Loading

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.

IATA increases 2013 profit forecast by 11% and 2014 forecast by 20%

In its latest quarterly update of its world airline industry financial forecast, published in Dec-2013, IATA has raised its 2013 net profit forecast by almost 11% from USD11.7 billion to USD12.9 billion. This represents a net margin of 1.8%, an increase of just 0.2 ppts from its last forecast, published in Sep-2013, and is 74% higher than the result recorded in 2012.

IATA’s 2013 operating margin forecast is now 3.3%, up from 3.2% previously.

Summary changes to IATA world airline industry profit forecasts for 2013

 

Mar-13

Jun-13

Sep-13

Dec-13

Change vs
Sep-13 forecast

Operating profit, USD billion

22.3

23.9

22.4

23.6

5.4%

Operating margin %

3.3

3.4

3.2

3.3

+0.2ppts

Net profit, USD billion

10.6

12.7

11.7

12.9

10.7%

Net margin %

1.6

1.8

1.6

1.8

+0.2ppts

For 2014, IATA has increased its net profit forecast by 20% to USD19.7 billion, which would be 52% higher than the net profit forecast for 2013. This represents a net margin of 2.6%, up 0.4 ppts from the Sep-2013 forecast. The operating margin of 4.7% forecast by IATA for 2014 is not far short of the 5.0% margin that represented the peak of the last cycle, seen in 2010, as the industry temporarily rebounded from the GFC.

Summary changes to IATA world airline industry profit forecasts for 2014

 

Sep-13

Dec-13

Change vs
Sep-13 forecast

Operating profit, USD billion

30

34.7

15.7%

Operating margin %

4.0

4.7

+0.6ppts

Net profit, USD billion

16.4

19.7

19.9%

Net margin %

2.2

2.6

+0.4ppts

Passenger traffic forecasts raised in spite of unchanged GDP growth forecast

In spite of keeping its 2013 world GDP growth forecast unchanged at 2.0%, IATA has increased its forecast of 2013 passenger traffic growth from 5.0% to 5.3%, noting that “The robustness of air travel, despite high oil prices and relatively weak economic growth, is one of the positive developments in recent years.” However, IATA has very slightly lowered its forecast of passenger yield growth in 2013 from flat to a fall of 0.2% due to competitive pressures.

It has made a very small upward revision to outlook for cargo traffic, which it sees growing at 1.0% in 2013, and it continues to expect a 4.9% drop in cargo yield.

IATA has also made an upward revision to its 2014 passenger traffic growth forecast (but no change to world GDP forecast) and it now forecasts 2014 passenger load factor will exceed 81% for the first time. IATA has made a significant cut to its 2014 cargo traffic growth forecast (from 3.7% to 2.1%). It continues to forecast declines in both passenger and cargo yield in 2014.

Forecast of total revenues remains unchanged

Changes to IATA world airline industry revenue driver forecasts for 2013

 

Mar-13

Jun-13

Sep-13

Dec-13

Change vs
Sep-13 forecast

World GDP growth %

2.4

2.2

2.0

2.0

+0.0ppts

Passenger traffic growth %

5.4

5.3

5.0

5.3

+0.3ppts

Cargo traffic growth %

2.7

1.5

0.9

1.0

+0.1ppts

Passenger yield growth %

0.4

0.3

0.0

-0.2

-0.2ppts

Cargo yield growth %

0.0

-2.0

-4.9

-4.9

+0.0ppts

Passenger load factor

79.8

80.3

80.2

80.3

+0.1ppts

Changes to IATA world airline industry revenue driver forecasts for 2014

 

Sep-13

Dec-13

Change vs
Sep-13 forecast

World GDP growth %

2.7

2.7

+0.0ppts

Passenger traffic growth %

5.8

6.0

+0.2ppts

Cargo traffic growth %

3.7

2.1

-1.6ppts

Passenger yield growth %

-0.5

-0.6

-0.1ppts

Cargo yield growth %

-2.1

-2.1

+0.0ppts

Passenger load factor

80.7

81.3

+0.6ppts

The net impact of IATA’s forecasts for these various elements of revenue drivers is to leave its 2013 and 2014 total industry revenue forecasts unchanged.

