Thank you all for joining us here in Geneva and around the world.
Today we have some moderately positive news. We are upgrading our forecast for 2013 global airline industry profits to $10.6 billion from the $8.4 billion that we had projected in December. It’s a small step in the right direction. It will raise the airline industry’s net profit margin to 1.6%. And even at that low level, it would be the third highest profit margin since 2000. That tells you something about how difficult the airline business is.
What has changed since our last forecast?
First, demand in the first quarter has been stronger than we had anticipated
- For cargo, we thought that the year would see growth of 1.4%. But improved business confidence and growing industrial production have raised expectations to full year growth of 2.7%. Considering that the market contracted by 2.0% last year and by 0.7% the year before, this is an important change in the trend. And the increased demand will see yields stabilize. In our previous forecast we were expecting them to fall by 1.5%.
- On the passenger side of the business, the growth in demand despite economic uncertainty in Western economies has been one of the more interesting developments of the last few years. Travel demand has been supported by robust growth in the so-called emerging markets, reflecting a longer term shift in the center of gravity of the industry. 2012 saw 5.3% growth on 2011. And we see that strength continuing into this year with a forecast of 5.4% growth. We had expected deterioration in yields in the December outlook. But with the strong start to the year we are now expecting a very modest improvement of 0.4%. Unfortunately this reflects the need for airlines to try to recover the higher fuel costs we now expect this year.
The result of demand improvements is increased revenue. The forecast for industry revenues has increased by $12 billion to $671 billion.
Of course, not all of that $12 billion will go the bottom line. Costs are also on the rise, with fuel being the main area of concern. In December we expected an jet fuel price of $124.3/barrel. At this point, $130/barrel seems more likely to be the average for the year. With that upward adjustment, we expect the fuel bill to rise by about $6 billion. On top of that higher capacity will also add $3 to 4 billion in costs.
So the net of that would leave airlines $2.2 billion better off for the year, taking net profits to a total of $10.6 billion in 2013. There is always a temptation to see shifts measured in billions of dollars as representing major change. But please keep in mind that this is for an industry that is expecting $671 billion in revenue. So a shift of $2 billion is equal to only a fraction of a percentage point of industry revenues.
What I think is very significant is that airlines are making any money at all in these difficult trading conditions, let alone increasing profit expectations. A look back to 2006 illustrates the point. In 2006 the aggregate operating margin was 3.2%. This year it is slightly better (3.3%) but under much more difficult conditions.
- In 2006 the economy was more robust—GDP grew by 4.0%. We are expecting growth of just 2.4% this year.
- 2006 oil was at about $65 per barrel (Brent) and drove 26% of industry costs. This year we are expecting $109.5 which is about 33% of costs.
Industry consolidation in domestic markets and joint ventures on long-haul routes have helped to improve efficiency, as economies of scale were realized by the merging of networks and fleets. A clear indicator of that is what has happened to passenger load factors. They were 76.1% in 2006. This year we expect 79.8%. That improvement of 3.7 percentage points is significant.
Before I go into a look at our regional expectations, I do need to highlight a very significant risk. The forecast is based on a stable, if weak, Eurozone economy and slow but steady economic growth in the US. Over the weekend we had a reminder that the Eurozone crisis is far from being resolved. The European Central Bank’s commitment to be the lender of last resort sent a strong positive signal to markets and boosted confidence. But the draconian measures proposed for Cyprus were a shock and threatens to undermine trust in the banks. It looks like the authorities are responding but it remains to be seen whether they will succeed or whether confidence in European recovery will be damaged.
It would not be the first time that developments in the Eurozone crisis have done so. In early 2011 and again in early 2012 we saw similar improving trends. And both times they lost steam as a result of the crisis taking a turn for the worse. It could happen again.
There is also a considerable amount of diversity in the global picture. You will find the details in the press release, but I would like to briefly review a few highlights. All regions will see improvements on the previous year.
Asia-Pacific airlines will contribute the most to industry profits—some $4.2 billion. With about a 40% share of global air cargo, these airlines will benefit most from the expected uptick in cargo. China will continue to generate growth opportunities. But this will be tempered somewhat by the Japanese domestic market which has not recovered from the earthquake and tsunami in 2011 and the Indian market which continues to suffer from some major structural impediments.
European carriers are expected to be among the weakest performer with expected profits of just $800 million. This is improved from the $300 million that they made in 2012. But, at only 0.4% of revenues, profits are thin and, naturally, the European carriers are most exposed to any worsening of the Eurozone crisis.
North American airlines will see profits of about $3.6 billion. It’s an improvement on the $2.3 billion of 2012. And the story here really is continuing efficiencies from careful capacity management.
Middle East airlines are expected to show a $1.4 billion profit which is also an improvement on 2012 when they returned $900 million. Their hub strategies continue to successfully provide long-haul connectivity, in particular to fast growing emerging markets.
Latin American airlines are forecast to deliver profits of $600 million. This is an improvement on last year ($300 million) but is $100 million below our December expectation. That is primarily owing to carriers trimming domestic operations in response to market volatility.
And lastly, African airlines are expected to post $100 million in profits after losing $100 million last year. The continent’s economies continue to expand and attract industry growth. With that comes some very stiff competition.
Lastly, I would like to leave you with a final thought. Each quarter we look at the industry’s financial performance. If we look back over the ten years from 2003 to 2012 the airline industry took in about $5 trillion in revenue and we basically broke even. This year airlines will generate aggregate revenue of $671 billion—and bring $10.6 billion to the bottom line. That’s about the same amount that Nestle earned last year but on just a sixth of the revenue.
The fortunes of the industry rise and fall with the global economic cycle. And efficiency gains have seen the airlines making some money in very difficult conditions (high oil prices and weak economic growth). A few years ago, that would have been impossible. But we still are nowhere near approaching what would be considered a normal return in other industries.
Airlines deliver tremendous value—connecting some 3 billion people and nearly 50 million tonnes of cargo. They support employment for some 57 million people and $2.2 trillion in economic activity. And about a third of world trade (by value) is with goods shipped by air. Aviation is a catalyst for economic growth and prosperity…and an industry that can generate sustainable returns can do that more effectively.
But many governments don’t seem to understand that. Just look at the knocks that the industry is taking....another increase in the UK Air Passenger Duty from April 1, another weak framework for moving forward the Single European Sky, proposals for punitive passenger rights regulations that score political points while ignoring what would deliver true value to passengers, and the threat of reduced air traffic management and facilitation services in the US as part of the budget sequestration process. There is a long list of government-generated impediments to providing the connectivity that could have a very powerful positive impact on generating the economic growth that is so desperately needed. That is why we will continue to remind governments to engage the industry in a partnership to create a joined-up policy framework that enables a sustainable aviation industry and encourages the benefits it brings.