Industry Net Margin Expected To Reach 1.3 Percent Next Year

The International Air Transport Association (IATA) has released an upward revision to its industry financial outlook. For 2012 airlines are expected to return a profit of $6.7 billion (up from the $4.1 billion forecast in October). This is expected to improve slightly to $8.4 billion in 2013 (marginally better than the $7.5 billion forecast in October). Industry net post-tax margin, however, will remain weak at 1.0% in 2012 and 1.3% in 2013.

Improved prospects for 2012 are being driven by strong airline performance in the second and third quarters. Despite high fuel prices and a slowing world economy, airline profits and cash flows held up at levels similar to 2006 when oil prices were about $45/barrel lower and world economic growth was 4.0%.

Historically, when GDP growth has fallen below 2% the airline industry has returned a collective loss. “With GDP growth close to the "stall speed" of 2.0% and oil at $109.5/barrel we expected much weaker performance. But airlines have adjusted to this difficult environment through improving efficiency and restructuring. That is protecting cash flows against weak economic growth and high fuel prices,” said Tony Tyler, IATA’s Director General and CEO.
 
The improved performance is most evident in large airlines for which Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) averaged between 10% and 15% of revenue in the third quarter of the year. “It’s a diverging picture. Economies of scale are helping larger airlines to cope much better with the difficult environment than small and medium-sized carriers which continue to struggle,” said Tyler.
 
Overall performance has been positively impacted by strong passenger traffic growth (5.3%) and a 3.0% improvement in yields. Despite the slowing world economy business travel was supported by more robust international trade in goods and service. This contributed to a positive picture for both passenger volumes and yields.  In sharp contrast, cargo markets have contracted by 2.0% and cargo yields are down 2.0% on 2011 levels. Although world trade is still expanding, the pattern of economic growth – concentrated in the emerging markets – has favored ocean over air freight.

The slight relief in oil prices (at $109.5/barrel, down from $110/barrel in the October forecast) did not translate into relief on the fuel price. Moving in the opposite direction, because of a widening of refinery margins, jet fuel costs are expected to average $129.5/barrel which is a $1.8/barrel increase on the previous forecast.

IATA emphasizes that despite the improved prospects, overall the industry remains weak:
The $6.7 billion expected net profit is a fall from the $8.8 billion that the industry made in 2011.
The 1.0% net profit margin is well below the 7-8% needed to recover the industry’s cost of capital.

IATA says that changes to industry structure are contributing to the improved airline financial performance seen since the second quarter. In the difficult business environment of the past year airlines have been seeking to lower costs and improve yields through restructuring. Recent alliances and joint ventures have enabled economies of scale as well as offering more choice for passengers. A sharp fall in the number of new entrants, due to the lack of funding for start-ups, and a number of airline bankruptcies have also contributed to an improved industry structure which has allowed airlines to share efficiency gains between improved service for passengers and better returns for investors.
 
Regionally, North American carriers are expected to end 2012 with a collective net profit of $2.4 billion. That is stronger than the $1.7 billion profit of 2011, largely on the back of much improved asset utilization as a result of recent industry consolidation. European carriers are expected to break even. That is $400 million worse than 2011 performance, but $1.2 billion better than the October forecast largely attributable to the results of efficiency programs and stronger traffic growth which drove improved results in the second and third quarter. Asia-Pacific carriers are expected to post a net profit of $3.0 billion, an improvement of $700 million on the October forecast. The region will deliver the largest aggregate profit among the regions.

Middle East airlines are expected to post a profit of $800 million, $100 million over the October outlook. That is slightly below the $1 billion that Middle East carriers made in 2011. The outlook for Latin American airlines is unchanged at $400 million. Along with North America, it is the only region to see an improvement on 2011 when the region’s carriers posted a profit of $300 million. African airlines are expected to end the year at break even ... unchanged from the previous forecast and from 2011.

"Prospects for 2013 will be largely unchanged from 2012. Net profits are expected to rise to $8.4 billion leaving the industry with a 1.3% net profit margin. It is good that we are moving in the right direction, but the year ahead is shaping up to be another tough one for the industry,” said Tyler.
 
The largest driver of industry prospects is global economic growth. This is expected to strengthen only slightly to 2.3% in 2013. Passenger demand in 2013 is expected to grow by 4.5%, which is below the 5.3% forecast for 2012. Yields are expected to deteriorate by 0.2%, largely in response to lower fuel costs. Cargo demand is expected to increase by 1.4% (not enough to make up for the 2.0% decline in 2012). The mismatch between growth rates for passenger and cargo demand tends to lead to cargo capacity in excess of demand and yields falling by 1.5%.
 
Oil prices are expected to moderate slightly to $104/barrel, down $5.5/barrel from 2012. The premium paid for jet fuel refining, however, will result in a smaller drop in jet fuel prices to $124.3/barrel, down $5.2 from 2012.
 
North American airlines are expected to post a combined net profit of $3.4 billion—the largest absolute profit among the regions, and a $1.0 billion improvement on 2012. The US economy is forecast to be the strongest growing among the developed economies and further benefits are expected from earlier consolidation. European airlines are expected to have a second consecutive year at break even. The continuing uncertainty in the European economy, high taxes and inefficient infrastructure continue to plague the industry in Europe.
 
Asia-Pacific airlines are expected to see net profits grow by $200 million to $3.2 billion in 2013. Economies in this region remain the most dynamic and the deterioration in cargo markets is expected to come to an end in 2013. Middle East airlines are expected to see profits rise by $300 million to $1.1 billion. Airlines in this region are forecast to continue to expand their share of international markets.
 
Latin American airlines will see net profits rise by $300 million to $700 million. Strong trade flows and robust growth in this region support revenues and improvements continue from consolidation in Brazil. African airlines are expected to post a third consecutive year of break even performance.  Economic growth and trade flows are robust but airlines performance remains uneven.

FMI: www.iata.org