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Airline financial outlook improves due to lower fuel prices

By Staff Reports on December 19, 2013

The International Air Transport Association announced an upward revision to its industry financial outlook.

For 2013, airlines are expected to return a global net profit of US$12.9 billion. This is expected to improve to a net profit of US$19.7 billion in 2014. Both are improvements on the September forecast.

The upward revision reflects lower jet fuel prices over the forecast period as well as improvements to the industry’s structure and efficiency. Passenger markets continue to outperform the cargo business, which remains stagnant both on volumes and revenues.

IATA expects 2014 to be a second consecutive year of strengthening profitability, beginning from 2012 when airlines posted a net profit of US$7.4 billion. Industry net profit margins, however, remain weak at 1.1 percent of revenues in 2012, 1.8 percent in 2013 and 2.6 percent in 2014.

The anticipated US$19.7 billion profit in 2014 would come on projected revenues of US$743 billion.

“Overall, the industry’s fortunes are moving in the right direction. Jet fuel prices remain high, but below their 2012 peak,” Tony Tyler, IATA’s director general and CEO, said. “We must temper our optimism with an appropriate dose of caution. It’s a tough environment in which to run an airline. Competition is intense and yields are deteriorating.  Cargo volumes haven’t grown since 2010 and cargo revenues are back at 2007 levels.  The passenger business is expanding more robustly. Some airlines will out-perform our estimates and others will under-perform.”

Forecast drivers include cargo demand, which remains largely stagnant. Airlines are expected to carry 51.6 million tonnes of cargo in 2013, increasing to 52.5 million tonnes in 2014. This modest increase in demand is expected to be offset by a decline in yields.

Despite the stagnation in the air cargo industry, belly capacity continues to be introduced as airlines seek to maximize on robust passenger demand. Cargo revenues are expected to be US$60 billion in both 2013 and 2014, which is basically unchanged from 2007 levels.

The “on-shoring” of production is having an adverse effect on the cargo business. Two forces are driving this. Since the recession, there has been a rise in protectionist measures by governments aiming to stimulate domestic economies. In tandem the effects of earlier liberalization are fading as costs rise in previously low labor-cost locations. These conditions are likely to extend over several years.

The World Trade Organization’s Bali agreement to liberalize markets and improve trade facilitation is expected to be good news for the air cargo industry.

“Removing the red tape that restricts and slows trade is a positive goal. It aligns well with our own efforts to bring efficiency to air cargo through E-freight,” Tyler said.

Other forecast drivers include the economic cycle. Global GDP is expected to expand by 2 percent in 2013 and 2.7 percent in 2014.

IATA also takes improved industry structure and fuel into account in its airline forecast. Improved industry structure and efficiency gains should allow the industry to leverage the improving economic cycle to boost profitability significantly in 2014.

A slight reduction in jet fuel prices is a major driver of the improved outlook. Following easing of tensions in Iran, oil prices are expected to see a slight downward movement from US$108.2/barrel in 2013 to $104.5/barrel in 2014.

Profitability varies greatly by region as well as by airline. All regions are expected to see improvements in profitability in 2014 compared to 2013.