Looking at the numbers
Improvement in 2013 slower than expected
Airline financial performance continued to improve in most regions during the second quarter of this year, but not by as much as had been expected.
We have been expecting to see an acceleration of global economic activity, and an upturn in the fortunes of the airline industry, ever since business confidence bottomed out at the end of last year. However, that upturn has not yet arrived in trade and production – though business confidence points to improvements ahead.
In fact the expected improvement in developed economies – the US in particular – has been happening, as the chart below shows. The steps taken after the global financial crisis to recapitalize the US banks, reduce private sector debt and boost central bank liquidity now appear to be strengthening US economic growth. Europe is far from resolving its debt problems but the Eurozone economy seems to have stopped shrinking. Japan is benefiting from monetary expansion and a more competitive exchange rate.
Source: Netherlands CPB
However, the emerging economies – Brazil and India in particular but to some extent also China – have slowed further, offsetting the impact on global growth of the improved situation in the developed economies.
These developments have been bad news for cargo markets and the regions, such as Asia-Pacific. Air travel has also slowed from its pace last year, though the robustness of business travel and the structural emergence of China’s domestic market have kept growth close to trend.
The slower than expected improvement of air transport markets and airline profits this year can be broadly explained by oil prices not falling as far as expected, due to the Syrian crisis, and a weaker upturn in world trade, due to the unexpected further slowdown in a number of key emerging economies.
As a result we have lowered our forecasts for passenger and cargo market growth this year, and cut our 2013 forecast for global commercial airline profits from $12.7 billion (in the June forecast) to $11.7 billion.
Prospects for 2014 look good (in parts)
Our first look into 2014 is fairly encouraging. The global business cycle has not yet turned up again, but improved consumer and business confidence suggests that it will do so in the fourth quarter of this year, and into 2014.
Oil prices are anticipated to fall to average $105/b, on lower geopolitical risk and the improved US energy outlook. Furthermore, the benefits of improving market structure in several regions are expected to rise, with consolidation on some mature markets, new entry down due to financing difficulties, and ancillary revenues growing in importance.
We forecast industry operating margins to average 4% in 2014, the best since 2010 although not as good as that year. Net income is expected to rise to $16.4 billion next year.
Source: ICAO (history), IATA (forecast)
The North American airlines are expected to do better this year and next, a combination of a consolidated, more efficient industry, and an improving economy. However, relatively weak cargo markets and slower emerging economies are expected to keep profits in the Asia-Pacific region from rising much next year. European airlines are slowly improving performance, mostly on long-haul markets. Africa is up but still struggling, while airlines in Latin America and the Middle East see further improvements in performance this year and in 2014.
Returns on invested capital are on an improving trend and our forecast for industry profits implies an average return on capital employed of 5.2% in 2014. But with higher bond yields the cost of capital – what investors expect to earn – has also risen. There is still some way to go before airline returns are adequate.
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