IATA - Airline Margins and Profits Remain Weak

airlineAirlines are expected to earn $4.1 billion in 2012 (up $1.1 billion from the $3.0 billion forecast in June), according to the International Air Transport Association (IATA) who announced an upward revision to its global aviation outlook for 2012. The fall in airline profits from the $8.4 billion that the industry earned in 2011 will be cushioned by improved airline performance, IATA said. 

The IATA revision will still see the industry’s net profit margins fall from the 1.4 percent realized in 2011 to 0.6 percent (up from the previously forecast 0.5 percent). In a first look at 2013, the association sees global profits rising modestly to $7.5 billion, though this is a net margin of just 1.1 percent.

“The European sovereign debt crisis lingers on. China continues to moderate its growth. And the impact of recent quantitative easing in Japan and the U.S. will take time to yield growth. While some of these risks have diminished slightly over recent months, they continue to take their toll on business confidence. The outlook improvement is due to airlines performing better in a difficult environment,” said Tony Tyler, IATA’s director general and CEO. 

Improved airline performance was evident in second quarter results, which showed operating profits close to those of the previous year, following a tough first quarter, IATA reports. The evidence is showing that consolidation is producing positive results. Asset utilization in the passenger segment is high across many markets. In past cycles passenger load factors and aircraft utilization would have fallen by this stage, in the face of slowing demand and increasing aircraft deliveries. In the current cycle airlines have kept both load factors and aircraft utilization high. This has allowed yields to improve and spread fixed costs more widely. However, asset utilization has fallen in the weaker cargo market, adversely affecting Asia-Pacific airlines in particular, where this business makes up a larger share of total revenues, IATA said.

“Even six years ago, generating a profit with oil at $110/barrel (Brent) would have been unthinkable. The industry has re-shaped itself to cope by investing in new fleets, adopting more efficient processes, carefully managing capacity and consolidating. But despite these efforts, the industry’s profitability still balances on a knife-edge, with profit margins that do not cover the cost of capital,” said Tyler.

“Aviation has an important role to play as the global economy struggles. Growth is the only way forward and a healthy aviation industry can stimulate that—linking stagnating developed economies to robust emerging markets. Aviation connectivity spurs growth at both ends. That is why it is important for governments to ensure aviation’s ability to be a catalyst for growth is not constrained. Unfortunately, in many parts of the world, it is an uphill struggle with high taxes, onerous regulation and insufficient infrastructure. All of this stunts industry growth to the detriment of the world economy,” said Tyler.

Globally, aviation supports some 57 million jobs and $2.2 trillion in economic activity.

IATA cites several 2012 outlook drivers, including:

Passenger: The passenger market has performed well in the face of weak business confidence in Western economies. Demand is expected to grow by 5.3 percent over the course of 2012, which is 0.5 percentage points better than was foreseen in June. Over the first eight months of 2012 passenger demand has increased by 1.4 percentage points ahead of capacity. These tighter supply and demand conditions led to strong load factors which averaged at 79.3 percent for January to August 2012. This set the stage for a stronger yield growth which is expected to be 2.5 percent (one percentage point ahead of what was anticipated in June).

The 2012 outlook varies widely by region, IATA notes:

North America: North American carriers are expected to post profits of $1.9 billion in 2012, up $0.5 billion from the previous forecast and from the $1.3 billion that the region made in 2011, IATA says. This is the largest improvement among all the regions, owing primarily to the impact of tight capacity management. Over the first eight months of the year, passenger demand grew by 1.3 percent while capacity expanded by just 0.2 percent. As a result, the region has also maintained consistently high load factors—averaging 83.2 percent for the January to August period, IATA says.

In its first look at 2013, IATA estimates industry profits rising to $7.5 billion, as economic forecasts point to slightly stronger economic growth and lower oil prices. That’s a better result than 2012 but with a profit margin of only 1.1 percent of revenues it still represents a return on capital far below other industries. The modest improvement is based on a forecast for global GDP of 2.5 percent growth (up from 2.1% in 2012), IATA says.

Regional divergences will persist in 2013. North American airlines are expected to continue to improve profitability based on tight capacity management. Asia-Pacific carriers will see a profitability boost from improved cargo volumes (if not yields). European airlines are expected to be the only region in the red for 2013, although losses will be trimmed as a result of slower capacity growth and improved global trading conditions on long-haul markets, IATA reports.

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