Looking at the Numbers
Confidence in the outlook for both the global economy and the airline industry has improved during the first quarter of 2013. Airline share prices are up 7% so far this year, outperforming equity markets generally, despite a 5% rise in the price of jet fuel. Markets consider that there has been a structural improvement in the financial performance of airlines.
Our projection for airline industry net post-tax profits in 2013 has been upgraded to US$10.6 billion, up from $8.4 billion in December – on the condition that the Eurozone remains stable.
Stronger revenues are the main reason for this upgrade, due largely to higher air travel volumes and a return to (modest) growth in air freight, but also because yields are no longer expected to fall.
However, slightly better yields are mostly reflecting an increase in forecast jet fuel prices from $124/b to $130/b, pushed higher by the improved economic outlook. A $9-10 billion increase in forecast operating costs offsets a large part of the $12 billion upgrade to forecast 2013 airline revenues.
Upgrades to global air travel and air freight have been made because we believe the low point in the global industrial production cycle was passed in the third quarter of last year. There have now been six months of improving output and business confidence.
We had two ‘false dawns’ in 2011 and 2012. Both of those were reversed after the Eurozone crisis intensified. The risk of a repeat of the 2011 and 2012 disappointments appears to have diminished, after the ECB promised to be the lender of last resort to governments.
Emerging markets are expected to continue to be the main source of growth in demand from originating passengers. However, by region of airline registration, the long-haul operations of airlines may offset, to some extent, weakness in home markets.
Asia-Pacific airlines will benefit most from a modest upturn in cargo markets, forecast to generate the highest profits in margins and absolute dollars this year. North American airlines are expected to be the second most profitable region, due to consolidation and efficiency gains. Europe continues to lag, largely as a result of the ongoing recession in home markets. Among the smaller regions, airlines from the Middle East will likely produce the highest margins and profits in dollar terms while African airlines will move to small profit, as strong growth continues in this region.
A measure of the improved financial performance of the airline industry is that profitability in 2013 is forecast to be similar to 2006, yet oil prices are $40/b higher and global economic growth is half as strong. But passenger load factors will be around 4% points higher, as airlines are expected to effectively control capacity. Consolidation through mergers on domestic markets and joint ventures on some long-haul markets has enabled efficiency improvements, boosting financial performance.
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