Performance in 2013 is considerably better than the $7.4 billion
net profit of 2012. The upward trend should continue into 2014 when airlines
are expected to return a net profit of $16.4 billion. This would make 2014 the
second strongest year this century after the record breaking $19.2 billion
profit in 2010.
“Overall, the story is largely positive. Profitability continues
on an improving trajectory. But we have run into a few speed bumps. Cargo
growth has not materialized. Emerging markets have slowed. And the oil price
spike has had a dampening effect. We do see a more optimistic end to the year.
And 2014 is shaping up to see profit more than double compared to 2012,” said Tony Tyler,
IATA’s Director General and CEO.
Airline performance remains strong. This year, airlines are
expected to post the same operating margin (3.2%) as in 2006, even with a 54%
hike in jet fuel prices. The industry has been able to absorb this enormous
cost increase as a result of changes in the industry structure (through
consolidation and joint ventures), increased ancillary sales and reduced new
entry due to tight financial markets. Moreover, the industry is expected to
have a relatively good year even with global economic growth at 2.0%.
Previously 2.0% gross domestic product (GDP) growth was considered the point below
which airlines posted losses.
Major Forecast Drivers for 2013
Economic Growth : Airline profits generally follow
broad economic trends. Business confidence bottomed out at the end of 2012 and
we have been expecting an acceleration of economic activity to follow. That has
not yet materialized. GDP growth in 2013 is now expected to be 2.0% which is
slightly below the 2.2% recorded in 2012. Within that overall trend, we have
seen an acceleration of improvements in developed markets (particularly the US ) and a deceleration of growth in some key
emerging markets (India , Brazil and to some extent China ).
Oil Price : Oil prices are expected to average
at $109/barrel (Brent) for the year. While this is $1.0 higher than previously
expected, jet fuel prices have softened slightly. We now expect jet fuel prices
to average $126.4/barrel ($1.0 less than expected). The net impact on the
overall fuel bill (which is expected to total $213 billion and account for 31%
of total costs) is expected to be neutral. The impact of the Syrian crisis and
higher oil prices has been felt more through a dampening of demand.
Passenger : Passenger growth remains robust at
5.0%, although slightly below the 5.3% previously projected and below the 5.3%
growth recorded in 2012. Passenger numbers are expected to grow to 3.12
billion—the first time that they have topped the 3 billion mark. Yields are
expected to be flat for the year (below the 0.3% growth previously projected).
It should however be noted that load factors are at record highs (80.2%) and
yields in the US
are above pre-recession levels.
Cargo : Cargo
markets remain in the doldrums. Growth of 0.9% is expected (down from the
previously projected 1.5%). The ability of airlines to match cargo capacity to
demand is limited by the natural growth in belly capacity that occurs as
airlines respond to passenger demand. As a result of this mismatch, cargo
yields are expected to fall by 4.9% this year (deeper than the 2.0% decline
previously projected). Cargo revenues are expected to show an $8 billion
decline to $59 billion from their peak in 2011. By comparison passenger
revenues expanded by $68 billion to $565 billion over the same period.
Regional Divergence in 2013
Asia-Pacific: The outlook for Asia-Pacific
airlines is downgraded by $1.5 billion to $3.1 billion profits largely driven
by slower growth among the region’s emerging economies. Asia-Pacific carriers
are the largest players in global cargo markets and the most impacted by its
flat performance. This has been somewhat offset by a strengthening
domestic market in China .
Japanese carriers are also seeing a boost as a result of monetary expansion,
more favorable exchange rates and the impacts of industry restructuring. We
expect robust passenger demand growth of 6.6% to be outstripped by a 6.9%
increase in capacity.
Middle East : Middle East
carriers are expected to post profits of $1.6 billion which is marginally ahead
of the $1.5 billion previously forecast. The region’s efficient hubs continue
to support strong performance on long-haul markets. And the impact of the
Syrian crisis has been limited. Passenger demand is expected to grow by 10.5%,
the strongest among all regions. But this will be slightly outstripped by
capacity growth of 11.3%.
The Outlook for 2014
Airlines are expected to see a significant boost in 2014 with
profits of $16.4 billion on revenues totaling $743 billion. Rising business and
consumer confidence levels should indicate an uptick in the global business
cycle (2.7% GDP growth is expected) which has a direct impact on airline
profitability. Oil prices are expected to fall to $105/barrel (Brent, from $109
expected this year) on the back of reduced geo-political tensions and an
improved US
energy outlook. A fall to below $100 would be expected from normal market forces.
But the OPEC cartel is preventing the full realization of the benefits of
better supply prospects. Furthermore, the benefits of improving market
structures on several regions are expected to continue to drive performance and
consumer benefits.
We expect slightly more robust passenger growth (5.8%) and a
significant improvement in cargo growth to 3.7%. Yields, however, for both
passenger and cargo markets are expected to continue to fall by 0.5% and 2.1%
respectively.
All regions will see improved profitability, but divergence in
performance will remain.
· 2014 is
expected to be particularly strong for North American carriers ($6.3 billion
net profit, the industry’s strongest) as the economy improves. Capacity
discipline is expected to see yields improve, bucking the global trend.
· European
carriers are also expected to see a near doubling of profits to $3.1 billion
(although even this will only generate an EBIT margin of 1.9% with only African
carriers being lower).
· Asia-Pacific
is expected to see a modest improvement in profitability to $3.6 billion,
largely on the back of improved cargo performance, the growing Chinese domestic
market and the benefits of restructuring in Japan .
· Middle East carriers are expected to post a $2.1
billion profit (their highest ever).
· Carriers
in Latin America are expected to see profits
rise to $1.1 billion.
· African
airlines are also expected to return a combined profit of $100 million.
Even with the significant improvements expected for 2014, an
industry profit of $16.4 billion implies a return on invested capital of just
5.2%. That remains significantly below the industry’s weighted average cost of
capital which is hovering between 7% and 8%.
“Airlines are demonstrating that they can be profitable in
adverse business conditions. Efficiencies are being generated through myriad
actions—consolidation, joint ventures, operational improvements, new market
development, product innovations and much more. When market forces drive
action, we get results that both strengthen the industry and benefit the
consumer. Quite simply, stronger airlines can invest more in improving
connectivity and service innovations. If more policy makers incorporated that
into the cost-benefit analysis when developing regulations, we would have a
much healthier industry generating even broader economic benefits,” said Tyler .
The balance between profit and loss remains delicate despite the
forecast improvement for 2014. “A $16.4 billion profit for transporting
some 3.3 billion passengers means that airlines will retain an average of about
$5.00 per passenger. That very simple calculation demonstrates that even a
small change in the operating environment—a new tax or other cost
increase for example—could change the outlook quite significantly,” said
Tyler.