Good morning from Montreal.
Today we are revising our industry outlook to a profit expectation of $11.7 billion. That is a $1 billion downgrade from what we thought earlier in the year. That is because the industry situation is not improving as quickly as we had expected. But, I should stress that it is an improvement on the 2012 profit of $7.4 billion. And we expect a further strengthening towards the end of the year that will set the industry up for $16.4 billion profit in 2014.
The optimism is on the passenger side of the business rather than in cargo.
The passenger business is showing robust growth in demand—about 5%. This is slightly below the 5.3% growth in 2012. And in fact it is slightly disappointing that we are not maintaining that in 2013. Emerging market growth in India, Brazil and to a certain extent China has been slower than anticipated. This has been somewhat balanced by improvements in the US economy as well as a stabilization in the Eurozone. Although load factors are high (around 80%), we have seen little improvement in yields.
In 2014 we expect the pace of growth to pick-up to around 5.8%. We don’t however see any good news for passenger yields. In fact we expect a fall of about 0.5% next year.
The cargo business is a completely different story. The market is flat—with demand growth of just 0.9% this year. And because the supply side of the equation is driven to a large extent by developments in the passenger business, we expect cargo to yields to fall by 4.9% this year. Looking into 2014, we do see an uptick—largely resting on the indications of improving business confidence. The expectation is for demand growth of 3.7%. But yields are expected to deteriorate by a further 2.1%.
To add some context to the cargo situation, cargo revenues peaked in 2011 at $67 billion. This year we expect revenues of only $59 billion. And that will increase to $60 billion in 2014. So basically revenues are back at 2007 levels.
If we look at the cost side of the business, the biggest item is fuel. We expect it to be 31% of costs this year and 30% in 2014. The spike in oil prices from concerns over Syria has been largely offset by a slight softening of Jet fuel prices. And the good news is that we expect a further decline next year. Jet fuel is expected to average at $126.4/barrel in 2013. That should fall slightly to $122.9 in 2014. A decline is good news. But the price is still high. For reference, the average price for jet kerosene in 2004 was $49.70/barrel.
How these global trends play out in the regions varies widely.
The good news story of the industry is North America. We expect North American carriers to deliver a combined profit of $4.9 billion this year—increasing to $6.3 billion in 2014. Consolidation and international joint ventures are driving efficiency gains. And consumers are benefitting from expanded networks as well as very significant investments in product improvements.
There are, however some negative trends. I was in the US last week outlining the industry’s concerns over increasingly onerous regulation and government intervention in the market place. The latest manifestation is the attempt by the US Department of Justice to scupper further consolidation. My message was that government should not forget or underestimate the effectiveness of market forces. Equally they should be wary of the unintended consequences that often result from regulation or intervention.
Europe is also a positive story. The stabilization in the Eurozone and strength in long-haul markets should see profits rise to $1.7 billion this year and further to $3.1 billion in 2014. It is moving in the right direction, but that is far from being healthy. The EBIT margin is second lowest in the industry next to Africa—a paltry 1.9% even with the improvements expected in 2014.
Asia-Pacific is a mixed bag. It is the only region where we expect profits to decline in 2013 compared to 2012. In 2012 Asia-Pacific carriers made $4.0 billion. That will decline to $3.1 billion this year and partially recover to $3.6 billion in 2014. On the positive side, we see a strengthening of the Japanese industry as a result of re-structuring and domestic market strength in China. Asia-Pacific carriers are the biggest players in air cargo. Consequently they are suffering the most from the stagnation in cargo markets. And the weakness in India is also a drag on the region’s prospects.
The Middle East region—particularly the Gulf—is on an improvement trend. We expect a $1.6 billion collective profit this year. And that will increase to $2.1 billion in 2014. The Syrian crisis has had only a margin negative impact. And demand—driven by long-haul connections through the region’s hubs—continues to expand at a double digit pace.
It is a similar positive story in Latin America where the $600 million 2013 profit is expected to grow to $1.1 billion next year. Long-haul markets to North America are doing well. Connections to both Asia and Africa show promise. But broader improvement is being held back by, among other factors, economic weakness in Brazil.
Lastly, Africa is facing stiff competition in long-haul markets and the inability to efficiently develop intra-Africa markets. The region’s carriers are hovering around break-even with a $100 million loss in 2013 expected to improve to a $100 million profit in 2014.
I must remind everyone that even with the overall improvement that we expect in 2014 the buffer between profit and loss is very small. If we divide a $16.4 billion profit among 3.3 billion travelers, you will see that airlines will make about $5 per passenger. New taxes and more onerous regulation can quickly erode that. So things are improving, but we are not yet at sustainable levels of profitability.
That is a message that we are delivering here in Montreal at the Assembly of the International Civil Aviation Organization (ICAO) where governments from 191 states are meeting to discuss the future of aviation.
The industry has come to ICAO with an agenda focused on asking governments to recognize that we share a common agenda in further developing connectivity sustainably; and that the best way to do this is with global standards that strike the right balance between what governments can dictate and market forces.
I would like to spend a minute on what is likely to be the most topical agenda item—the environment. The industry and governments share a common goal to cap aviation’s net emissions from 2020 with carbon-neutral growth (CNG2020). We also agree that a package of measures will be needed to achieve this—improvements in technology, operations and infrastructure.
But, at least in the short term, there will be a gap to fill with market based measures (MBM). In other words we need a mechanism for the industry to pay for its post-2020 growth. An IATA resolution calls on governments to adopt a single MBM. We think that a global mandatory carbon off-setting scheme would be the simplest and easiest MBM to implement.
Our members want an agreement. They have even agreed principles to fairly deal with the various circumstances that airlines face. I hope that the industry’s united call for a single MBM will be an inspiration for governments in their difficult deliberations.
One thing that I will stress is the need for a global approach. Aviation is a global industry. Managing emissions is a global challenge. The solution must therefore be global. Achieving consensus on a global MBM is, however, a politically charged and difficult task. The only way to get there is by keeping focused on achieving the common goal—CNG2020. That means avoiding being sidetracked by regional discussions.
Last year one regional scheme—the extraterritorial application of the EU Emissions Trading Scheme —took us to the brink of a trade war until cooler heads prevailed. The clock is stopped. But that dispute has cast a strong shadow in the run-up to the Assembly discussions. Governments must not let it become a distraction to achieving what could be a truly historic outcome.