Good morning to those joining us in Europe, Africa and the Middle East and good evening for those in Asia. I suspect that it is a bit too early for our colleagues in the Americas.
Before I begin, I would like to offer our deepest sympathy [and condolences] to all those affected by the disappearance [loss] of Malaysia Airlines Flight 370.
Today we are announcing a downward revision to our industry outlook from a previously projected net profit of $19.7 billion to $18.7 billion. This is an industry forecast—covering not just IATA’s 240 member airlines but the entire airline industry. The scale of numbers in an industry forecast can give some false impressions. So let me deal with three at the outset.
First, while this is a $1 billion downgrade, it comes on revenues of some $745 billion. On such a large revenue base, a $1 billion shift is equal to less than a seventh of one percent. So, rather than being a substantial downgrade, it is probably better characterized as a tweak and the overall forecast is still very aligned to our December thinking. Basically the fuel bill will be about $3 billion higher than we expected in December. And this will be partially offset by an increase in revenues of $2 billion—primarily due to stronger cargo markets.
Second, even though this is a forecast downgrade, the overall story for the industry is positive. In 2012 airlines made $6.1 billion. Last year ended with a $12.9 billion profit. And this year will continue that improving trend.
Third, in absolute terms, an overall profit of $18.7 billion is a significant amount of money—even for a tech company or social media start-up. And considering that on balance, the industry has since 2000, endured more annual losses than annual profits, staying in the black is in itself an achievement that reflects the major restructuring that has taken place.
But I would temper that heavily with the fact that an $18.7 billion profit for an industry that generates $745 billion in revenues equals an average net margin of just 2.5%. Put another way, the average fare is about $200 (including ancillaries) and airlines will make about $5.65 for every departing passenger. So, running an airline remains a very tough business. It is closely tied to the economic cycle and vulnerable to many risks. I will come back to discuss risks later.
You have the forecast, so I won’t review that in detail. But I will briefly go over some trends.
The first is cargo. The cargo side of the business is difficult but doing better than we had thought a few months ago. Since 2010 revenues have hovered around the $60 billion level while volumes hovered around the 50 million tonne mark. There are pressures from “on shoring” of supply chains and protectionist measures which are slowing the growth in world trade and holding back the cargo side of the business. None-the-less we are seeing a cyclical upswing in demand. And as a result of this we increased our revenue outlook to $63 billion. That is $2 billion better than 2013 and $3 billion better than we thought in December.
On the passenger side, we are still seeing growth, but the nature has shifted. Up until last year, the story was one of strong emerging markets driving growth. Now the story is firmly about developed economies leading growth. And we see many developing markets—India, Brazil etc.—showing slower growth trends. Growth in emerging markets generates proportionately larger traffic flows than in mature markets. So we have had a slight downward revision in expected growth rates from 6.0% to 5.8%.
If you take a regional view on the industry’s performance, you will see that these global trends are all playing out against very different circumstances. In all regions, we are expecting 2014 to be a more profitable year than 2013.
- The North American industry is expected to be the largest contributor to global profits. Its airlines are expected to post a combined profit of $8.6 billion. The success of the North American industry demonstrates clearly the benefits of consolidation and joint ventures. This continues to the benefit of passengers who gain value both in terms of options and efficiencies from the improved industry structure and from the billions that the carriers are now able to invest in product improvements.
- The story in Europe is one of carriers benefitting from the ending of austerity measures but still suffering from high taxes, inefficient air traffic management, and onerous regulation. The region is expected to generate some $3.1 billion in profit this year.
- Asia Pacific airlines are expected to realize a profit of some $3.7 billion. The improvement in cargo prospects is helping. But this is being offset by slower growth as counties like India and Indonesia cope with the impact of the turmoil in foreign exchange markets.
- The Middle East continues to expand market share by facilitating efficient connectivity through its growing hubs. Cargo performance has been particularly strong on routes connecting Africa and Asia. The region’s carriers are expected to turn a profit of some $2.2 billion. The key concern in the region is a by-product of its success. Air traffic congestion in the Gulf is a growing issue that needs urgent attention.
- Latin American airlines are expected to deliver a collective profit of $1 billion. The weak economic performances of Brazil and Argentina are dampening prospects. And in many places across the region airport infrastructure constraints remain. The benefit of an improved industry structure, achieved through consolidation, is among the factors helping to balance the impact of poor economic performance.
- African airlines will see the $100 million loss of 2013 turn to a $100 million profit in 2014. The region faces a familiar list of challenges, including poor infrastructure, high taxes, and restrictive market access policies for intra-Africa connectivity. This is on top of the intensifying competition that the region’s airlines face on long-haul routes. On the positive side, the Abuja Declaration is focusing governments on a commitment to achieve world class safety levels by 2015.
Having gone over the global trends and the regional picture, the last area of the outlook on which I would like to comment concerns mounting risks.
Some risks are quite obvious. The situation in the Ukraine is causing instability that is pushing up the price of oil. And that was the main negative driver of today’s downwards revision.
I have also spoken about the negative impact on traffic of growth led by developed markets. Many countries—including Turkey, India, Indonesia and South Africa—have tightened monetary policy in order to protect exchange rates—slowing economic growth. And we see this trend continuing.
There are also less visible developments which are hampering the industry. We have been talking a lot about the proliferation of Passenger Rights regulations which are not coordinated or compliant with any global standard. So we are working with governments—directly and through the International Civil Aviation Organization—on ways to align. At our June AGM, the IATA airlines even agreed principles for this.
There is one risk in particular which is taking up a lot of my time—the situation in Venezuela. Aside from what is regularly reported, there is a side story that deeply concerns the aviation industry. The Venezuelan government is blocking airlines from repatriating some $3.7 billion of their money. This ignores international treaties. And it is making it very difficult for airlines to maintain their commitment to that market. The impact of this blocked cash is quite easily seen when you consider that airlines this year will only make $18.7 billion globally. Of course this is cash and not pure profit. But it is a major sum of money. And it is unacceptable that the Venezuelan government is not playing by the rules to which it is treaty-bound. Airlines certainly cannot sustain operations indefinitely if they can’t get paid. I have written to President Maduro asking for his urgent attention to this issue. I raise it today because it illustrates quite well some of the extraordinary challenges that airlines can face.
Before I open the floor to questions, I also want to touch on the situation with MH370. We are all saddened by this event; and our thoughts and prayers are with the family members and friends of all those involved. Like everyone, we hope that the aircraft will be located so that those whose friends and loved ones were on the flight can move beyond the current uncertainty. It will also allow us to transition from the current speculation into a full-scale investigation. The goal is to find out what happened and make sure that it does not happen again.
I should make clear IATA’s role in this. We are not an investigator or regulator. And we are not a speculator. As the industry association, our role is to provide useful background and context where necessary. More importantly, once the authorities have determined the cause of this apparent tragedy, we will work with our members and other stakeholders to apply any lessons learned so as to help ensure that whatever may have happened to MH370 is not repeated.
Aviation is a safe industry. This year we expect some 3.3 billion people to travel by air. That is 9 million people a day with over 6,000 people per minute boarding an aircraft. The global fleet travels some 70,000 kilometers each minute. We are able to achieve this through teamwork that includes airlines, regulators, air navigation service providers, airports, caterers, ground handlers and aircraft, engine and systems manufacturers. As an industry we make safety our top priority and work together closely to achieve it. But on very rare occasions tragedy strikes. And each time it does, it rededicates the whole industry to continue to improve.