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Airline Industry Braces for Turbulence in 2012

Peter Suciu,|Special to CNBC.com
Friday, 11 Nov 2011 | 3:27 PM ET

Despite being profitable in 2011, the airline industry is bracing for turbulence in 2012.

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Paul Dingman
Incheon International Airport

The combination of major tax increases and fuel prices that are widely expected to rise, means there could be rougher skies ahead for the carriers. Passengers, as well, will likely face fewer frills, fewer route options and notably higher prices.

“The airline industry has raised their ticket prices to meet the soaring fuel costs,” Wayne Plucker, Senior Industry Analyst with Frost & Sullivan’s Aerospace and Defense Group tells CNBC. “The airlines have also stretched the fees and cut the service as far as they can. So if they can’t make money now, with the ticket prices and fees, then they shouldn’t be in business.”

With the reduction on the number of flights, along with fees for everything from meals to bags to early boarding, the result is that most American carriers are actually now profitable.

“We do predict a small profit for 2012, but it is not going to be as strong as 2011” says Lori Ranson, America’s Air Transport Editor for FlightGlobal. “The International Air Transport Association (IATA) shows a net profit of $6.9 billion for 2011, and next year should be about $4.9 billion with a net margin of 0.8 percent.” The forecast for North America is profits of $1.2 billion.

The biggest factor for airlines of course remains fuel costs, and no one expects that to change.

“Fuel is still the biggest unknown of the carriers,” says Ranson. “But what is known now is that the price won’t go down for 2012.”

IATA’s predicts a total fuel bill of $176 billion in 2012, accounting for 30 percent of industry costs. That assumes oil prices of $110 per barrel price of oil, which would be up 39 percent from the $79.4/barrel average in 2010.

“It is remarkable that there is any profitability,” says Ranson.

In addition to fuel costs the airline industry remains susceptible to major disruptions, with everything from wild weather to natural disasters to outbreaks of illnesses that can play havoc on schedules and even ground flights.

Aside from the usual costs, two outstanding issues could affect business in 2012.

The first is that the European Union is looking to force international airlines to pay for their polluting emissions. So far several U.S. and Canadian-based airlines and airline associations have sued the EU in reaction to this plan.

The second the Obama administration has proposed a tax increase on flights to reduce the federal deficit, with a per-takeoff fee on flights as high as $100.

“Those are two big things to watch,” says Ranson, noting that the industry has responded with no holds barred lobbying efforts, with more than 100 House members on board to oppose the takeoff tax proposal. “Those two big efforts could take airlines into the red.”

At the same time IATA reported that passenger demand has been stronger than anticipated despite the gloomy economy. According to IATA there were 2.83 billion scheduled passengers for 2011, and that number is expected to grow to 2.95 billion in 2012.

This increase will likely mean fuller flights. Delta has reported plans to bring capacity down by two to three percent for 2012, while United has announced that capacity for next year will remain flat.

The experts still see that the customers are likely the biggest losers in all this, paying more for less and those who need to fly are simply paying more.

“Corporate demand has been good this year,” says Ranson. “Business travel has been strong as capacity has been cut, with supply and demand behaving rationally.”

Cutting capacity and raising fares seems to be what air travelers should expect next year.

“The truth is that the cost to fly per mile just hasn’t kept pace, when it is adjusted over 20 years” says independent airline industry consultant Robert Herbst of Airline Financials. “More focus needs to be put on making the airline industry better and not cheaper. This could mean cutting capacity where fewer people will be able to fly. The airlines are in the business to make a profit, and flying is not an entitlement.”

All this comes as two of the leading carriers reported a sharp drop in their quarterly profits.

United Continental Holdings , which is the result of the merger of United Airlines and Continental Airlines, along with US Airways saw decline in profits from the same period a year ago.

United’s net income fell 23.4 percent to $653 million, while US Airways was down 70 percent to $76 million, with Delta Airlines Inc however reporting an increase in profit, up 50 percent to $549 million for the quarter. By contrast Southwest Airlines Co. hit bumpy skies, losing $140 million, while American Airlines and parent AMR Corp. lost $162 million due to higher fuel costs.

In the international skies, Singapore Airlines saw its half-year net profits nosedive 62 percent from the prior year to $187 million, while German carrier Lufthansa Group reported a 27 percent drop for the third quarter. Europe’s largest airline group by revenue saw a decline to 575 million euro partially on concerns related to the Europe debt crisis.

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