Looking at the numbers
Economic performance of the airline industry – 2014 mid-year report
Consumers are seeing a substantial increase in the value they derive from air transport this year. We expect 1% of world GDP to be spent on air transport in 2014, reaching almost $750 billion. Air travel is accelerating, with growth of 5.9%, the best since 2011, moving above the 5.5% trend of the past 20 years.
But consumers are also benefiting from cheaper travel, with the average one-way fare (before surcharges and tax) of $231 in 2014 being 3.5% lower than last year after adjusting for inflation. Business is also benefiting with the cost of shipping freight falling 4%.
Airline CFOs and heads of cargo reported in April that they expect growth in passenger and cargo services over the next 12 months to be almost as strong as in 2010 and early 2011. The upturn in economic activity driving these expectations is at risk, as the recent situation in Ukraine has shown. However, an easing in fiscal austerity policies, continued expansionary monetary policy and progress in deleveraging the private sector, are all coming together to boost growth, particularly in economies like the US.
Economic development worldwide is getting a significant boost from air transport. This wider economic benefit is being generated by increasing connections between cities—enabling the flow of goods, people, capital, technology and ideas and reducing air transport costs. The number of unique city pair connections is estimated at more than 16,000, almost double the connectivity by air twenty years ago.
Governments have also gained substantially from the good performance of the airline industry, which provided an estimated $121 billion in tax revenues this year.
Debt providers to the airline industry are well rewarded for their capital, usually invested with the security of a very mobile aircraft asset to back it. Net post-tax profits are positive, expected at $18 billion, so the industry is generating enough revenue to pay its suppliers bills and service its debt. But $18 billion is a margin on revenues of only 2.4%, so it would not take much of a shock to make over $7 billion of debt interest costs look challenging.
Equity owners are not rewarded adequately for risking their capital, except at a handful of airlines. The average return on invested capital (ROIC) in the airline industry has been improving, and is expected to reach 5.4%. However, that is more than 2% points lower than it should be in an industry that is highly competitive, whereas it is much higher in other industries.
Commercial airlines will take delivery of more than 1,400 new aircraft, representing an investment by the industry of over $150 billion. Additional capacity is being used more intensively, which is critical for profitability in such a capital intensive industry and also reduces environmental impact. Passenger load factors are expected to exceed a worldwide average of 80% for the first time this year.
We estimate airlines will spend $212 billion on jet fuel, which represents almost 30% of their total operating costs. Jet fuel prices are stable, but there has never been a 3-year period when energy costs have remained at such high levels.
Airlines are continuing to hire. Jobs in the industry should reach 2.39 million, productivity is up 2.5% and GVA/employee exceeds $100,000. Productivity has also been strong, with the average employee generating 478 ATKs in 2014, which is a 2.5% improvement over last year. This strong trend improvement in productivity is helping airlines to keep unit labour costs under control, an important objective given persistently high fuel costs. We estimate unit labour costs will be reduced by 0.7% in 2014.Infrastructure use costs are rising, plus inefficiencies in Europe alone add $3.8bn to airline costs.
The North American region is expected to perform best with a 4.3% net post-tax profit margin. Africa is the weakest region, as in the past 2 years, with margins of just 0.8%.