The International Air Transport Association (IATA) has revised its 2013 global industry outlook downwards to $11.7 billion on revenues of $708 billion but expects profits to rise in 2014 painting a positive future profitability for the business. The grouping said airline performance continued to improve in the second quarter; however at a slower pace than was expected with the previous projection (in June) of $12.7 billion. “This reflects the impact on demand of the oil price spike associated with the Syrian crisis and disappointing growth in several key emerging markets,” says IATA.
The performance outlook in 2013 is still considerably better than the $7.4 billion net profit of 2012 and the upward trend should continue into 2014 when airlines are expected to return a net profit of $16.4 billion, according to IATA forecasts. 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, director general and chief executive officer, IATA.
The IATA data forecasts that airlines are expected to post the same operating margin (3.2 per cent) as in 2006, even with a 54 per cent 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 per cent. Previously 2.0 per cent gross domestic product (GDP) growth was considered the point below which airlines posted losses.
Airline profits generally follow broad economic trends. Business confidence bottomed out at the end of 2012 and the industry had been expecting an acceleration of economic activity to follow. That has not yet materialized, according to IATA. GDP growth in 2013 is now expected to be 2.0 per cent which is slightly below the 2.2 per cent recorded in 2012. Within that overall trend, there has been 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).
A big issue for airlines remains the price of fuel and IATA says 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 and it now expects 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 per cent of airline total costs) is expected to be neutral, says IATA. The impact of the Syrian crisis and higher oil prices has been felt more through a dampening of demand, it also notes.
IATA says passenger growth will remain robust for 2013 at 5.0 per cent, although slightly below the 5.3 per cent previously projected and below the 5.3 per cent 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, it says, while yields are expected to be flat for the year (below the 0.3 per cent 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, according to the data analysis.
Looking forward to 2014, IATA says airlines are expected to see a significant boost 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 per cent GDP growth is expected) which has a direct impact on airline profitability, says IATA. Oil prices are expected to fall to $105/barrel 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,” says IATA. Furthermore, the benefits of improving market structures on several regions are expected to continue to drive performance and consumer benefits.
IATA expects slightly more robust passenger growth (5.8 per cent) 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 per cent and 2.1 per cent respectively. All regions will see improved profitability, but divergence in performance will remain, although North American and European airlines are expected to post favourable returns as the economy improves.
However, 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 per cent. That remains significantly below the industry’s weighted average cost of capital which is hovering between 7 per cent and 8 per cent.
“Airlines are demonstrating that they can be profitable in adverse business conditions. 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,” warned Tyler.