The International Air Transport Association lowered its 2013 global industry outlook to US$11.7 billion (8.6 billion euros).
Airline performance continued to improve in the second quarter, but at a slower pace than was expected with the previous projection in June of US$12.7 billion (9.4 billion euros). This reflects the effect on demand of the oil price spike associated with the Syrian crisis and disappointing growth in several key emerging markets.
Performance in 2013 is considerably better than 2012. The upward trend should continue into 2014 when airlines are expected to return a net profit of $16.4 billion (12.1 billion euros). This would make 2014 the second strongest year this century after 2010.
In 2014, IATA expects a significant improvement in cargo growth to 3.7 percent. But yields for cargo markets are expected to fall by 2.1 percent.
“Overall, the story is largely positive,” Tony Tyler, IATA’s director general and CEO, said. “Profitability continues on an improving trajectory. But we have run into a few speed bumps. Cargo growth has not materialized. Emerging markets have slowed. And the oil price spike has had a dampening effect. We do see a more optimistic end to the year. And 2014 is shaping up to see profit more than double compared to 2012.”
Airline profits generally follow broad economic trends. Business confidence bottomed out at the end of 2012, and an expected acceleration of economic activity has not yet followed.
There has been an acceleration of improvements in developed markets, particularly the U.S., and a deceleration of growth in some key emerging markets, including India, Brazil and to some extent China.
Jet fuel prices have softened slightly. The effect on the overall fuel bill, which is expected to account for 31 percent of total costs, is expected to be neutral. The effect of the Syrian crisis and higher oil prices has been felt more through a dampening of demand.
Cargo markets remain stagnant. Growth of 0.9 percent is expected, down from the previously projected 1.5 percent.
The ability of airlines to match cargo capacity to demand is limited by the natural growth in belly capacity that occurs as airlines respond to passenger demand. As a result of this mismatch, cargo yields are expected to fall by 4.9 percent this year.
Cargo revenues are expected to show an US$8 billion (6 billion euros) decline to US$59 billion (43 billion euros) from their peak in 2011.
North American airlines are expected to post the strongest performance. There is greater concern over the trend toward more burdensome regulation in the U.S.
European airlines are expected to record higher profits than in 2012. Slowly improving performance is largely being driven by long-haul markets and economic stabilization in the Eurozone. German and UK markets are seeing stronger performance.
The outlook for Asia-Pacific airlines is downgraded largely due to slower growth among the region’s emerging economies. Asia-Pacific carriers are the largest players in global cargo markets and the most affected by its flat performance. This has been somewhat offset by a strengthening domestic market in China.
The outlook for Latin American carriers is unchanged. Economic weakness in Brazil is being offset by performance improvements as a result of restructuring and capacity discipline. The long-haul market between North and South America continues to grow.
New connectivity from Latin America to Africa and Asia, particularly for cargo, is also showing promise, although obscured somewhat by the cyclical downturn in many emerging economies.
Middle East carriers are expected to post profits marginally ahead of the previous forecast. The region’s efficient hubs continue to support strong performance on long-haul markets, and the effect of the Syrian crisis has been limited.
African carriers will fall into losses. Long-haul markets face stiff competition, while intra-Africa market development remains constrained by a restrictive regulatory environment.
Although African economies are among the world’s fastest-growing, the region’s airlines face the significant impediments of high costs, onerous taxes, government interference, inefficient fleets and poor infrastructure.
“Airlines are demonstrating that they can be profitable in adverse business conditions. Efficiencies are being generated through myriad actions—consolidation, joint ventures, operational improvements, new market development, product innovations and much more,” Tyler said. “When market forces drive action, we get results that both strengthen the industry and benefit the consumer. Quite simply, stronger airlines can invest more in improving connectivity and service innovations. If more policymakers incorporated that into the cost-benefit analysis when developing regulations, we would have a much healthier industry generating even broader economic benefits.”