Airline profits expected to fall by 78%

Airlines are expected to make just a fifth of the profits they made last year as higher oil prices increase the cost of flying and deter cash-strapped customers, their industry body has warned.

The International Air Transport Association (IATA) forecasts that airlines will make profits of four billion US dollars (£2.4 billion) in 2011, a 78% drop from the 18 billion US dollars (£11 billion) in 2010.

This represents a significant deterioration from its forecast in March when it thought profits would fall by almost a half to 8.6 billion US dollars (£5.2 billion).

The downgrade to the profits forecast has mainly been caused by higher oil prices, which have risen 15% to 110 US dollars a barrel since March, driven by the crisis in the Middle East.

Higher air fares are putting off value-sensitive leisure customers, with passenger numbers falling by between 3% and 4% over the past five months, making it harder for airlines to increase revenues.

As a result, passenger demand is now expected to grow 4.4% in 2011, whereas it had been expected to grow by 5.6% previously in March.

Cargo demand is expected to increase by 5.5%, down from the previous prediction of 6.1% as the cost of transporting goods by plane rises.

The Japanese earthquake and tsunami, which triggered the Fukushima nuclear disaster, will also dent global passenger numbers by about 1%, it said.

And in Europe, airlines are being hit by higher taxes, such as Air Passenger Duty in the UK.

Airlines are expected to increase their capacity by 5.8% this year but profitability will be hit as the "load factor" decreases.

Giovanni Bisignani, Iata's director-general and chief executive, said: "Natural disasters in Japan, unrest in the Middle East and North Africa, plus the sharp rise in oil prices have slashed industry profit expectations to 4 billion US dollars this year.

"That we are making any money at all in a year with this combination of unprecedented shocks is a result of a very fragile balance.

"But with a dismal 0.7% margin, there is little buffer left against further shocks."

In Europe, profits are expected to hit 500 million US dollars (£304.3 million) down from 1.9 billion US dollars (£1.2 billion) the previous year as demand is dampened by weak economic growth and passenger duties.

Carriers in the Asia-Pacific region are expected to be the most profitable, with earnings of 2.1 billion US dollars (£1.3 billion). But this is "dramatically" down on the 10 billion US dollars (£6.1 billion) in the previous year, as a result of increased fuel costs and the disaster in Japan.