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MARGINS REMAIN WEAK

Global airlines' profit to hit $12.7bn in 2013

Capetown, June 3, 2013

The International Air Transport Association (IATA) said the airline industry is set to make a profit of $12.7 billion profit in 2013, up from a previous forecast of $10.6 billion profit in March.

Addressing the gathering of aviation experts, Tony Tyler, the director general and CEO said, "Margins remain weak. On revenues that are expected to total $711 billion this year, the net profit margin is expected to be 1.8 per cent. 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."

However, the outlook for global economic growth had deteriorated slightly since March as the recession in Europe proves to be deeper than expected, IATA said in a statement.
 
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, it added.

“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,” said Tyler.

"In 2007 the industry earned 2.9 per cent net profit margin ($14.7 billion) and in 2010 airlines generated a 3.3 per cent net profit margin ($19.2 billion)," he noted.

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 per cent in 2013 - 6 percentage points above 2006 levels, the global aviation body said in its statement.

Additionally, airlines have found new sources of value that have increased the contribution of ancillary revenues from 0.5 per cent in 2007 to over 5 per cent in 2013, said the IATA statement.

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, it added.

"Generating even small profits with oil prices at $108/barrel and a weak economic outlook is a major achievement," remarked Tyler.

"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 per cent for the year. And with ancillary revenues topping 5 per cent, it is clear that airlines have found new ways to add value to the travel experience and to shore-up the bottom line,” he added.

The IATA chief said the $12.7 billion profit represents a Return on Invested Capital (ROIC) of 4.8 per cent. "This will enable the industry to pay for its debts and pay equity investors a small dividend," he stated.

“But returns of 4.8 per cent are still materially lower than the 7 per cent to 8 per cent 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,” observed Tyler.

On the growth outlook, IATA said the industry load factor is expected to average 80.3 per cent, which is a record high. Overall passenger capacity is expected to expand 4.3 per cent, which is under the 5.3 per cent anticipated growth in demand for the year.

This will be the second consecutive year that airlines keep capacity additions below the growth of demand, in spite of high numbers of new aircraft deliveries. All regions are expected to see demand grow faster than capacity.

The tight supply and demand conditions, however, are not expected to lead to significant yield improvements. Passenger yields are expected to grow a modest 0.3 per cent in 2013, it added.

A total of 3.13 billion passengers are expected to travel in 2013 - the first time in history that passenger numbers have risen above the 3 billion mark.

On the regional airlines' performance, IATA said the Middle East carriers were expected to show a profit of $1.5 billion, slightly improved from the previous projection of $1.4 billion.

"Passenger demand is expected to continue apace at 15 per cent, well ahead of the anticipated 12.6 per cent capacity expansion. The region’s successful hubs continue to connect long-haul traffic, with particular strength in facilitating connectivity to emerging economies in Asia and Africa, stated Tyler.

Latin American airlines are expected to post a $0.6 billion profit, unchanged from the previous forecast. Passenger demand (9.8 per cent) and capacity (7.8 per cent) growth are second only to the Middle East.

This growth is boosted by the effects of buoyant trade and other business flows with Asia and North America. The region’s EBIT margin of 2.8 per cent is an improvement on 2012 (2.1 per cent), but it is significantly lower than the leaders in North America (4.2 per cent) and Asia-Pacific (5.0 per cent).

European airlines are expected to report profits of $1.6 billion, double the previous projection of $0.8 billion, said the aviation body.

African airlines continue to be the weakest performers, with passenger load factors below 70 per cent, operating margins averaging less than 1 per cent and profits of just $100 million. Compared with the $100 million loss of 2012, however, this is a better performance.

On the cargo business, IATA said it continues to suffer the brunt of the impact of the weak outlook in developed economies.

Freight volumes are expected to be basically stagnant at 52.1 million tonnes. Effectively, there has been no significant growth since 2010 when freight volumes were 50.7 million tonnes. After a 6.3 per cent fall in yields in 2012, we expect a further contraction of 2.0 per cent in 2013 as capacity conditions remain much more challenging than in passenger markets," remarked Tyler.

According to him, the jet fuel prices increased some 55 per cent over the period 2006–2013. This was the biggest contributor to the 23 per cent increase in unit costs over the same period.

This unit cost increase would have been much higher had airlines not kept non-fuel unit costs virtually unchanged in real terms, along with implementing significant programs to improve fuel efficiency. Intense competition has meant that fares alone have not been able to recoup this cost.

According to Tyler, the airlines have found new ways to add value to passenger journeys, boosting ancillary revenues.

"Ancillary revenues contributed $36 billon of the $680 billion in revenue earned in 2012. This 5 per cent of total revenues is expected to grow significantly in 2013. In 2007, ancillary revenues contributed $2.5 billion, or 0.5 per cent of the industry’s $510 billion revenue line," he added.-TradeArabia News Service




Tags: Middle East | Iata | travel | growth | Airlines |

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