IATA’s latest improved profits outlook released today struck a decidedly positive note, even if the climate is still pretty tough for many carriers.
The airline body has lifted its collective profits forecast for this year by over $1 billion from its outlook of three months ago to $12.9 billion. This was largely driven by continued restructuring efforts by airlines and an easing in fuel prices.
It returns global airline profits to a growth track. Worries over oil prices, fuelled by tensions in the Middle East, had prompted IATA to scale back its outlook by $1 billion in September. The projected $12.9 billion net profit for the industry is comfortably above the $8.4 billion it was projecting a year ago and the $7.4 billion the industry made in 2012.
It forms part of a positive picture presented by IATA in Geneva today. Lower fuels costs, together with an improving economic climate, are behind IATA lift projections for 2014 by more than $3 billion to $19.7 billion. This would be a fifth consecutive year of net profit – in stark contrast to the heavy losses racked up in the previous decade – and top the $19.2 billion record profit of 2010. And all the regions are seen as profitable in 2014.
IATA though is quick to place caveat to record profits. It notes that in terms of margins it is still below the 2010 performance. The $19 billion profits that year represented 3.3% of total revenues of $579 billion, while in 2014 that will come off the back of projected revenues of $743 million which would be around a 2.6% share. At an operating level, margins of 4.7% are likely to be lower in 2014 than the 5% in 2010.
The vast majority of the improvement in profits is, as has been the case for much of the year, driven by US carriers reaping the benefits of consolidation and an improving economy. IATA has lifted its forecast for North American by $900 million over the last three months to $5.8 billion. It has added $2 billion to its profits projections for the region for 2014, which at $8.3 billion, makes it comfortably the most profitable region.
Asian carriers are the next most profitable, but are some way from the levels enjoyed a few years ago as they grapple with a still stagnant cargo market and falling yields. While that picture is mixed across the different markets, fares have struggled in some key areas like India where the extra capacity has increased pressure in the short-term. IATA points to the impact on supply-demand in the region from the expected delivery of 710 aircraft next year.
For all its difficulties, European carrier profit projections – while still small – are on the up. This has been aided by strong long-haul performances. Again this differs widely across markets. But generally most of the strength has been linking northern European markets on North Atlantic routes. By contrast many southern European economies continue to struggle, while links on south Atlantic markets are also weaker.
While there may be a difference in cash flow performance between major carriers in Asia and those in the USA and Europe – the latter two on the up while Asian operators have seen a slip – IATA chief economist Brian Pearce argues all are doing better than might be expected given high fuel prices and relatively lower economic growth.
“The cash being generated by airlines is rather good under the circumstances,” says Pearce. “This puts the airlines in a good position to start improving their financials when the global economy starts turning around. And we think we are now seeing the economic cycle turning upwards again. Unless we experience a shock, 2014 should be stronger than 2013.”
He adds: “Cycles are often knocked off course by shocks. The start of the up cycle in 2009, was interrupted over the last couple of years, so we are getting back to the cycle.”
This also marks the first IATA December forecast for a couple of years without specifying a downside risk. “We had the Eurozone crisis - that seems to have eased. The banking crisis - in the USA they seem to have turned that around, and fears have eased a bit on oil prices,” says Pearce.
“Fuel prices have been in a flat range for the last three or four years. We expect to see some easing in fuel prices, because we have seen some changes [on the supply side],” he says, pointing to improved relations with Iran and the fresh supply of shale gas in the USA.
“There are still worries around Europe,” he adds. “There is a lot of work we need to see in Europe to see the relative calm continue.”
He also believes full implementation of the recent Bali trade deal will be key to boosting international trade, a crucial element to lifting freight demand out of its slumber. “We do need to get Bali implemented otherwise we’ll continue with slow cargo growth,” says Pearce.
Indeed the different fortunes of the passenger and freight business have in anything become even more pronounced. While passenger traffic is growing at historically typical rates - IATA sees passenger numbers growing 6% to 3.3 billion in 2014 - the air cargo market is still to recover. After two years of decline, air freight levels will rise only 1% this year and 2% in 2014. This growth will be wiped out by falling freight yields.
“Cargo has been a very difficult market. How that business develops depends on seeing much stronger growth in international trade. Stronger economic growth should help that,” says Pearce. While there have been some new trade markets – notably the development of routes linking Africa and China – he suggests increased protectionist policies with followed the recession are also dampening demand.
The issue is compounded for cargo operators because the strong passenger demand is bringing with it additional belly freight capacity. “Despite efforts to reduce the freighter fleet, it has not been enough to bring the capacity in line with demand because of the growth in the passenger fleet.
“Getting that stronger international trade will help. We are seeing some signs of turnaround, some stronger volumes, so it’s heading in the right direction,” he adds. “But I don’t think it will get there in the next 12 months.”