Global airlines should post an industry profit of $12.7 billion this year, an increase from a previous $10.6 billion forecast, as lower oil prices and belt-tightening offset difficult economic conditions, industry group IATA said on Monday.
This is an improvement on the $7.6 billion profit generated in 2012.
However, the International Air Transport Association said margins remained weak amid Europe’s ongoing debt crisis.
“The day-to-day challenges of keeping revenues ahead of costs remain monumental,” IATA director general Tony Tyler said at a meeting of more than 200 airlines in Cape Town.
“On average, airlines will earn about $4 for every passenger, which is less than the cost of a sandwich in most places,” he told Reuters Television.
Addressing reporters later, Tyler said record passenger numbers and growth in “ancillary” revenues were the two key reasons driving improved profitability.
Airlines are expected to fill a record 80.3 percent of seats and transport an unprecedented 3.13 billion passengers in 2013, up from 79.2 percent and 2.98 billion respectively last year, as operational changes and better capacity management filter through.
Tyler said ancillary revenues would rise to $36 billion, or 5%of total turnover, as airlines unbundle more services from base fares and charge for additional services such as meals, extra baggage and seats.
“These are significant factors that are driving performance,” Tyler said.
Nevertheless, profit margins remain weak. On revenues that are expected to total $711 billion this year, the net profit margin is expected to be 1.8%. However, IATA said that even this small margin will make 2013 the third strongest year for airlines since the events of 2001. In 2007 the industry earned 2.9% net profit margin ($14.7 billion) and in 2010 airlines generated a 3.3% net profit margin ($19.2 billion).
Macro-economic factors have contributed to improved airline performance – oil prices are expected to average $108/barrel (Brent), a little below the $111.8 average for 2012, in part due to increasing supply from North America.
Jet fuel prices increased some 55% over the period 2006–2013. This was the biggest contributor to the 23% increase in unit costs over the same period.
Meanwhile, the outlook for global economic growth has deteriorated slightly since March as the recession in Europe proves to be deeper than expected, IATA said. The beneficial impact of lower fuel prices is expected to offset the adverse effect of weaker economic growth, providing a moderate boost to industry profitability, IATA cautioned.
The $12.7 billion profit represents a Return on Invested Capital (ROIC) of 4.8%. This will enable the industry to pay for its debts and pay equity investors a small dividend. “But returns of 4.8% are still materially lower than the 7% to 8% average cost of capital required for the industry. If airlines are to find the $4 trillion to $5 trillion needed to finance the projected fleet development over the next 20 years, even more improvements are needed,” said Tyler.
A total of 3.13 billion passengers are expected in 2013—the first time in history that passenger numbers rise above the 3 billion mark.
However, the cargo business continues to suffer the brunt of the impact of the weak outlook in developed economies. Freight volumes are expected to be basically stagnant at 52.1 million tonnes.
Regionally, all world regions are expected to report a profit in 2013, with some being stronger than others. Overall, a trend is emerging that sees strengthening profitability among larger or niche airlines.
Asia-Pacific airlines are expected to post a combined profit of $4.6 billion in 2013 (up from the previous projection of $4.2 billion). North American airlines are expected to deliver a $4.4 billion profit, significantly up from the $3.6 billion projected previously. European airlines are expected to report profits of $1.6 billion, double the previous projection of $0.8 billion. Middle East carriers are expected to show a profit of $1.5 billion, slightly improved from the previous projection of $1.4 billion. The region’s successful hubs continue to connect long-haul traffic, with particular strength in facilitating connectivity to emerging economies in Asia and Africa. According to IATA, Latin American airlines are expected to post a $0.6 billion profit, unchanged from the previous forecast.
African airlines continue to be the weakest performers, with passenger load factors below 70%, operating margins averaging less than 1% and profits of just $100 million. Compared with the $100 million loss of 2012, however, this is a better performance.
African passenger capacity growth (6.7%) is expected to be outstripped by demand growth of 7.5%. This will improve load factors. The region’s airlines continue to face high operating costs, especially for fuel, which is on average 21% more costly than in other parts of the world. Long haul services face stiff competition from carriers outside the region, while significant aero-political barriers still stand in the way of enhanced regional connectivity, IATA said.