TravelNewsAsia.com

Airline Industry on Track for Second Year of Improving Profits

Travel News Asia Videos Podcasts Latest Travel News Asia Thursday, 13 March 2014
 

IATA has said that 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, the airline industry remains on track to deliver a second consecutive year of improved profitability.

The main driver of the downward revision is higher oil prices which are now expected to average $108/barrel (Brent) which is $3.5/barrel above previous projections. The $3 billion added cost on the industrys 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 ($2 billion greater than previously projected).

"In general, the outlook is positive. 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%," said Tony Tyler, IATAs Director General and CEO.

The aviation industry retains on average $5.65/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.

"The efficiencies of improved industry structure through consolidation and joint ventures is providing more value to passengers and helping airlines to remain profitable even in difficult trading conditions. But we still need governments to understand the link between aviation-friendly policies and broader economic benefits. In many parts of the world the industrys innate power to drive prosperity through connectivity is compromised by high taxes, insufficient infrastructure and onerous regulation," said Tyler.

Major Forecast Drivers

Fuel Prices: Fuel currently accounts for some 30% of the average airline cost structure. Recent tensions, including in the Ukraine, have sparked an upward trend. Oil prices are now expected to average $108/barrel (Brent) which is $3.5 higher than previously forecast. Jet fuel prices are also expected to be higher at $124.6/barrel which is a $1.7/barrel increase from previously forecast (and unchanged from 2013). Overall, fuel costs are expected to rise by some $3 billion to $213 billion compared to the December forecast.

Demand: Air travel demand remains strong and now demand for air cargo is growing.

Passenger demand has been strong throughout the recovery process. IATA says it expects passenger demand growth of 5.8% this year. That is slightly weaker than previously forecast (6.0%, but an improvement on the 5.3% growth for 2013. Passenger yields however are expected to deteriorate by 0.3%.

Cargo demand is showing the biggest improvement. Instead of the previously projected 2.1% growth, it now appears that air cargo is headed for 4.0% growth in 2014. And the yield decline will be moderated from the previously forecast 2.1% fall to a decline of 1.5%. Trading conditions remain challenging, but positive macro-economic trends are providing a much-needed boost. There are however, several major changes which continue to challenge the cargo business. Traditionally air cargo has grown only slightly less than world trade, at twice the rate of expansion of industrial production. The recent trend is for air cargo, world trade and industrial production to grow in tandem. The industry is growing more slowly than normal at this stage of the economic cycle. The "on-shoring" of production supply chains continues to impact the cargo business driven by:

- Protectionist measures which are dampening international trade and encouraging companies to "on-shore" supply chains, including many buy local procurement policies. Some 500 protectionist measures have been documented by Global Trade Alert in 2012 alone.

- Relative changes in production costs. For example, US energy prices have dropped whereas Chinese wage rates continue to rise.

Ancillary Revenues: 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. Ancillary services may add almost $14 on top of this. Industry consensus continues to build on the need for New Distribution Capability. Pilot projects continue to be launched in anticipation of the expected US Department of Transportation approval later this year. Modernizing distribution standards will enable airlines to develop further innovations which enhance consumer choice and add value to the travel experience.

Global Economic Trends: GDP growth projections for 2014 have been raised to 2.9% (from 2.7%). Improvements in the global economic outlook are largely being driven by developed economies. Job creation in the US, the end of fiscal austerity in Europe and a much weaker yen are stimulating demand. While China appears to be continuing on a trajectory of impressive growth, key emerging economies such as India and Brazil face major economic challenges.

Emerging market volatility is further increased by the recent flow of capital into US 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. This is compounding their difficulties with economic growth.

Regional Performance

Regional performance by airlines highlights there is a wide range of challenges and opportunities. All regions are expected to see higher profits and EBIT 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 economic recovery in the US. 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, and represents a third consecutive year of improving profitability. An anticipated EBIT margin of 6.5% is the strongest among the regions.

European airlines are expected to post a $3.1 billion profit. That is $100 million less than previously forecast, but more than double the $1.2 billion profit posted in 2013. EBIT margins remain weak (1.9%). While there is optimism over the end of the Eurozone recession and the winding down of austerity measures, major structural issues remain. The regions carriers are heavily impacted by high taxation, onerous regulation and infrastructure bottlenecks such as 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%. This is 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 in the region 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 airlines in this region in 2014 is $400 million less than the previous projection.

Middle Eastern airlines are expected to post a $2.2 billion profit. This is an improvement on the $1.6 billion profit that the regions airlines made in 2013, but it is a $200 million downgrading from the previous forecast. Oil revenues from high oil prices are benefiting the home markets and the regions carriers continue to win market share in long-haul connections through the regions 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.

Latin American airlines are expected to post a $1 billion profit. This is $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 (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

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. Government policies cannot over-rule market forces; however they can create an environment in which aviation (and other industries) can thrive. 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 policy threats to connectivity are many. For example the proliferation of passenger rights regimes and punitive regulations adds 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 governments 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. Aviation provides vital connectivity to the Venezuelan economy. The government should not put this at risk," said Tyler.

IATA

Subscribe to our Travel Industry News RSS Feed Travel Industry News RSS Feed from TravelNewsAsia.com. To do that in Outlook, right-click the RSS Feeds folder, select Add a New RSS Feed, enter the URL of our RSS Feed which is: https://www.travelnewsasia.com/travelnews.xml and click Add. The feed can also be used to add the headlines to your website or channel via a customisable applet. Have questions? Please read our Travel News FAQ. Thank you.

     
Advertising
Advertising
Copyright © 1997-2024 TravelNewsAsia.com