Expanding passenger demand and ancillary revenues are helping airlines to achieve profitability. For 2013 airlines are expected to return a global net profit of $12.9 billion, the International Air Transport Association (IATA) reports in an upward revision to its industry financial outlook. This is expected to improve to a net profit of $19.7 billion in 2014, IATA says, an improvement on IATA’s September forecast which anticipated an industry net profit of $11.7 billion in 2013 increasing to $16.4 billion in 2014.
The upward revision reflects lower jet fuel prices over the forecast period as well as improvements to the industry’s structure and efficiency already visible in quarterly results this year. Passenger markets continue to outperform the cargo business which remains stagnant both on volumes and revenues, IATA says.
IATA expects 2014 to be a second consecutive year of strengthening profitability (beginning from 2012 when airlines posted a net profit of $7.4 billion).
Industry net profit margins, however, remain weak at 1.1 percent of revenues in 2012, 1.8 percent in 2013 and 2.6 percent in 2014. Within this aggregate forecast for the entire industry, performance of individual airlines and regions will vary considerably, IATA says.
The anticipated $19.7 billion profit in 2014 would come on projected revenues of $743 billion. While this would be the largest absolute profit for the airline industry—outstripping the $19.2 billion net profit that the industry returned in 2010 –IATA notes that 2010 revenues were $579 billion. The net profit margin in 2010 was 3.3 percent, some 0.7 percentage points higher than the 2.6 percent expected for 2014.
“Overall, the industry’s fortunes are moving in the right direction. Jet fuel prices remain high, but below their 2012 peak. Passenger demand is expanding in the 5-6 percent range—in line with the historical trend. Efficiencies gained through mergers and joint ventures are delivering value to both passengers and shareholders. And product innovations are growing ancillary revenues,” said Tony Tyler, IATA’s director general and CEO.
“We must temper our optimism with an appropriate dose of caution. It’s a tough environment in which to run an airline. Competition is intense and yields are deteriorating. Cargo volumes haven’t grown since 2010 and cargo revenues are back at 2007 levels. The passenger business is expanding more robustly. Some airlines will out-perform our estimates and others will under-perform. But, on average, airlines will only make a net profit of about $5.94 per passenger in 2014,” said Tyler.
IATA expects North American carriers to achieve $8.3 billion profit in 2014. In both years North American carriers will outperform the aggregate industry to deliver both the highest absolute profits and the strongest EBIT margins (4.8% in 2013, 6.4% in 2014), IATA says.
“Mergers on home markets and joint ventures on some international markets have helped to improve asset utilization to very high levels and generate efficiencies, as well as deliver benefits to passengers from the merged networks. However, higher government fees on airlines and their passengers, as a result of the Congressional budget deal, risk damaging airlines, investors and passengers, “IATA reports.
IATA also noted that ancillary revenues are a key driver of improved financial performance. Worldwide ancillary revenues have risen to an estimated $13/passenger. Airlines are underpinning their profitability with innovative products and services. On a per passenger basis, ancillary revenues are greater than the $5.94/passenger profit that airlines are expected to earn in 2014. Without ancillaries, the industry would be making a loss from its core seat and cargo products.