Business Environment

Growth tempered by policy uncertainty

Global GDP growth for 2012 was disappointing at 2.2 percent. Expectations for a strengthening economic recovery as the year progressed failed to materialize. Policy uncertainty in the Eurozone caused the yields of peripheral country sovereign bonds to spike in mid-year, pushing Europe back into recession. US policy uncertainty produced the threat of the economy falling over a "fiscal cliff." The result was weaker growth, not only in these major developed economies, but also in major emerging economies.

Regions recover at different rates

Emerging economies also faced their own headwinds. In China, investment and industrial production slowed in the face of the inventory buildup that resulted from the stimulus-driven boom of 2010 and 2011. Regulations aimed at curbing excesses in the property market also contributed to the slowdown. Growth in the rest of Asia was relatively strong, driven by robust domestic demand, which buffered lower demand for exports. The exception was Japan, which was mired in recession for most of the year. Growth moderated in Latin America and the deceleration was particularly pronounced in Brazil. The Mexican economy, by contrast, strengthened as increased business and consumer confidence sustained domestic demand.

Recovery in the major developed economies has been weak as households and governments reduce debt built up before and during the Great Recession. Global growth in 2013 is forecast to be no stronger than in 2012, though as policy uncertainty recedes, momentum is projected to increase in the second half of the year. This should provide a more robust base for accelerated growth in 2014 and 2015.

Fuel prices continue to challenge profitability

Volatile oil prices have been the greatest challenge to airline profitability apart from the weak economy. Fuel costs have surpassed labor as the largest segment of airline operating cost. Fuel costs, approximately 13 percent of total costs in 2002, are closer to 34 percent today. After spiking in early 2012, oil prices have remained relatively stable. On the demand side, the weak economic outlook has moderated near-term growth projections. On the supply side, rising shale oil production in the United States is moderating near-term price projections. Lower jet fuel prices are bolstering near-term airline profitability outlooks.