Good afternoon and thanks for joining us this afternoon.
These last weeks have been eventful for IATA and for air transport. Today I would like to update you on our latest outlook, some insights on how the cargo industry is doing and recent developments in environment.
First, the outlook. On September 23 we revised our outlook for the year. We continue to see 2013 as a better year for the industry than 2012. The bottom line numbers support that. Airlines made a net profit of $7.4 billion last year. We see that increasing to $11.7 billion this year. And we expect a further increase to $16.4 billion in 2014.
The industry is generating profits—which as you know is not always the case. And those profits are increasing—which is good news. But I need to add a familiar caveat to this which is that the industry’s net profit is still far from acceptable. Next year, for example, we expect airlines to earn a $16.4 billion net profit on overall revenues of some $743 billion. For those good at math, you will have calculated that is a 2.2% net profit margin. Looked at another way, if we are correct about our 2014 forecast including that passenger numbers will climb to nearly 3.3 billion, airlines will earn less than $5 per passenger carried.
Running an airline is a tough business. And, it would not take much in terms of a new tax, increased charge or change in the economic environment to significantly impact the bottom line.
We announced this new outlook a few weeks ago, so I don’t want to spend a lot of time rehashing the specifics of the forecast. But I would like to quickly discuss some of the macro-trends which are impacting this outlook before moving to more regional comments.
Global Trends and Regional Performance
Oil prices remain high. We expect some price relief in 2014…with a slight decline to $105/barrel (Brent) from $109 this year. But to understand the burden that prices of this level cause the industry, let’s remember that in 2004 oil was at $38.3/barrel.
That airlines are making any money at all with fuel above $100/barrel bears witness to the enormous changes—restructuring, efficiency gains, re-engineering—that has taken place over the last decade.
The second factor is the generally weak economy. Historically, airlines delivered a collective loss when global GDP growth was 2.0% or below. This year we will see a de-coupling of that relationship with airlines delivering a small profit with GDP growth expected to be exactly 2.0%. As with oil prices, this speaks to the fundamental changes that airlines have made in order to improve efficiencies and generate profit even in difficult economic conditions.
The third factor is a divergence between cargo and passenger performance. Passenger demand continues to show robust growth. August passenger traffic was up 6.8% on the previous year. August air cargo performance, however, was up just 3.6%. While this illustrates the gap, the year-to-date performance of just 0.7% growth tells an even more compelling story of an air cargo sector in a major slump.
This is not a recent phenomenon. Cargo plummeted with the global financial crisis. It re-bounded strongly in 2010 but has been stagnant ever since. Passenger travel, on the other hand, had a slower rebound, but it has been consistently growing along the historical trend line of 5% to 6%.
And the fourth factor is the success of consolidation and joint ventures. This is making a real difference to industry performance. We can see it most clearly in North America where airlines—on the back of consolidation in the US market—are among the industry’s strongest performers. We expect North American airlines to deliver net profits of $4.9 billion this year, increasing to $6.3 billion in 2014.
European airlines are also improving performance, but remain very weak with a $1.7 billion net profit this year increasing to $3.1 billion in 2014.
Asia-Pacific airlines—while stronger than their European counterparts—are not having an easy time. In 2010 the region was the most profitable with $11.1 billion netprofit. That was more than halved in 2011 to $5.0 billion. It fell again in 2012 to $4.0 billion. Compared to last year Asia-Pacific will be the only region to see profitability decline—with an expected profit of $3.1 billion in 2013. We are hopeful that the trend will reverse in 2014 with a $3.6 billion profit.
Asia-Pacific is a mixed bag of good and difficult news. On the positive side, we are seeing some growth in Japan as a result of industry re-structuring and government policies to support general economic growth. We are also seeing China’s domestic market barreling on. August domestic traffic was up 13.7% on the previous year. But India is a major concern with high operating costs and infrastructure issues. And the air cargo slump is hitting the region’s carriers hardest. Together they account for almost 40% of the global market.
One of the events that drove the timing of my trip here is cargo related—the FIATA World Congress which some of you may be covering. Tomorrow I will address the group with a pretty frank analysis of the challenges that air cargo faces. While cargo volumes have basically been stagnant at around 50 million tonnes a year since 2010, cargo revenues have declined from a peak of $67 billion in 2011 to an expected $59 billion this year.
That is a complicated way of saying that the sector is not growing and that yields are falling. On top of that, there is evidence of a loss of market share. Air cargo volumes are growing more slowly than world trade is expanding.
As I will mention in my speech tomorrow, shippers are finding new alternatives to the speed that air cargo provides. My remarks will point to the need for the sector to work together to deliver efficiencies with programs like e-freight and to improve quality standards to ensure that shippers get value for the premiums that they pay to ship by air.
And lastly, before I take your questions, I wanted to mention the historic agreement on Environment that was achieved at the 38th Assembly of the International Civil Aviation Organization (ICAO) on 4 October. For those of you not familiar with ICAO, it is the UN specialized organization for civil aviation. It is where governments meet to set global standards for the sector.
The ICAO assembly happens only once in three years. And it was a 2-week marathon of global discussions on a broad range of topics. Enormous progress was made on safety, air navigation, passenger rights, the treatment of unruly passengers and other important issues. But it was the environment discussions that captured the most attention.
Part of that was at the prompting of Europe. As you will remember, Europe’s plans to include international aviation in its emissions trading scheme brought the world to the brink of a trade war. Tensions eased in November last year when Europe stopped the clock on implementation. And that gave the world some space to work on a global approach.
The aviation industry has always called for a global approach. And we have had the support of many key governments—including Singapore. Aviation needs to earn its license to grow by managing the 2% of manmade carbon emissions for which it is responsible. To that point, the industry has committed to carbon neutral growth from 2020 and to cutting net emissions in half by 2050 compared to 2005 levels. That is not just the airlines. It is a common commitment of airlines, airports, air navigation service providers, business jet operators and the manufacturing community.
We have also agreed—across the industry and with governments—that this would be achieved with a combination of improvements in technology, operations and infrastructure as well as with the use of market-based measures or MBMs.
In June, at our Annual General Meeting, IATA’s airlines called on governments to implement a single MBM from 2020. The preferred option is a global mandatory carbon offsetting scheme. We see that as the simplest, fairest and easiest to both implement and manage.
Governments have now mandated ICAO to develop a single global MBM for implementation from 2020. And by the next Assembly—2016—they will have the first proposals for how this can be achieved. Industry is committed to working with governments to bring this to a successful conclusion.
And I would just like to emphasize the significance of this achievement. No other sector has made such a commitment. It is a bright spot in the entire climate change effort. And IATA and its members—indeed the entire aviation industry—are committed to ensuring that it will be successful.
With that, I am happy to take your questions.