IATA Issues Positive Outlook But Jet Fuel Prices on the Rise

airplaneThe International Air Transport Association (IATA) said the airline industry remains on track to deliver a second consecutive year of improved profitability. This is despite a slight downward revision to its industry outlook for 2014 to an industry profit of $18.7 billion from the previously forecast $19.7 billion.

But IATA also said the main driver of the downward revision is a higher price for jet fuel. Higher oil prices are now expected to average $108 a barrel which is $3.5 per barrel above previous projections. "Recent tensions, including in the Ukraine, have sparked an upward trend," said the association in a press statement.

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The $3 billion added cost on the industry’s fuel bill is expected to be largely offset by stronger demand, especially for cargo, which is being supported by a strengthening global economy.

Overall industry revenues are expected to rise to $745 billion, which is$2 billion greater than previously projected. “In general, the outlook is positive," said Tony Tyler, IATA’s director general and CEO. "The cyclical economic upturn is supporting a strong demand environment. And that is compensating for the challenges of higher fuel costs related to geo-political instability."

Overall industry returns, however, remain at an unsatisfactory level with a net profit margin of just 2.5 percent, he continued. The aviation industry retains on average $5.65 per passenger in net profit. This is improved from $2.05 in 2012 and $4.13 in 2013. But it is below the $6.45 achieved in 2010.

Efficiencies of improved industry structure through consolidation and joint ventures are providing more value to passengers and helping airlines remain profitable even in difficult trading conditions, Tyler said, but the industry still needs governments to understand the link between aviation-friendly policies and broader economic benefits.

"In many parts of the world the industry’s innate power to drive prosperity through connectivity is compromised by high taxes, insufficient infrastructure and onerous regulation,” said Tyler.

IATA also said its outlook forecasts are estimates of the aggregate performance of the global air transport sector and should not be taken as an indicator of individual airline performance which can vary greatly in magnitude and direction from the global outlook.

Major Forecast Drivers

Fuel currently accounts for some 30 percent of the average airline cost structure. Jet fuel prices are expected to be higher at $124.6 per barrel which is a $1.7 per barrel increase from previously forecast, and about the same as 2013. Overall, fuel costs are expected to rise by some $3 billion to $213 billion compared to the December forecast.

Demand for air travel remains strong, though, and demand for air cargo is up. Passenger demand has been strong throughout the recovery process. "We expect passenger demand growth of 5.8 percent this year," IATA said, weaker than the 6 percent previous forecast but improving from the 5.3 percent growth experienced in 2013. Passenger yields, however, are expected to deteriorate by .3 percent.

Cargo demand is showing the biggest improvement. Instead of the previously projected 2.1 percent percent, cargo is projected for 4 percent growth in 2014. And the yield decline will be moderated from the previously forecast 2.1 percent fall to a decline of 1.5 percent.

IATA said airlines continue to introduce new product options for passengers which are boosting ancillary revenues. The average fare per departing passenger is expected to be about $181, plus ancillary services may add almost $14 on top of that.

The association also said "industry consensus continues to build on the need for new distribution capability, with pilot projects continuing to be launched in anticipation of expected U.S. Department of Transportation approval later this year." Modernizing distribution standards will enable airlines to develop further innovations that will give consumers more choice and add value to the travel experience, IATA said.

Global Economic Trends

GDP growth projections for 2014 were raised to 2.9 percent from 2.7 percent. "Improvements in the global economic outlook are largely being driven by developed economies," IATA said, citing job creation in the US, the end of fiscal austerity in Europe and a much weaker yen. All are stimulating demand.

While China appears to be continuing on a trajectory of impressive growth, key emerging economies such as India and Brazil continue to face major economic challenges, though. Emerging market volatility is further increased by the recent flow of capital into U.S. dollar assets causing problems for emerging markets with current account deficits.

Several emerging markets have taken steps to raise interest rates -- despite soft economies -- in order to stem larger currency exchange rate fluctuations, IATA said. The result, however, is that they've compounded their difficulties with economic growth.

Regional Performance

All regions are expected to see higher profits and EBIT (operating earnings over operating sales) margins in 2014 than in 2013. North American airlines are expected to post a profit of $8.6 billion—the biggest contribution to industry profits.

This is $300 million better than previously projected, reflecting the strength of the U.S. economic recovery. IATA said "the solid profitability of the North American industry is being driven by the efficiencies gained through consolidation and the contribution of ancillary revenues, which are most developed in the North American market."

