IATA has revised its industry financial outlook.
For 2013 airlines are expected to return a
global net profit of $12.9 billion. This is expected to improve to
a net profit of $19.7 billion in 2014. Both are improvements on
the 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 industrys 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 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% of revenues in 2012, 1.8% in
2013 and 2.6% in 2014. Within this aggregate forecast for the
entire industry, performance of individual airlines and regions
will vary considerably.
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
industryoutstripping the $19.2 billion net profit that the
industry returned in 2010 - it is important to note that 2010
revenues were $579 billion. The net profit margin in 2010 was
3.3%, some 0.7 percentage points higher than the 2.6% expected for
"Overall, the industrys 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% rangein 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, IATAs Director General and CEO. "We must temper our optimism with an appropriate
dose of caution. Its a tough environment in which to run an
airline. Competition is intense and yields are deteriorating.
Cargo volumes havent 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."
IATA outlook forecasts are estimates of the
aggregate performance of the global air transport sector and
should not be taken as in indicator of individual airline
performance which can vary greatly from the global outlook,
including variations from its directional shifts.
Economic Cycle: Global GDP is expected to
expand by 2.0% in 2013 and 2.7% in 2014. This is unchanged from
the September forecast. The general trend of improvement in
developed economies particularly for the US - and relatively
disappointing growth in the BRICS countries is expected to
continue into 2014.
Passenger Demand: Passenger demand is robust
and passenger numbers are expected to reach 3.1 billion in 2013
and rise by 6% to 3.3 billion in 2014. Nonetheless, competition
remains intense and industry-wide average yields are expected to
fall by 0.2% in 2013 and by 0.6% in 2014.
Ancillary Revenues: 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.
Improved Industry Structure: Improved
industry structure and efficiency gains should allow the industry
to leverage the improving economic cycle to boost profitability
significantly in 2014. Airlines in North America, where
consolidation has progressed the furthest, are expected to
generate the largest profits and best margins in both 2013 and
2014. European airlines, still suffering from the weak European
economy, are expected to see some improvements in profitability
from successful joint ventures over the North Atlantic.
Cargo Demand: Cargo demand remains largely
stagnant. Airlines are expected to carry 51.6 million tonnes of
cargo in 2013, increasing to 52.5 million tonnes in 2014. This
modest increase in demand is expected to be offset by a decline in
yields (-2.1% in 2014). Despite the stagnation in the air cargo
industry, belly capacity continues to be introduced as airlines
seek to maximize on the robust passenger demand. Cargo revenues
are expected to be $60 billion in both 2013 and 2014. While
revenues peaked in 2011 at $67 billion, for 2013 and 2014 they are
basically unchanged from 2007 levels.
The "on-shoring" of production is having an
adverse impact on the cargo business. This is being driven by two
forces. Since the recession we have seen a rise in protectionist
measures by governments aiming to stimulate domestic economies. In
tandem the effects of earlier liberalization are fading as costs
rise in previously low labor-cost locations. These conditions are
likely to extend over several years.
The World Trade Organizations Bali agreement to
liberalize markets and improve trade facilitation is expected to
be good news for the air cargo industry. "Removing the red tape
that restricts and slows trade is a positive goal. It aligns well
with our own efforts to bring efficiency to air cargo through
e-Freight," said Tyler.
Fuel: A slight reduction in jet fuel prices is
a major driver of the improved outlook. Following easing of
tensions in Iran, oil prices are expected to see a slight downward
movement from $108.2/barrel (Brent) in 2013 to $104.5/barrel in
2014. This is $0.80 and $0.50 less per barrel than previously
forecast in September for 2013 and 2014 respectively. This
positive trend will be amplified by a reduction in the crack
spread of jet fuel resulting in savings of $2 billion in 2013 (to
$211 billion) and $5 billion in 2014 (to $210 billion) for the
overall industry fuel bill compared to the September forecast.
Profitability varies greatly by region as well
as by airline. All regions are expected to see improvements in
profitability in 2014 compared to 2013. With the exception of
Africa (which remains unchanged), all regions are expected to see
better profitability in 2014 than previously forecast.
North America: North American airlines are
expected to post a $5.8 billion profit in 2013, increasing to $8.3
billion 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). 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 both airlines,
investors and passengers.
Europe: European airlines will see
profitability improve in 2014 over 2013. Net profits for 2013 are
expected to be $1.7 billion, rising to $3.2 billion in 2014.
