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Buoyant Outlook For Aviation Industry Profits

by Ulrika Lomas, Tax-News.com, Brussels

07 October 2013


Industry profits are expected to be considerably higher this year and next than in 2012 despite a downward revision to the International Air Transport Association's (IATA) latest global industry profitability outlook.

In its latest outlook, IATA expects industry profits to total USD11.7bn in 2013, on revenues of USD708bn, which is USD1bn lower than in IATA's June outlook.

IATA said that, although airline performance continued to improve in the third quarter, airlines suffered from a spike in oil prices associated with the Syria crisis and disappointing growth was reported in several key emerging markets.

IATA's revised profit outlook points to industry profits growing further to USD16.4bn in 2014, more than double the industry's performance in 2012 (USD7.4bn). This would make 2014 the second strongest year this century after the record-breaking profit of USD19.2bn seen in 2010.

"Overall, the story is largely positive. 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," Tony Tyler, IATA's Director General and CEO, commented.

Airline performance remains strong. This year, airlines are expected to post the same operating margin (3.2 percent) as in 2006, even with a 54 percent hike in jet fuel prices. The industry has been able to absorb this enormous cost increase as a result of changes in the industry structure (through consolidation and joint ventures,) increased ancillary sales and reduced new entry due to tight financial markets. Moreover, the industry is expected to have a relatively good year even with subdued global economic growth at 2 percent. Previously 2 percent gross domestic product (GDP) growth was considered the point below which airlines would post losses.

Passenger growth remains robust at 5 percent, although slightly below the 5.3 percent previously projected, and below the 5.3 percent growth recorded in 2012. Passenger numbers are expected to grow to 3.12 billion – the first time that they have topped the 3 billion mark.

On a regional basis:

  • North American airlines are expected to post the strongest profits of USD4.9bn (up from previous forecasts of USD4.4bn), representative of an Earnings Before Interest and Taxes (EBIT) margin of 4.3 percent. This is more than double the USD2.3bn profit of 2012. Passenger demand is expected to grow by a modest 2 percent, the slowest growth of any region, but this will outstrip the 1.6 percent expansion in capacity.
  • European airlines are expected to record profits of USD1.7bn (up from June's forecast of USD1.6bn). While this is a considerable improvement on the USD400m profit that European carriers made in 2012, an EBIT margin of just 1.3 percent is the weakest among the major regions and well below the industry average of 3.2 percent. IATA expects a 4 percent expansion of passenger demand with only a 2.8 percent increase in capacity.
  • The outlook for Asia-Pacific airlines has been downgraded by USD1.5bn to USD3.1bn largely driven by slower growth among the region's emerging economies. Passenger growth is expected to leap 6.6 percent, marginally lower than capacity growth of 6.9 percent.
  • The outlook for Latin American carriers is unchanged at USD600m profits. Passenger demand growth of 6 percent is expected to outstrip capacity expansion of 5.3 percent.
  • Middle East carriers are expected to post profits of USD1.6bn, marginally ahead of the USD1.5bn previously forecast. The region's efficient hubs continue to support strong performance on long-haul markets, and the impact of the Syrian crisis has been limited. Passenger demand is expected to grow by 10.5 percent – the strongest among all regions – but this will be slightly outstripped by capacity growth of 11.3 percent.
  • In Africa, carriers will fall into losses of USD100m (down from a previously projected profit of USD100m). 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. Demand growth is expected to be a robust 7.8 percent ahead of a capacity expansion of just 5.5 percent.

Looking ahead, IATA expects that all regions will see improved profitability, but divergence in performance will remain. The salient findings of its 2014 profit outlook include that:

  • 2014 is expected to be particularly strong for North American carriers (USD6.3bn net profit, the industry's strongest) as the economy improves;
  • European carriers are also expected to see a near doubling of profits to USD3.1bn (although even this will only generate an EBIT margin of 1.9 percent with only African carriers being lower);
  • Asia-Pacific is expected to see a modest improvement in profitability to USD3.6bn, largely on the back of improved cargo performance;
  • Middle East carriers are expected to post a USD2.1bn profit (their highest ever);
  • Carriers in Latin America are expected to see profits rise to USD1.1bn; and,
  • African airlines are also expected to return a combined profit of USD100m.

Tyler highlighted that even with the significant improvements expected for 2014, an industry profit of USD16.4bn implies a return on invested capital of just 5.2 percent. That remains significantly below the industry's weighted average cost of capital which is hovering between 7 percent and 8 percent.

"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. 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 policy makers incorporated that into the cost-benefit analysis when developing regulations, we would have a much healthier industry generating even broader economic benefits," Tyler said..

"A USD16.4bn profit for transporting some 3.3 billion passengers means that airlines will retain an average of about USD5 per passenger. That very simple calculation demonstrates that even a small change in the operating environment – a new tax or other cost increase for example – could change the outlook quite significantly," he concluded.

TAGS: environment | tax | business | Syria | gross domestic product (GDP) | regulation | Europe | Asia-Pacific | North America | Africa | Middle East | Tax

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