Airlines profit margin improves to 1.6%

The International Air Transport Association (IATA) announced a modest improvement in its outlook for the 2013 financial performance of the global airline industry primarily based on stronger revenues. IATA now expects airlines to produce a combined net post-tax profit margin of 1.6% (up from the previously forecast 1.3%) with a net post-tax profit of $10.6 billion (up from the previously projected $8.4 billion). 

“Industry profits are taking a small step in the right direction. Against a backdrop of improved optimism for global economic prospects passenger demand has been strong and cargo markets are starting to grow again. The economic optimism is also pushing fuel prices higher. We are seeing a $12 billion improvement in revenue, and a $9-10 billion increase in costs—most of which is related to fuel,” said Tony Tyler, IATA’s Director General and CEO.

Risks and Volatility

IATA noted that considerable risks remain which could derail recovery. The outlook is based on evidence of growing business confidence. But the controversy over the draconian bailout proposal for Cypriot financial institutions is a clear indicator that the Eurozone crisis is not over and could take a turn for the worse. 

“European Central Bank commitments with respect to the Eurozone crisis and the slow economic recovery in the US should be pointing us towards a durable, if weak, upswing. But we have had two false starts already. Improving conditions in early 2011 and 2012 disintegrated as the Eurozone crisis intensified. And it could happen again. The impact of the unfolding situation in Cyprus is a risk factor that cannot be ignored,” said Tyler.

Forecast Highlights

Stronger Revenue: Stronger revenues ($671 billion, up $12 billion from the December outlook) are the main driver of the slightly improved financial performance. Cargo demand is expected to grow by 2.7% (reversing the declining trend of the last two years) and cargo yields are expected to be flat (an improvement on the 1.5% decline previously projected). Passenger demand is forecast to grow by 5.4% (up from the 4.5% previously expected) and yields are expected to grow by 0.4% (rather than the 0.2% decline previously projected).

Costs: Fuel costs are increasing. Jet fuel is now expected to average $130/barrel for the year (up from $124.3/barrel projected in December). And the fuel bill will grow to $216 billion, a $6 billion increase over December’s expectations. Overall, fuel will account for 33% of airline costs, unchanged from 2012.

Cash Flow: Airline cash flows are showing better than expected performance given high costs and weak growth. This however varies by region and airline size. Large Asian carriers have seen the most improvement.
The trend in the US is flat but comparable with pre-recession levels, while European airlines are struggling with the lingering recession.

Efficiency: A comparison of 2013 conditions and expected profitability to those of 2006 reveals significant gains in efficiency. The industry aggregate operating margin in both years was similar (3.2% in 2006 and 3.3% is expected for 2013) but conditions in 2013 are much more difficult.

Consolidation in domestic markets and joint ventures on some long-haul routes have been key factors in generating efficiency gains to support financial performance. This is illustrated by a rise in the load factor from 76.1% in 2006 to an expected 79.8% in 2013.