Looking at the Numbers
Upgraded outlook for airline performance
We now expect the global commercial airline industry to generate net post-tax profits of $12.9 billion this year and $19.7 billion, or 2.6% of revenues, next year. This represents an upward revision of $1.2 billion in 2013 and $3.3 billion in 2014, which reflects the impact of lower jet fuel prices over the forecast period and the improvements to industry structure and efficiency already visible in quarterly results this year.
The outlook for revenues is unchanged but its composition is different, with stronger passenger markets but weaker cargo. A downward revision in the outlook for costs reflects a slightly lower trajectory for crude oil prices and also slower growth in capacity, as changes in industry structure complement focus on improving efficiency and the utilization of aircraft.
The pattern of economic growth, with improving developed economies and relatively disappointing growth in the BRICs next year, will also influence airline performance.
A stronger US economy coinciding with a consolidated airline industry at home and on the North Atlantic is expected to produce a much improved performance for N. American airlines next year. European airlines are still hampered by weak home markets in parts of the Eurozone, but the performance of joint ventures on the N. Atlantic will help to improve profitability.
Asia-Pacific airlines will still generate the second largest net profit, but the weakness of cargo and key Asian growth markets will subdue performance in this region. Airlines in the Middle East and Latin America are forecast to be 2nd and 3rd to N. America in terms of margins. Africa does little better than break-even.
Business environment improving but…
The fortunes of the commercial airline industry are inextricably linked to the strength of global economic development. The improvement visible in financial performance during 2013 is in part due to the upturn of economic growth, first signaled by rising business confidence in 2012Q4 and then followed by a slow but significant upturn in industrial production and world trade growth.
But the most worrying recent economic development has been the apparent halt in globalization. World trade has slowed, since the recession, to grow no faster than domestic industrial production.
Production is being ‘on-shored’ partly because of rising trade barriers since the recession – which could potentially be resisted and reversed – and partly due to a market driven slowdown to further globalization.
The growth of air travel and air cargo is much more closely linked to the expansion of international trade than to GDP. An end to the rapid growth of international trade, if that persists, would mean much slower growth of air transport in the future.
Hopefully, the Bali trade deal just concluded will fire up the engines of international trade once more. However, that might take some time to come about and lift air cargo growth significantly.
Source: Netherlands, CPB, Markit
Consolidation and ancillaries are key
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 furthest, are expected to generate the largest profits next year. European airlines, still suffering from weak home markets in much of the eurozone, will benefit from the success of JVs on the North Atlantic.
Source: Netherlands, CPB
Ancillaries have been the second key factor behind better financial performance. Worldwide ancillaries are forecast to rise to an estimated average of $13 per passenger. But even with ancillaries, industry net profits next year of $19.7 billion are still only $5.94 per passenger, a margin vulnerable to shocks from regulatory costs or market developments.
More information on IATA economic analysis at www.iata.org/publications/economics/