IATA Reports Improved Airline Performance

airlineThe International Air Transport Association (IATA) reports an upward revision to its industry financial outlook. For 2012 airlines are expected to return a profit of $6.7 billion (up from the $4.1 billion forecast in October). This is expected to improve slightly to $8.4 billion in 2013 (marginally better than the $7.5 billion forecast in October). Industry net post-tax margin, however, will remain weak at 1.0 percent in 2012 and 1.3 percent in 2013.

Improved prospects for 2012 are being driven by strong airline performance in the second and third quarters, IATA says. Despite high fuel prices and a slowing world economy, airline profits and cash flows held up at levels similar to 2006 when oil prices were about $45/barrel lower and world economic growth was 4.0 percent.

Historically, when GDP growth has fallen below 2 percent the airline industry has returned a collective loss. “With GDP growth close to the ‘stall speed’ of 2.0 percent and oil at $109.5/barrel we expected much weaker performance. But airlines have adjusted to this difficult environment through improving efficiency and restructuring. That is protecting cash flows against weak economic growth and high fuel prices,” said Tony Tyler, IATA’s director general and CEO.

Overall performance has been positively impacted by strong passenger traffic growth (5.3%) and a 3.0 percent improvement in yields. Despite the slowing world economy business travel was supported by more robust international trade in goods and service. IATA emphasizes that despite the improved prospects, overall the industry remains weak:

The $6.7 billion expected net profit is a fall from the $8.8 billion that the industry made in 2011.

The 1.0 percent net profit margin is well below the 7-8 percent needed to recover the industry’s cost of capital.

North American carriers are expected to end 2012 with a collective net profit of $2.4 billion. That is stronger than the $1.7 billion profit of 2011, largely on the back of much improved asset utilization as a result of recent industry consolidation. The Earnings Before Interest and Taxes (EBIT) margin of 3.4 percent is the strongest among regions.

“Prospects for 2013 will be largely unchanged from 2012. Net profits are expected to rise to $8.4 billion leaving the industry with a 1.3% net profit margin. It is good that we are moving in the right direction, but the year ahead is shaping up to be another tough one for the industry,” said Tyler.

In 2013, IATA estimates North American airlines are expected to post a combined net profit of $3.4 billion—the largest absolute profit among the regions, and a $1.0 billion improvement on 2012. The EBIT margin will grow to 3.8 percent (up from 3.4% in 2012). The US economy is forecast to be the strongest growing among the developed economies and further benefits are expected from earlier consolidation, IATA says. 

Meanwhile, policy risks also persist, IATA says. “We need to make sure that cash strapped governments understand aviation is a catalyst for economic growth and ensure that light touch regulation does not become a license for infrastructure providers to let costs get out of control. We will also maintain pressure on governments for important infrastructure improvements—including the Single European Sky so that hard-won cost efficiencies are not lost to battles with congestion,” said Tyler.

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