Next year will be the most profitable ever for the airline industry in absolute terms, the (IATA) predicts.
IATA upped its profit forecast for 2013 and 2014 based on several factors that are benefitting the industry. The group believes that the industry will post a combined net profit of $19.7 billion in 2014, $3.3 billion higher than the last forecast in September. This year is also going to be better than expected as profits will rise to $12.9 billion, up from the previous prediction of $11.7 billion.
IATA’s Chief Economist Brian Pearce sees “quite a decent combination” of factors that are contributing to a significant improvement of the industry’s fortunes. Indications for a stronger global economy are becoming “visible”, he says, “and the fuel prices have been flat for 3-4 years.” For 2014, Pearce expects “some easing” of fuel prices as substantial new supplies have been discovered and geopolitical tension particularly surrounding Iran is “going down.”
There are also structural improvements in the industry that have helped the airlines, IATA Director General and CEO Tony Tyler points out. Airlines have been able to introduce ancillary fees more broadly, opening up another source of revenues that has not been available to them previously. Tyler also cites “the positive impact that mergers and joint ventures are having, generating better connectivity for passengers and driving efficiencies.”
In absolute terms, North American carriers will deliver the largest portion of the $19.7 billion net profit expected for next year. They are forecast to achieve a profit of $8.3 billion, while profits will reach $4.1 billion for Asia-Pacific airlines and $3.2 billion for European carriers. Middle Eastern airlines will make a combined $2.4 billion profit while Latin American airlines are expected to reach $1.5 billion.
In terms of margins, North American airlines will also be the most profitable at 6.4%, followed by their colleagues in Latin America (5.1%), Middle East (4.7%), Asia-Pacific (4.4%), Europe (2%) and Africa (0.7%).
Still, the overall profit margin will be slim at 2.6%. “$19.7 billion probably sounds like a very big number. It is. But it is shared among hundreds of airlines,” Tyler says. IATA expects airlines to make a $5.94 average profit per passenger in 2014. Of the average $224 fare, $13 is allocated to ancillary fees, $180 is the actual air fare and about $30 goes to cargo and other revenue channels. Pearce says the returns are “still inadequate for investors.”
The industry has not yet seen the return of international premium travel to levels seen before the last financial crisis. Pearce attributes this to the relatively weak state of global trade that has a dampening effect on business travel. And business travellers have also tended to fly coach rather than in the premium cabins.
IATA sees the weak development of international trade as the main reason for the continued crisis for air cargo. The association also criticises many countries for acting in a more protectionist manner, as witnessed in the dispute between the EU and China over solar panels.
So there are other barriers to growth other than demand – trade restrictions are playing an increasing role, too. “We hope that the Bali trade deal will help turn this situation around,” Pearce says. “The prospect of improved trade facilitation, simplifying customs procedures, could lower trade costs and increase trade.”