Airline profitability outlook strengthens

The International Air Transport Association (IATA) announced an expected strengthening of the airline industry's profitability in an improved outlook for 2023. Highlights include:

Airline industry net profits are expected to reach $9.8 billion in 2023 (1.2% net profit margin), more than double the previous forecast of $4.7 billion (December 2022).

The airline industry's operating profit is expected to reach $22.4 billion in 2023, well above the December forecast of an operating profit of $3.2 billion. It's also more than double the estimated $10.1 billion operating profit for 2022.

Some 4.35 billion people are expected to travel in 2023, which is close to the 4.54 billion who flew in 2019.

Cargo volumes are expected to be 57.8 million tons, which has fallen below the 61.5 million tons transported in 2019 with a sharp slowdown in international trade volumes.

Total revenue is expected to grow 9.7% year-over-year to $803 billion. This marks the first time the industry's revenue has surpassed the $800 billion mark since 2019 ($838 billion). Spending growth is expected to be contained to an annual increase of 8.1%.

“The financial performance of airlines in 2023 is exceeding expectations. The higher performance is supported by several positive developments. China lifted COVID-19 restrictions ahead of schedule in the year. Cargo revenue remains above pre-pandemic levels, though volumes have not. And, on the cost side, there is some relief. Jet fuel prices, while still high, have moderated over the first half of the year,” said Willie Walsh, IATA Director General.

The return to net profitability, even with a net profit margin of 1.2%, is a significant achievement. First, it was achieved at a time of significant economic uncertainties. And second, it follows the deepest losses in aviation history ($183.3 billion net loss for 2020-2022 (inclusive) for an average net profit margin of -11.3% over that period). It should be noted that the airline industry entered the COVID-19 crisis at the end of a historic winning streak that saw an average net profit margin of 4.2% for the 2015-2019 period.

“Economic uncertainties have not dampened the desire to travel, even as ticket prices have absorbed soaring fuel costs. After deep losses from COVID-19, even a 1.2% net profit margin is something to celebrate! But with airlines only earning $2.25 per passenger on average, repairing damaged balance sheets and providing investors with sustainable returns on their capital will continue to be a challenge for many airlines," Walsh said.  

Outlook Drivers
Revenues are increasing (9.7%) faster than expenses (8.1%), strengthening profitability.

Revenue – Industry revenue is expected to reach $803 billion in 2023 (+9.7% in 2022 and -4.1% in 2019). It is expected to have an inventory of 34.4 million flights in 2023 (+24.4% in 2022, -11.5% in 2019).

Passenger revenue is expected to reach $546 billion (+27% in 2022, -10% in 2019). With COVID-19 restrictions now lifted in all major markets, the industry is expected to reach 87.8% of 2019 levels of revenue per passenger-kilometre (RPK) for the year with passenger traffic strengthening to as the year progresses. High travel demand in many markets is keeping returns strong with a modest 1.1% decline expected in 2023 compared to 2022 levels (following increases of 9.8% in 2022 and 3.7% in 2021 ).

Efficiency levels are high with an expected average passenger load factor of 80.9% by 2023. That is very close to the record 2019 performance of 82.6%.

Data from IATA's May 2023 passenger survey supports the optimistic outlook, with 41% of travelers indicating they expect to travel more in the next 12 months than the previous year and 49% expecting to make the same level of travel. trips. In addition, 77% of those surveyed indicated that they were already traveling as much or more than before the pandemic.

Cargo revenue is expected to be $142.3 billion. While that is a sharp reduction from $210 billion in 2021 and $207 billion in 2022, it is well above the $100 billion earned in 2019. Returns will be negatively affected by two factors: (1) increasing passenger capacity that automatically increases the availability of belly capacity for cargo and (2) the possible negative effects on international trade of the economic cooling measures introduced to combat inflation. Yields are expected to correct down 28.6% this year, but remain high by all historical comparisons. Note that there were performance increases of 54.7% in 2020, 25.9% in 2021, and 7.4% in 2022.
Expenses are expected to grow to $781 billion (+8.1% in 2022 and -1.8% in 2019).

Jet fuel costs are expected to average $98.5/barrel by 2023 for a total fuel bill of $215 billion. That is cheaper than the $111.9/barrel previously expected (Dec 2022) and the $135.6 average cost experienced in 2022.

High crude oil prices were overstated for airlines, as the crack spread (premium paid to refine crude oil into jet fuel) averaged more than 34% by 2022, significantly above the long-term average. As a result, fuel was responsible for almost 30% of the total expense. In recent months the crack spread has narrowed and the full year average crack spread is expected to fall to around 23%, which is more in line with the historical average rate. Fuel costs will account for 28% of the average cost structure, which is still above the 24% of 2019.

Non-fuel expenses have been well controlled by airlines despite inflationary pressures. As fixed costs are spread over a larger scale of activity, non-fuel unit costs per available ton-kilometre (ATK) are expected to fall to 39 cents per ATK. That's -6.4% compared to 2022 (41.7 cents/ATK) and marks a return to pre-COVID levels. Total non-fuel costs are expected to reach $565 billion by 2023.

