IATA raises its airline profit outlook, but the cracks are still clearly visible under the surface

IATA's Dec-2013 forecasts of airline industry profits make positive reading at first glance. IATA has increased its profit forecasts for both 2013 and 2014 and its 2014 margin forecast is close to 2010's cyclical peak. However, beneath the surface the cracks are still clearly visible.

Higher profit forecasts are entirely due to lower fuel prices and the drive to reduce non-fuel costs has lost some momentum. Cargo is a drag on industry profits (particularly in Asia) and regional divergence is increasing. Top-performer North America is benefiting from consolidation, but this is impeded at the global level by restrictions on ownership and control. Under-achiever Europe is held back by legacy cost issues, a still weak economy and government-imposed taxes and regulation.

Our previous observation that we may be witnessing a structural improvement in world airline profitability remains valid, but beating the cost of capital remains distant. This will require not only an even sharper focus on cost and capacity discipline from airlines, but also concerted moves by governments to lower taxes and charges and to remove the restrictions on ownership and market access.