Changes to IATA world airline industry revenue forecasts for 2013

 

Mar-13

Jun-13

Sep-13

Dec-13

Change vs
Sep-13 forecast

Passenger revenues

539

572

565

566

0.2%

Cargo revenues

68

62

59

60

1.7%

Other revenues

64

77

84

82

-2.4%

Total revenues

671

711

708

708

0.0%

Changes to IATA world airline industry revenue forecasts for 2014

 

Sep-13

Dec-13

Change vs
Sep-13 forecast

Passenger revenues

595

596

0.2%

Cargo revenues

60

60

0.0%

Other revenues

88

87

-1.1%

Total revenues

743

743

0.0%

Lower jet fuel prices lead to reduced cost forecasts

The increased profit forecasts for 2013 and 2014 are due to lower jet fuel price forecasts. For both years, IATA now expects jet kerosene to be almost 2% lower than it did in Sep-2013, following the easing of geopolitical tensions over Iran. This is more than the reduction in the crude oil price forecast, reflecting a reduction in the crack spread.

IATA’s forecasts do not see much change in non-fuel costs per ATK relative to its previous outlook.

Changes to IATA world airline industry cost driver forecasts for 2013

Forecast for 2013

Mar-13

Jun-13

Sep-13

Dec-13

Change vs
Sep-13 forecast

Crude oil, Brent USD per barrel

109.5

108.0

109.0

108.2

-0.7%

Jet kerosene, USD per barrel

130

127.4

126.4

124.0

-1.9%

Non-fuel cost per ATK change %

0.4

0.0

0

0.1

+0.1ppts

Non-fuel cost per ATK US cent

41.3

44.3

44.3

44.4

+0.1ppts

Changes to IATA world airline industry cost driver forecasts for 2014

Forecast for 2014

Sep-13

Dec-13

Change vs
Sep-13 forecast

Crude oil, Brent USD per barrel

105.0

104.5

-0.5%

Jet kerosene, USD per barrel

122.9

120.6

-1.9%

Non-fuel cost per ATK change %

0.5

0.5

+0.0ppts

Non-fuel cost per ATK US cent

44.5

44.6

+0.1ppts

The increase in IATA’s Dec-2013 forecast operating profit relative to its Sep-2013 forecast is around USD1 billion for 2013 and around USD5 billion for 2014. Almost all the difference for both years is explained by lower fuel costs in the new forecast.

Changes to IATA world airline industry cost forecasts for 2013

 

Mar-13

Jun-13

Sep-13

Dec-13

Change vs
Sep-13 forecast

Fuel costs

216

214

213

211

-0.8%

Non-fuel costs

433

473

473

473

0.1%

Total costs

649

687

686

685

-0.2%

Changes to IATA world airline industry cost forecasts for 2014

 

Sep-13

Dec-13

Change vs
Sep-13 forecast

Fuel costs

215

210

-2.3%

Non-fuel costs

499

498

-0.2%

Total costs

714

708

-0.8%

North America to remain most profitable region

By region, North America is still forecast to have the highest operating margins in the world, increasing from 3.4% in 2012 to 4.8% in 2013 and 6.4% in 2014, significantly higher than the 4.7% global operating margin forecast. A stronger US economy and the benefits of industry consolidation are the two key factors in driving this upward trend.

Latin America is now forecast to rise from being the third least profitable region in 2012 to being the second most profitable in 2014, when IATA forecasts its margin at 5.1%. Expansion of hub carriers in the Persian Gulf is set to push the Middle East’s margin to overtake that of Asia Pacific, whose profitability is weighed down by the weakness of cargo operations and poor profitability in markets such as India.

Asia Pacific profitability is also likely to be subdued in the impact of an expected delivery of 710 new aircraft in 2014, according to IATA. The region is the only one among the big three global air traffic regions to see its EBIT margin forecast for 2014 reduced by IATA.

Europe’s margins are forecast to follow an upward trend as the Eurozone economy returns to growth and long haul markets perform reasonably well, particularly for those carriers involved in North Atlantic joint ventures. Nevertheless, the gap between the region’s profitability and that of the world airline industry globally is set to widen as the economic backdrop remains slow and as Europe’s larger legacy carriers continue to grapple with restructuring programmes.

IATA argues that Europe’s airlines are “burdened by high costs, cumbersome regulation and high taxes”.

IATA expects Africa to remain the least profitable region, with EBIT losses in 2013 and reduced margin forecasts in both 2013 and 2014.

