Long-Term Market
Continued passenger demand growth
With first-quarter data in hand, 2012 appears to be another challenging year for the airlines. Economic forecasters expect that the European debt crisis will tip Europe into recession and reduce growth in other regions. Global economic growth is projected to lag behind the long-term average into 2013.
Despite the sub-par economic outlook, air passenger demand is forecast to grow at close to the long-term average rate of 5 percent in 2012. Trends that drove above-average passenger growth in 2011 have continued into 2012: economic growth and expanding middle classes in emerging markets; liberalization and new airline business models that stimulate demand; and corporate focus on revenue growth, which bolsters demand for business-class travel.
Air cargo traffic growth, on the other hand, has loitered below the long-term average since 2011, weighed down by weak economic growth, spiking fuel prices, and supply chain shocks. Historically, air cargo traffic has been a reasonable indicator of current economic health, rather than of future economic performance or global passenger trends. Air cargo traffic correlates well with long-haul passenger traffic, while the strong demand for short-haul travel has made overall passenger traffic resilient to the challenges that have recently faced air cargo.
Oil price pressures easing
Beyond the weak economic environment, the key external challenge for airlines has been volatile oil prices. After spiking in early 2012 in response to Middle East supply concerns, Brent crude oil prices dropped below $100 per barrel for the first time since early 2011 as a result of fluctuations in both demand and supply outlooks. On the demand side, projections are declining as economists cut near-term global economic growth forecasts to reflect the impacts of the Eurozone debt crisis. Investor demand for oil and other commodities is also dropping as investors move from commodities to safer assets like US treasury bonds. On the supply side, projections are increasing as OPEC and US production rises. In the long term, energy forecasters are reassessing supply projections and, in some cases, moderating future price projections, to reflect improving North American oil shale prospects. Lower jet fuel prices will bolster near-term airline profitability outlooks, despite the uncertain economic outlook.
