capacity. Europe’s strong performance is somewhat surprising in light of the European sovereign debt crisis; however European airlines have benefited from robust business travel on long-haul markets, in part related to strong exports from Northern Europe.

North American carriers had the industry’s highest load factors for both the year—80.7%, and the month of December, 80.5%. These figures demonstrate tight capacity management, as the industry coped with demand increases of just 1% for December and 4% for the year. Nevertheless, capacity still expanded a little faster than demand, with increases of 1.4% in December and 6% for the year, so load factors were not quite as high as in 2010.

Latin American airlines led the industry in traffic growth in 2011 with a 10.2% rise in demand compared to 2010. This also was the only region in which demand growth outstripped capacity growth for the full year, with capacity up 9.2%. However, December’s strong traffic growth of 8.8% was exceeded by an 11.1% rise in capacity. Latin America air traffic is supported by healthy domestic economic conditions and trade activity with North America and Asia.

Middle Eastern carriers’ traffic rose 8.9% for the year, against a 9.7% climb in capacity, putting pressure on load factors, which at 75.4%, was the lowest except for Africa. However, December ended on a more positive note, with traffic up 11.7% against an 11% rise in capacity and a load factor of 77.1%. Airlines in this region have slowed the pace at which they have expanded but price competitive products and geographically well-positioned hubs are enabling Middle East carriers to continue to improve their share of long-haul markets.

Asia-Pacific airlines experienced the widest traffic/capacity gap for the year, with annual traffic up 4.1% versus a 6.4% climb in capacity. A significant part of this slowdown was due to the earthquake and tsunami in Japan, the impact of which on air travel should be temporary. However, the sharp fall in air freight in the region as Western demand for manufactured goods declined also reduced some business travel for the region’s airlines. The average load factor was 75.9%. In December, demand climbed 3.7% and capacity rose 5.9% producing a 74.7% load factor.

African airlines saw travel demand fall 0.7% for December, but it rose 2.3% for the full year. This relatively weak performance was in part owing to the civil unrest in a number of North African countries. However, good economic performance in the region was also generating significant demand for air travel. African airlines were unable to fully benefit and their low growth represents a loss of market share. Capacity climbed just 0.2% for December and 4.4% for the 12 months. Load factors were the weakest in the industry at 68.9% for December and 67.2% for the full year.

Domestic Passenger Markets

Passenger demand in domestic markets for the full year rose 4.2% compared to a 3.1% rise in capacity, leading to a load factor of 79.3%. December demand rose 3.7% from a year earlier, however, this represented a 0.5% decline from November. It is not clear yet whether this signals a new trend or is just an anomaly. Individual markets varied dramatically in their performance.

US demand rose just 1.3% for the year – the result of market maturity and a sluggish US economy – but with nearly flat capacity growth of 0.5%, load factors led the industry at 83%, helping to boost airline unit revenues. For December, traffic actually contracted 1.2% while capacity tightened 1.4%, pushing load factors to 81.1%.

Chinese domestic demand rose a solid 10.9% for the year on a 7.8% lift in capacity, strengthening load factors to 82.2%, which helped the profitability of the country’s airlines. Economic growth slowed but by most standards still remained strong, underpinning air travel demand. December capacity rose 14% compared to the year-ago period with demand up 12.3%, achieving a 78.7% load factor.

India had the strongest annual growth with demand up 16.4% but capacity rose 18.6% and the load factor was 74.7%. The demand/capacity gap was particularly acute in December, with traffic rising 9.3% on a 15.5% increase in capacity. The deterioration in load factors generated by this excess capacity is one of the factors behind the losses being reported by Indian airlines, in contrast to the current situation in China.

The impact of last year’s earthquake and tsunami meant Japan’s airlines ended the year with demand down 15.2% on a capacity decline of 11.5%. By December, however, the domestic market had recovered to levels 4.7% below pre-earthquake levels. Even with an 8.7% drop in capacity load factors were the lowest among the group at just 58.8%.

Brazilian carriers saw a 13.7% jump in demand from their home market last year on an 11.2% rise in capacity. Load factors remain below the industry average at 69.3%. December demand slipped back to 5.6% on a 9.6% rise in capacity, resulting in a load factor of 69.6%.

Air Freight (Domestic and International)

Air freight markets turned up at the end of the year after shrinking through much of the summer and autumn as business confidence across major economies, and export orders, slumped. Surveys are now showing that business confidence, a leading indicator for changes in cargo markets, turned up in December, suggesting that industrial production and international trade may be stabilizing. Although international freight markets contracted 0.6% for the full year and 0.8% in December, compared to a year ago, December international demand was 1.5% ahead of the level in November, while domestic demand was up 3.2% compared to November and 5.5% compared to December 2010. Freight markets have now shown sequential month-over-month growth in November and December, adding evidence to the view that international trade may be stabilizing. However, the situation for airlines in these markets has deteriorated significantly. Freight load factors declined considerably to 45.9% in 2011, as measures to match capacity with demand by reducing the freighter fleet have been offset by introduction of new twin aisle passenger aircraft.

The Bottom Line

“Improving business confidence and encouraging news from the US economy are heartening developments. But it is far too early to start predicting a soft landing for 2012. The euro zone crisis is far from over. Failure to achieve a durable solution will have dire consequences for economies around the world. And it would most certainly tip the airline industry into the red,” said Tyler.

“Airlines have made massive investments in new fuel-efficient, environmentally friendly aircraft. The challenge is to deploy them profitably into a dynamic and uncertain market. Governments, meanwhile, need to take a strategic view of the airline industry that recognizes its value as a catalyst for economic growth. Airlines transport about 3 billion people a year. And over a third of the value of goods that are traded internationally is transported by air. Getting people and goods to their destinations more efficiently improves competitiveness. Infrastructure investments to enable aircraft to land and takeoff with a minimum of delay and fly the most fuel and carbon efficient trajectories will return a far greater payout to global GDP than shortsighted and narrowly-focused tax grabs. Let’s hope that 2012 will be the year when politicians put the required political capital behind important projects such as the Single European Sky and NextGen in the US,” said Tyler.

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