Risks
The economic and geopolitical environment presents several risks to the outlook. With just $22.4bn in operating profit (2.8%) between $803bn in revenue and $781bn in expenses, industry profitability is fragile and could be affected (positively or negatively) by a number of factors. In particular, it should be taken into account:

Anti-inflation measures are maturing at different rates in different markets. Central banks are calibrating the best levels for interest rates to have maximum cooling effect on inflation and prevent economies from slipping into recession. An early or lower end to rate hikes could stimulate markets for a stronger year-end outlook. Similarly, the risk of recession remains. If the recession leads to job losses, the outlook for the industry could change negatively.

The war in Ukraine is not having a major impact on the profitability of most airlines. A currently unanticipated peace could have the potential for cost improvements with lower oil prices and efficiencies from the removal or relaxation of airspace restrictions. However, an escalation would likely have negative prospects for global aviation. Already broader geopolitical tensions are weighing on international trade and any escalation of such tensions poses a downside risk to the industry's outlook.

Supply chain issues continue to impact global business and trade. Supply chains are changing to fill the gaps in resilience caused by current geopolitical tensions and the challenges experienced during COVID-19. Airlines have been directly affected by disruptions in the aircraft parts supply chain that aircraft and engine manufacturers have been unable to resolve. This is negatively affecting the delivery of new aircraft and the ability of airlines to maintain and deploy existing fleets.

Regulatory cost burdens are at risk of increasing due to increasingly interventionist regulators. In particular, the industry could face increasing compliance costs from increasingly punitive passenger rights regimes and regional environmental initiatives.

Regional Overview
While the global airline industry is expected to return to profitability in 2023, financial performance across regions remains mixed. The positive news is that industry finances are improving in all regions from the COVID-related depths of 2020, although not all regions are expected to turn a profit this year.

North American carriers

North America continues to be the standout region in terms of financial performance. Consumer spending has remained strong, despite cost-of-living pressures, and demand for air travel remains strong; Air passenger demand is forecast to surpass its pre-COVID (2019) level this year.

European carriers 

Despite various capacity constraints experienced during the summer period, European airlines were able to return to profit in 2022. That profitability will strengthen further in 2023. Key regional risks relate to the war in Ukraine, labor unrest and concerns about economic performance in some countries. key countries.

Asia-Pacific carriers 

Now that all economies in the region have lifted COVID travel restrictions, the industry's recovery is underway. A strong increase in both passenger volume and capacity is expected to be reflected in a considerable improvement in 2023 financial results and a narrowing of the gap with other regions.

Middle East carriers 

The region's return to profitability in 2022 was supported by a significant increase in the passenger load factor of almost 25 percentage points, outperforming the other regions. At the same time, carriers in the Middle East have been rapidly rebuilding their international networks, and as of March 2023, the region's international connectivity was back to 98% of its pre-COVID level.

Latin American carriers

Passenger volumes are picking up quickly, but financial performance varies considerably across the region. The region will remain in the red, although some airlines are expected to post solid gains. In general, the financial performance of the industry is expected to continue to improve, but a challenging economic context in several countries in the region is slowing down the pace of the recovery.

African carriers

Africa remains a difficult market in which to operate an airline, with economic, infrastructure and connectivity challenges affecting industry performance. However, despite these challenges, there is still strong demand for air travel in the region, supporting the continued movement towards a return to overall industry profitability.

2022: The improvement in the financial performance of the industry in 2022 exceeded previous expectations. Industry net losses for 2022 are now estimated at -$3.6 billion, a strengthening from the previously estimated loss of -$6.9 billion (December 2022). At the operational level, and despite the large variation in performance, the latest data points to the industry returning to profit in 2022 before taxes.

Bottom Line
“Resilience is the story of the day and there are many good reasons for optimism. Achieving industry-level profitability after the depths of the COVID-19 crisis opens up great potential for airlines to reward investors, fund sustainability and invest in efficiencies to connect the world even more effectively. That's a big "to do" list to accomplish with just a 1.2% net profit margin. That is why we call on governments to maintain their focus on initiatives that will strengthen secure, sustainable, efficient, and cost-effective connectivity", Walsh said.

“Priorities for 2023 include SAF production incentives to accelerate progress toward net zero carbon emissions, ensuring the integrity of CORSIA as the economic measure applied to international aviation, eliminating inefficiencies in air traffic management, and enforcing global standards. consistently,” Walsh said.

Passengers have a safe, sustainable, efficient and profitable airline industry. A recent IATA survey of travelers in 11 global markets revealed that 81% of those surveyed emerged from the pandemic with a greater appreciation of the freedom that makes flying possible. The same study also demonstrated the important role that travelers see in the airline industry:

90% said air connectivity is essential for the economy.
91% said air travel is a necessity for modern life.
88% said that air travel has a positive impact on societies.
82% said the global air transport network is a key contributor to the UN Sustainable Development Goals (SDGs), 96% expressed satisfaction with their last flight, and 77% said flying was good value for money price.