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Margins thin as airlines report upsurge in profit

Airline industry earnings that are forecast to reach a record this year on surging U.S. gains mask margins too thin to provide any real resilience to economic setbacks, the International Air Transport Association said.

Carriers will earn $18 billion in combined net income in 2014, IATA CEO Tony Tyler said Monday at the group’s annual meeting in Qatar. That’s $700 million less than previously forecast and represents a margin of just 2.4 percent on projected sales of $746 billion, or $5.42 per passenger.

“We have seen consolidation and international cooperation between airlines assist in this movement upwards, but it’s still very vulnerable to any number of shocks,” Tyler said in an interview, adding that the historically unprofitable industry “can afford to be a little bit optimistic.”

Mergers including the formation of American Airlines Group Inc. out of AMR Corp. and US Airways Group Inc. have seen three main network operators emerge in both the U.S. and Europe, helping to rein in capacity and bolster fares. At the same time, fuel prices remain high and airlines in the Gulf and Asia are ordering vast new wide-body fleets that require sustained global growth to avoid a glut of excess seats.

The forecast global profit for this year would represent a 70 percent gain on last year’s $10.6 billion.

A surge in North American earnings underpins the expected improvement, with the continent forecast to post net income of $9.2 billion, slightly more than 50 percent of the global total. The figure translates into a retained profit of $11.09 per passenger, compared with only $2.83 as recently as 2012.

Other regions will fare less well, with the forecast reflecting a “slight downgrade” from one for a $18.7 billion profit issued in March in light of slowing trade and a slide in business confidence tied to concerns over China, IATA said.

“The level of profitability is on an upward path and that’s good, but it’s still very thin,” Tyler said in the interview.

Setbacks including an economic reversal, natural disaster, surge in fuel costs or outbreak of an epidemic could all erase profit, and while the industry is structurally stronger, margins still don’t cover the 7 percent to 8 percent cost of capital, he said.

Gulf carriers such as Dubai-based Emirates and Qatar Airways Ltd., which helped host the IATA meeting, represent significant competition for more established airlines, though those companies can and will respond, he said.

Tyler said that while the industry is particularly exposed to China both as a burgeoning travel market and driver for the global economy, his time leading Cathay Pacific Airways Ltd. in Hong Kong gives him confidence in the country’s economic resilience.

“I don’t think we need to be too concerned about a hard landing,” he said. “I believe the government will manage its way through the current economic issues.”

IATA had initially forecast industry earnings of $19.7 billion for 2014 in December, before paring the estimate to $18.7 billion in March as the Ukraine crisis drove up oil prices and growth in emerging markets slowed.

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