EBIT margin (%) by region 2009 to 2012 and forecasts 2013 and 2014

IATA.PNG" alt="" width="656" height="358" />

2014 passenger traffic growth is in line with long term average, although GDP growth is below average

IATA’s Dec-2013 forecasts continue to see world GDP growth of 2.7% in 2014. This is below the long term average GDP growth rate of 3.1%, but IATA forecasts passenger traffic growth of 6.0%, in line with its long term average. It seems that the airline industry is generating higher traffic growth from a given level of world GDP growth than in the past, possibly reflecting the growing weight of emerging markets in global air traffic. Modestly lower forecast yields may also be stimulating traffic growth, but are also counteracting it to result in broadly unchanged revenue forecasts.

IATA sees cargo traffic growth picking up from 1.0% in 2013 to 2.1%, in 2014, but this is lower than its previous 2014 forecast and well below long term average rates of growth in cargo traffic. On the cost side, a modest fall in oil prices is forecast, with little change expected in non-fuel cost per ATK.

2014 operating margin forecast close to last cyclical peak

The result of these elements for 2014 is that IATA forecasts revenues up by 4.9%, faster than cost growth of 3.4%. This drives an increase in the forecast industry operating margin from 3.3% in 2013 to 4.7% in 2014 and net profit growth of 52% to USD19.7 billion. The 2014 operating margin forecast is almost twice the average figure from 1971 to 2012 of 2.4% and is close to the 5.0% reached in 2010, which was the peak of the last cycle.

Previous cycles had seen operating margins peak at around 6%. Whether the industry can go on to achieve, or exceed, this level in the next few years will depend on economic growth, capacity discipline and the absence of shocks to demand or oil prices.

World airline industry revenues, costs and profits 2003 to 2012 and IATA forecast* 2013 to 2014

USD billion

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013F

2014F

Passenger revenues

249

294

323

365

399

444

374

445

497

538

566

596

Cargo revenues

40

47

48

53

59

63

48

66

67

62

60

60

Other revenues

33

38

42

47

52

63

54

68

72

79

82

87

Total revenues

322

379

413

465

510

570

476

579

636

679

708

743

Total revenue growth

-

17.7

9.0

12.6

9.7

11.8

-16.5

21.6

9.8

6.8

4.3

4.9

Fuel costs

44

65

91

116

133

187

123

139

176

210

211

210

Non-fuel costs

279

311

318

334

356

384

351

412

446

455

473

498

Total costs

323

376

409

450

490

571

474

550

622

665

685

708

Total cost growth

-

16.4

8.8

10.0

8.8

16.6

-17.0

16.0

13.1

6.9

3.0

3.4

Operating profit, USD billion

-1.4

3.3

4.4

15.0

19.9

-1.1

1.9

28.9

14.1

14.8

23.6

34.7

Operating margin %

-0.4

0.9

1.1

3.2

3.9

-0.2

0.4

5.0

2.2

2.2

3.3

4.7

Net profit, USD billion

-7.5

-5.6

-4.1

5.0

14.7

-26.1

-4.6

19.2

8.4

7.4

12.9

19.7

Net margin %

-2.3

-1.5

-1.0

1.1

2.9

-4.6

-1.0

3.3

1.3

1.1

1.8

2.6

Cargo revenues have lagged

Total airline industry revenues more than doubled from 2003 to 2012, with passenger revenues outpacing the total and cargo revenues lagging behind. As dedicated freighters continue to fall out of favour, passenger belly space is taking a growing proportion of air cargo. However, air cargo is suffering a structural loss of share to sea transport and world trade remains relatively weak overall as a result of the ‘on-shoring’ of production.

This means that total cargo capacity is still growing faster than demand for air cargo. IATA’s forecasts see cargo revenues stagnating at USD60 million, around the same level as in 2007, while 2014 passenger revenues are forecast to be 50% higher than in 2007.

World airline industry revenues (USD billion) 2003 to 2012 and IATA forecast* 2013 to 2014

Revenues other than passenger and cargo revenues have seen the fastest growth since 2003. This revenue stream is ill defined, but includes ancillary revenues in addition to non-flight activities of airlines, such as MRO, handling and third party catering. These other revenues grew by almost 140% from 2003 to 2012 to become more important than cargo revenues. IATA forecasts further growth, broadly in line with passenger revenues, to 2014.

Reduction in non-fuel costs as a percentage of revenues has not continued

On the cost side of the equation, the industry’s fuel costs increased from 14% of revenues in 2003 to 31% in 2012, after peaking at 33% in 2008. The increase in fuel costs prompted a strong focus on non-fuel costs, which fell from 87% of revenues in 2003 to 67% of revenues in 2008. However, the reduction in non-fuel costs as a percentage of revenues has not continued: after jumping back to 74% in 2009 (mainly the result of a collapse in revenues) it has fallen back to 67% again, where it is forecast to remain.

