Profits at global airlines to grow 'modestly': Moody's

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A slow US economic recovery and weakness in Europe will continue to weigh on the aviation sector during the next 12 to 18 months, but lower fuel costs should offset soft demand and higher non-fuel operating expenses, according to a senior credit officer at Moody's Investors Service.

"We expect the global airline industry's operating profits to grow modestly this year and next," says Moody's Jonathan Root. "But we do not anticipate a meaningful expansion in profit margins in this time due to economic headwinds and capacity additions."

The outlook for the global airline industry remains stable, he says.

Capacity discipline, careful management of non-fuel costs and ancillary fees will remain the primary tools for carriers as they seek to achieve their targeted returns, Root says.

Moody's expects industry adjusted operating profit margins of between 4% and 7% in 2013 and 2014, and yield growth to be in the range of -1% to 3% in 2013 and to be flat to 3% in 2014.

US airlines are likely to enjoy "better-than-average profitability", says Root.

"Delta, JetBlue, Southwest, United Airlines, US Airways and American Airlines will be helped by their conservative capacity management and improved ability to raise fares when fuel prices rise and tack on additional fees for checked bags, meals and other items," says Root.

Root believes slow economic recovery will continue to "impede the efforts" of low-cost carriers such as Ryanair and EasyJet to improve their profit margins. However, larger carriers such as Lufthansa and International Airlines Group's British Airways should see their operating profits grow this year, he says.

Elsewhere, both Qantas and Air New Zealand will see their earnings expand as "demand remains steady".

Growth in emerging markets will drive an overall increase in revenue passenger kilometers, Root says. "In the Middle East, we expect strong growth in available seat kilometers to lead to gains in passenger traffic, thanks to increasing trade between the Middle East and emerging economies in Africa and Asia."

Robust traffic increases are also expected in Asia and Latin America. Led by strong growth in China and long-haul markets, Asian carriers are projected to post a 6.3% gain in revenue passenger kilometers in 2013. And passenger demand among Latin American carriers is expected to jump 9.8% during the same period, thanks to brisk trade with Asia and North America.