ATW Editor's Blog

Fiscal Cliffs, Euro Precipices and Airline Profitability

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As we fast approach the close of 2012, the US remains precariously perched on the edge of the so-called fiscal cliff, the self-imposed Dec. 31 deadline for when more than $600 billion spending cuts automatically go live, along with the expiration of a raft of temporary tax cuts.

Whether Washington manages to claw its way back to some kind of economic sanity or takes a freefall -- bedamned-the-consequences -- has yet to be played out. But it's worth taking a look at what the consequences of hitting the fiscal cliff could have on airline profitability.

In its 2013 industry financial outlook, released Dec. 13, IATA estimated that net post-tax profits for next year will be $8.4 billion, up from a previous forecast of $7.5 billion. That would mean an industry-wide profit margin of 1.3%. Any profit forecast is good news, but it's still a razor-thin and fragile margin which, as IATA chief economist Brian Pearce points out, is at risk "if things go wrong."

Among the things that could go wrong, IATA lists four main economic risks for airline profitability: the US hitting the fiscal cliff, China taking a hard landing, a Euro-zone breakup, and an Iran crisis.

Breaking down those risks into their potential size of impact, the fiscal cliff would have about the same effect on traffic and airline profitability as an Iran crises or a partial Euro-zone breakup, stripping about 2% points off both RPKs and profits, according to IATA.

A Chinese economic hard landing, meanwhile, could take about 3-4% off profits, while a full Euro-zone breakup could knock RPKs by about 4% and hurt profitability by 5%.

So while a Euro-zone precipice is still the worst-feared scenario, each one of these events could flip the airline industry into the red. Whither the economy, there goes the airline industry. Air travel, whether for business or pleasure, is one of the first optional spends that people cut when the economy is squeezed.I personally think the timing of the fiscal cliff uncertainty makes it more dangerous because many American companies and individuals are finalizing their 2013 budgets right now or making their 2013 personal vacation plans. With the threat of the fiscal cliff not being addressed, they are likely to take the more conservative approach to travel budgets - and potentially not adjust those plans even if Washington finds its fiscal head.

You can read much more detail on the IATA forecast and other predictions for 2013 in the January issue of ATW; and I will also be discussing 2013 industry forecasts with fellow editors Aaron Karp and Victoria Moores at our Webinar on Jan. 23. Mark your calendars and join the discussion!

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