Profit pressure: Global airlines’ profits slump on rising fuel costs in 2011

» Rising fuel costs will pressure operating profits. Higher jet fuel costs, though tempered by fare increases and effective capacity management, will continue to pressure passenger airlines’ operating profits. We still expect a majority of carriers to achieve operating profits in 2011, but at significantly lower levels than in 2010 because of the difficulty of entirely offsetting the increased cost of fuel.

» Passenger traffic could weaken. Business and leisure travel have recovered strongly since the depths of the recession. By and large, this demand has not been dissuaded by higher fares, fuel surcharges and ancillary fees. However, should the cost of jet fuel be sustained above $3.50 per gallon, we believe it would be difficult to avoid a meaningful hit to load factors because the carriers would likely seek further fare increases.

» Yield growth likely to slow. Recent fare increases have produced a positive trend in yields, but slowing demand after the peak summer travel season is likely to pressure yield growth. We forecast yield growth of 5%-8% in 2011, down from 11% in 2010. Softening demand, particularly from leisure travelers, will likely pressure the growth of yields this fall.

» Airlines will maintain capacity discipline. Airlines have not responded to strong demand with large capacity additions that could hurt yields. We expect most carriers to support yields by maintaining stable capacity through the summer travel season, before implementing capacity reductions this fall. We expect the carriers’ capacity growth rates to range from negative 2% to positive 8% for all of 2011.