It seems that efforts to reduce non-fuel costs are driven by increases in fuel costs. When fuel costs have eased back a little, so has the pressure to reduce non-fuel costs. IATA’s forecasts for improved margins in 2013 and 2014 rely in the industry holding onto the benefit of slightly lower fuel costs without allowing any increase in non-fuel costs.

World airline industry fuel costs and non fuel costs as a percentage of revenues 2003 to 2012 and IATA forecast* 2013 to 2014

Margins remain thin, but are in a multi-year phase of being positive

This trade-off between fuel costs and non-fuel costs has meant that, in spite of revenue growth over the past decade, operating margins have remained thin and volatile. If the two forecast years 2013 and 2014 are brought into the picture, the chart below suggests a broadly upward trend in margins over the past decade or so, perhaps reflecting the industry’s efforts to reduce non-fuel costs and the more stable fuel price environment in the latter years.

If IATA’s forecasts for 2013 and 2014 are borne out, the six years of positive operating margins from 2009 to 2014 will have been the longest period of uninterrupted positive margins since the 1990s.

World airline industry revenues and operating costs (USD billion) and operating margin (%) 2003 to 2012 and IATA forecast* 2013 to 2014

The long term margin trend is sideways, but recent years hint at a structural improvement

However, a chart with a longer time horizon, including previous decades, is less clear on any upward trend in profitability, although we have previously suggested that there is some evidence of a structural improvement in world airline profitability. If IATA’s forecasts for 2013 and 2014 prove to be correct, it seems that the current decade is managing to achieve traffic growth and operating margins at a higher rate from a given rate of world GDP growth than in the past.

See related report: Airline profitability: witness to a structural improvement?

Our Capacity Index is an overall measure of the world airline fleet’s capacity utilisation. It demonstrates a close relationship with world airline operating margins (see chart below). If passenger traffic growth is higher than fleet growth, our index will rise and this indicates a positive outlook for world airline operating margins.

The Capacity Index is turning up

This looks set to happen in 2013 and 2014, although the Capacity Index is set to remain well short of historic peak levels in the next two years, whereas IATA expects operating margins to approach their peaks more closely. As we have suggested previously, it seems that the airline industry is now achieving better margins from a given level of capacity utilisation than in the past.

Capacity Index* and global airline operating margins (%), 1970 to 2012

See related report: Airline capacity discipline: a new global religion delivers better margins – but for how long?

A cheese sandwich is more valuable than an espresso

Of course, it will take a few more years before this apparent structural improvement in profitability can become clearly established. The airline industry is notoriously susceptible to one-off events that hit demand and/or costs. It is also highly cyclical, with a pattern of profitability that is closely related to economic growth. Moreover, it has historically failed to cover the cost of capital as determined by investment market benchmarks.

To put rising industry profits into context, IATA forecasts that the world’s airlines will generate USD224 billion of revenues per passenger in 2014. After paying all costs, including finance and taxation, they will be left with a forecast net profit per passenger of only USD5.94, enough to buy a cheese sandwich for each passenger. This is better than the cup of espresso represented by 2012’s USD2.56 per passenger, but highlights what is still a very low margin, especially given the industry’s capital investment needs.

Liberalisation of restrictions on ownership and market access is needed

These inadequate levels of profitability will have to increase if the industry is to continue to attract investment and to play its part in economic growth. This will require even greater efforts to control costs and capacity, but it will also require a more complete process of cross-regional consolidation than has been allowed to date.

Only full liberalisation of restrictions on ownership and market access can lead to a truly global market in which the more efficient operators can enter new markets, engage in genuine mergers and drive up returns.

In spite of reduced levels of state ownership of airlines compared with the past, governments still have a major role to play in allowing the industry the freedom to achieve financial sustainability.

On the positive side, at least some governments are awake to this need; but often they receive mixed signals from short term protectionist noises like those emitted by Airlines4America. More often however, governments are simply unaware of the negative impact of their inertia. Here there is still a job to be done by the world's airlines.

Return on capital invested in airlines and their cost of capital

 

Want More Analysis Like This?

CAPA Membership provides access to all news and analysis on the site, along with access to many areas of our comprehensive databases and toolsets.
Find Out More