IATA shows airline improvements but Africa still struggling

Above: Tony Tyler.

This latest forecast is $2.1 billion better than the $10.6 billion profit projected in March of this year and an improvement on the $7.6 billion profit generated in 2012.

Margins remain weak, Tyler said. On revenues that are expected to total $711 billion this year, the net profit margin is expected to be 1.8%. Indicative of the characteristically razor thin profits of the airline industry, 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).

“This is a very tough business. The day-to-day challenges of keeping revenues ahead of costs remain monumental. Many airlines are struggling. On average airlines will earn about $4 for every passenger carried - less than the cost of a sandwich in most places,” Tyler said.

Profitability is thin, but there is a solid performance improvement story over the last seven to eight years. More efficient use of assets is the main contributor. The industry load factor is expected to average a record high of 80.3% in 2013—6.0 percentage points above 2006 levels. Additionally, airlines have found new sources of value that have increased the contribution of ancillary revenues from 0.5% in 2007 to over 5% in 2013.

Macro-economic factors have also contributed. 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. Meanwhile, the outlook for global economic growth has deteriorated slightly since March as the recession in Europe proves to be deeper than expected. 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.

“Generating even small profits with oil prices at $108/barrel and a weak economic outlook is a major achievement. Improved performance is what’s keeping airlines in the black. Airlines are putting more people in seats. For the first time in history, the industry load factor is expected to average above 80% for the year. And with ancillary revenues topping 5%, it is clear that airlines have found new ways to add value to the travel experience and to shore-up the bottom line,” said Tyler.

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.

African airlines continue to be the weakest global 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. 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.