Efficiencies from joint ventures over the North Atlantic are
expected to be a major contributor to this improvement, offsetting
slightly the impact of the continuing economic slump across the
Eurozone. Despite this near doubling of absolute profits, EBIT
margins for the regions airlines (1.3% in 2013, 2.0% in 2014) are
the weakest next to those of Africa. The region remains burdened
by high costs, cumbersome regulation and high taxes. For example,
the UK government continues to increase its Air Passenger Duty
unabated, having just confirmed the next increase to the worlds
largest aviation tax in April 2014.
Asia Pacific: Asia Pacific airlines are
expected to post a $3.2 billion profit in 2013 which will be a
third consecutive year of declining profits. The trend is expected
to reverse in 2014 with a slight uptick to $4.1 billion. In both
years, the region is expected to deliver the second largest
absolute profit. The regions EBIT margin of 4.1% in 2013 is
expected to improve slightly to 4.4% in 2014. The profitability of
the regions airlines is subdued by the ongoing weakness in cargo
demand and the impact on supply-demand conditions of an expected
delivery of 710 new aircraft next year. The Asia Pacific carriers
are the largest players in global cargo markets with a nearly 40%
market share. Home market performance has also been mixed. Despite
a shift to a lower economic growth trajectory, Chinas domestic
market continues to see strong growth in RPKs of 12% or more.
Indias domestic market had weakened sharply in line with the
economy, but there has been a recent revival of air travel with
growth rates back to low double digit figures. Japan, by contrast,
has only seen a very low rise in domestic air travel and the size
of the market is still not back to pre-tsunami levels.
Middle East: Middle East airlines are
expected to return a net profit of $1.6 billion in 2013,
increasing to $2.4 billion in 2014. EBIT margins also continue to
improvefrom 3.8% in 2013 to 4.7% in 2014.The regions hubs,
particularly in the Gulf, continue to expand in support of growing
long-haul connectivity. Strong oil revenuesas oil prices stay
high continue to support travel generated by domestic activity
and the development of the tourist industry. The Syrian crisis has
not impacted traffic beyond its borders.
Latin America: Latin America is expected
to return a $700 million profit in 2013, increasing to $1.5
billion in 2014. The regions EBIT margin also continues to
improve from 3.1% in 2013 to an expected 5.1% in 2014. Airlines in
the region are burdened with infrastructure that is not keeping
pace with the growth in demand. While some countries, such as
Chile, have worked hard to evolve a policy framework on which
airlines can grow and drive economic growth, others have policies
which are counterproductive. For example, Mexico has implemented a
tax on jet fuel which adds to the industrys number one cost in
contravention of global agreements. Brazils import parity pricing
for jet fuel has a similar impact. And Venezuela continues to
block repatriation of some $2.6 billion of the industrys cash.
African Airlines: The outlook for African
airlines is unchanged from September with a $100 million loss in
2013 switching to a $100 million profit in 2014. It is the weakest
financial performance of any region with an EBIT margin of -0.5%
in 2013 improving to 0.7% in 2014. The regions carriers face
stiff competition on intercontinental routes while intra-African
connectivity is underdeveloped as a result of market access
restrictions. Additionally, high operating costs, heavy taxation
and infrastructure deficiencies hamper the regions airlines.
Improving safety remains the top priority for the region.
Governments have agreed, through the Abuja declaration, to aim for
world class safety by 2015.
Airlines have made great strides at improving
their businesses in the face of very adverse business conditions.
Where they have been able to improve the industry structure
through mergers and joint ventures, consumers have benefitted with
more efficient connectivity and this has translated to improved
Fuel consumption provides a good example of the
efficiencies that airlines are putting in place. In the face of
rapidly rising fuel costs, airlines have dramatically improved
fuel efficiency. In 2004 airlines transported two billion
passengers and 38 million tonnes of cargo using 65 billion gallons
of fuel. In 2014 we expect some 3.3 billion travelers and 52
million tonnes of cargoincreases of 64% and 37% respectively.
Over the same period fuel uplift has grown by only 17% to 76
"Airlines have shown that they can rise to the
challenges of a difficult trading environment. Thats good news
for economies and consumers that depend on global connectivity.
But I am increasingly concerned that governments have not fully
appreciated the critical role that aviation plays in our connected
world. Regulatory and tax burdens incrementally, but
significantly, rise year-on-year. Some governments even appear to
be backtracking on deregulation and are micro-managing in areas
such as passenger rights," said Tyler. "In 2014 we will mark
100 years since the first scheduled commercial air service was
inaugurated. Over aviations first century, our world has changed
for the better in many ways. The industry evolved into a powerful
draft horse connecting people and growing economies. Governments
should keep this in mind when developing policies or deciding
taxes. Supporting aviations enabling capabilities pays big