Airline Profits Grow Slowly in 2013 But 2014 Looks Good

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, according to Tony Tyler, the International Air Transport Association's (IATA) Director General and CEO.

"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. 

Tyler's remarks emerged as IATA revised its 2013 global industry outlook downwards to $11.7 billion on revenues of $708 billion and offered its forecast for 2014. 

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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, IATA says. Performance in 2013 is considerably better than the $7.4 billion net profit of 2012, IATA says.  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, IATA says.

“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 Tyler.

Airline performance remains strong, IATA said. This year, airlines are expected to post the same operating margin (3.2%) as in 2006, even with a 54 percent 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 percent. Previously 2.0 percent gross domestic product (GDP) growth was considered the point below which airlines posted losses.

Major Forecast Drivers for 2013 Cited by IATA:

 

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 percent which is slightly below the 2.2 percent 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 percent 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 percent, although slightly below the 5.3 percent previously projected and below the 5.3 percent 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.

North America: North American airlines are expected to post the strongest performance at $4.9 billion profits (up from the previously forecast $4.4 billion) for an Earnings Before Interest and Taxes (EBIT) margin of 4.3 percent, IATA reports. This is more than double the $2.3 billion profit of 2012. Along with an improved overall economic outlook, the North American industry’s improved profitability is being driven by the impact of a better industry structure. Consolidation and international joint ventures on major markets are driving efficiency gains. Consumers are benefitting both from expanded networks with more travel options and from significant investments to improve service levels. Passenger demand is expected to grow by a modest 2.0% which is the slowest growth of any region. But this will outstrip the 1.6 percent expansion in capacity. Concerns over the trend towards more onerous regulation in the US have increased considerably with unfounded objections to further consolidation by the US Department of Justice.

IATA's 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. 

IATA said we expect slightly more robust passenger growth (5.8%) and a significant improvement in cargo growth to 3.7 percent. Yields, however, for both passenger and cargo markets are expected to continue to fall by 0.5 percent and 2.1 percent respectively.

All regions will see improved profitability, but divergence in performance will remain, IATA says.     

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.

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, IATA reports.

Visit www.IATA.org

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