The International Air Transport Association (IATA) reports a modest improvement in its outlook for the 2013 financial performance of the global airline industry primarily based on stronger revenues.
IATA said it now expects airlines to produce a combined net post-tax profit margin of 1.6 percent (up from the previously forecast 1.3%) with a net post-tax profit of $10.6 billion (up from the previously projected $8.4 billion).
“Industry profits are taking a small step in the right direction. Against a backdrop of improved optimism for global economic prospects passenger demand has been strong and cargo markets are starting to grow again. The economic optimism is also pushing fuel prices higher. We are seeing a $12 billion improvement in revenue, and a $9-10 billion increase in costs—most of which is related to fuel,” said Tony Tyler, IATA’s Director General and CEO.
Confidence in the airline industry is rising around several factors, IATA says:
• GDP growth forecasts for 2013 have been upgraded to 2.4 percent, a significant improvement from the 2.1 percent in 2012.
• It appears that the bottom of the global industrial production cycle was reached in the third quarter of 2012 after which there has been six months of increasing output and improvements to business confidence.
• There is a structural improvement in the airline industry’s financial performance as recognized by a 7 percent increase in share prices since the beginning of the year, despite a 5 percent increase in fuel costs.
Risks and Volatility: IATA noted that considerable risks remain which could derail recovery. The outlook is based on evidence of growing business confidence. But the controversy over the draconian bailout proposal for Cypriot financial institutions is a clear indicator that the Eurozone crisis is not over and could take a turn for the worse.
“European Central Bank commitments with respect to the Eurozone crisis and the slow economic recovery in the U.S. should be pointing us towards a durable, if weak, upswing. But we have had two false starts already. Improving conditions in early 2011 and 2012 disintegrated as the Eurozone crisis intensified. And it could happen again. The impact of the unfolding situation in Cyprus is a risk factor that cannot be ignored,” said Tyler.
Highlights of IATA's Forecast, include:
Stronger Revenue: Stronger revenues ($671 billion, up $12 billion from the December outlook) are the main driver of the slightly improved financial performance. Cargo demand is expected to grow by 2.7 percent (reversing the declining trend of the last two years) and cargo yields are expected to be flat (an improvement on the 1.5 percent decline previously projected). Passenger demand is forecast to grow by 5.4 percent (up from the 4.5% previously expected) and yields are expected to grow by 0.4 percent (rather than the 0.2% decline previously projected).
Costs: Fuel costs are increasing. Jet fuel is now expected to average $130/barrel for the year (up from $124.3/barrel projected in December). And the fuel bill will grow to $216 billion, a $6 billion increase over December’s expectations. Overall, fuel will account for 33 percent of airline costs, unchanged from 2012.
Cash Flow: Airline cash flows are showing better than expected performance given high costs and weak growth. This however varies by region and airline size. Large Asian carriers have seen the most improvement. The trend in the US is flat but comparable with pre-recession levels, while European airlines are struggling with the lingering recession.
Efficiency: A comparison of 2013 conditions and expected profitability to those of 2006 reveals significant gains in efficiency. The industry aggregate operating margin in both years was similar (3.2% in 2006 and 3.3% is expected for 2013) but conditions in 2013 are much more difficult.
Consolidation in domestic markets and joint ventures on some long-haul routes have been key factors in generating efficiency gains to support financial performance. This is illustrated by a rise in the load factor from 76.1 percent in 2006 to an expected 79.8 percent in 2013.
North American airlines are expected to report a $3.6 billion profit. This is slightly ahead of the $3.4 billion previously projected and the $2.3 billion profit reported in 2012. The region is a mature market (particularly for domestic operations). Tight management of capacity in response to the high fuel cost environment will see a 1.3 percent expansion in demand leading a 1.1 percent expansion in capacity.
“The improvements in industry profitability are encouraging. But they must be kept in perspective. We are projecting that airlines will make a net profit of $10.6 billion on $671 billion in industry revenues. By comparison last year Nestle, a single company, made over $11.5 billion in profit on revenues of about $100 billion. Chronic anemic profitability is characteristic across most of the aviation value chain when compared to other sectors. It will require more than improving economic conditions to fix. Neither the challenges nor the benefits of doing so should be underestimated,” said Tyler.
“The only way out of the current economic difficulties that we see around the world is growth. Airlines play an important role, providing connectivity that stimulates business and delivers products to global markets. But we can only do this if the industry is generating sustainable returns,” said Tyler.
“The improved outlook despite the difficult operating environment demonstrates the efficiencies and improvements achieved as the industry has restructured itself over the last decade. But too often governments throw us curve balls. In the last weeks we had some unpleasant reminders. Europe announced proposals for passenger rights legislation that will add costs to flying, but with little or no long-term benefit to consumers, " Tyler said.
"The US budget sequestration will see cuts to air traffic management, security and border control that may cost more economically than the benefit of the cost savings achieved. And the UK’s Air Passenger Duty—the highest aviation tax in the world—will increase again on 1 April. Airlines don’t want special treatment, but they do need a joined-up policy framework that enables them to meet the growing needs for connectivity sustainably. With a 1.6 percent net profit margin, there is very little buffer between profit and loss,” said Tyler.
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