The anticipated $8.6 billion profit is more than double the $4.2 billion profit posted in 2010, the previous peak. That represents a third consecutive year of improving profitability. Plus, North American airlines' anticipated EBIT margin of 6.5 percent is the strongest among the regions.

European airlines are expected to post a $3.1 billion profit, IATA reported, about $100 million less than previously forecast, but more than double the $1.2 billion profit posted in 2013. EBIT margins for European carriers remain weak at 1.9 percent.

While there is optimism over the end of the Eurozone recession and the winding down of austerity measures, major structural issues remain. IATA said the region’s carriers are heavily impacted by high taxation, onerous regulation and infrastructure bottlenecks such as the failure of the Single European Sky.

The region also faces the greatest exposure to the geopolitical conflict in the Ukraine. Asia-Pacific airlines are expected to post profits of $3.7 billion and an EBIT margin of 3.4 percent, an improvement over 2013, helped by a slightly better outlook for cargo markets. Airlines in this region have the largest share of the international air cargo market.

However, the turmoil in foreign exchange markets earlier this year has adversely affected growth prospects for large economies like India and Indonesia. Even China has slowed, albeit to a much lesser extent.

The resulting adverse impact on passenger revenues more than offsets the improvement in cargo. IATA's forecast for the profits of Asia-Pacific airlines in 2014 is $400 million less than previously projected.

Middle Eastern airlines are expected to post a $2.2 billion profit this year, up from a $1.6 billion profit last year. But that's downgraded from the previous forecast.

Oil revenues from high oil prices are benefiting the home markets and the region’s carriers continue to win market share in long-haul connections through the Middle Eastern region’s hubs. Cargo, in particular is experiencing strong growth as a result, partly, of tapping into newly emerging trade lanes such as those between Africa and Asia. This follows significant investments by Chinese companies in Africa.

IATA reported that Latin American airlines are expected to post a $1 billion profit. That's $500 million less than previously projected, following a weaker than expected improvement in 2013. But the outcome this year is still more than double the $400 million profit recorded in 2013.

Poor economic performance in Argentina and Brazil are the main drivers of the reduced profitability expectations, along with the continued political and social unrest in Venezuela. An improved industry structure achieved through consolidation -- both within Brazil and across borders -- and a closer matching of capacity to demand are driving improvements over the 2013 performance.

African airlines are expected to post a $100 million profit, unchanged from the previous forecast, but reversing the $100 million loss in 2013. Economic growth and network development by a handful of African airlines is leading growth.

But profitability is far from being evenly spread across the continent. While African governments are committed to achieving world-class safety levels by 2015, the continent suffers from the lack of a holistic vision for the development of connectivity across its vast distances.

Poor regulation and high infrastructure costs and an array of taxes and charges continue to hinder development. And intra-Africa connectivity is hampered by market access restrictions despite the commitments to liberalize recorded in the Yamoussoukro Declaration.

Risks and Government Policy

In providing its economic update, IATA said airline profitability is highly sensitive to economic performance and geopolitical tensions. "For example, while a resolution of the situation in the Ukraine is still far from clear, the rise in oil prices is being felt across the industry," the association's press release said.

Government policies cannot over-rule market forces; however they can create an environment in which aviation and other industries can thrive, IATA noted: "In the case of aviation, it is a catalyst for prosperity supporting some $2.2 trillion of economic activity and over a third of world trade by value. It is therefore a common interest for governments to provide a policy environment in which airlines can successfully connect people, businesses and economies."

The association said it sees "many policy threats to connectivity," including the proliferation of passenger rights regimes and punitive regulations, which it believes add  cost and confusion to airline operations without addressing the root causes for delays.

Along with promoting guidelines for the development of passenger rights regulations that are in line with a global approach, the industry is strongly supporting the initiative of the International Civil Aviation Organization to develop global guidance in this area.

The situation in Venezuela is another major concern for the industry. The Venezuelan government’s policies continue to ignore international obligations and block the repatriation of airline funds. In total, some $3.7 billion of airline money is being blocked.

“The situation represents an unacceptable failure of the Venezuelan government to meet its commitments," said Tyler. "Aviation provides vital connectivity to the Venezuelan economy. The government should not put this at risk."

IATA represents 240 airlines that handle 84 percent of global air traffic. To read the full text of Tyler's remarks, visit www.iata.org/pressroom/speeches/Pages/2014-12-03-01.aspx.