Transport Airlines

The State of Airline Industry, 100 Years In

Jun 02, 2014 9:00 am

Skift Take

A great primer on how the global airline industry performed and managed in the last decade, and where it is going from here.

— Rafat Ali

Free Report: The State of Student Travel

Courtesy IATA

Tony Tyler, the CEO of IATA, at his speech in global meeting in Doha. Courtesy IATA


Earlier today, the International Air Transport Association (IATA) 70th annual general meeting started in Doha, and CEO of IATA Tony Tyler gave a state of the industry speech on where the global airline industry stands now, 100 years into its existence.

We are extracting his speech below, which gives a great overview of where the airline industry stands in terms of its global influence, performance in 2014 and where the growth is going to come from.
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Global spend on air transport is expected to reach $746 billion in 2014, which equals 1% of world GDP. The number of passengers is expected to reach 3.3 billion as travelers benefit from a growing global network and airfares that are expected to fall 3.5% in real terms (after inflation). Businesses are also benefiting from the growth in connectivity and a 4% fall in freight rates, after inflation.

The catalytic benefits of aviation are illustrated by the $621 billion in tourism spend that the industry will facilitate over the course of the year, as well as the $6.8 trillion worth of goods that will be delivered by air. Employment supported by aviation has reached some 58 million jobs worldwide. In addition, airlines are making enormous investments in modernizing fleets. This year, the industry will take delivery of 1,400 aircraft worth some $150 billion.

These benefits are being generated and investments being made, despite persistent weak profitability and a tax burden which this year is expected to reach $121 billion (up from $113 in 2013). Airlines are expected to earn a net profit in 2014 of $18.0 billion for a net profit margin of 2.4%. This will be up from earnings of $6.1 billion in 2012 and $10.6 billion last year. This and other figures notes are aggregated at the industry level. They are not indicators of individual airline performance.

Investors will see more favorable returns from airlines in 2014. The industry average return on invested capital (ROIC) is expected to reach 5.4% in 2014 (up from 3.7% in 2012 and 4.4% in 2013). But even with the improvement, there is still a gap before ROIC reaches the industry’s cost of capital—considered the minimum in most industries—which is estimated in the 7%-8% range. Despite these relatively low returns, the industry is still forecast to make substantial investments and major contributions to jobs and economic development.

“Aviation is a catalyst for economic growth. Airline revenues now total 1% of global GDP and the industry will safely transport 3.3 billion people and $6.8 trillion worth of goods this year. In addition, the jobs and tourism receipts aviation helps generate are major contributors to the global economy.

Airlines themselves remain burdened with high taxes and weak profitability. With a net profit margin of just 2.4%, airlines will retain only $5.42 per passenger carried. There is a mismatch between the value that the industry contributes to economies and the rewards that generates for those who risk their capital to finance the industry,” said Tony Tyler, IATA’s Director General and CEO.

“Airline efforts to improve performance further need a counterpart in governments. That means a regulatory structure that facilitates success; the provision of cost-efficient infrastructure to meet consumer and business demands; and a reasonable tax burden. Governments should understand that the real value of aviation is the global connectivity it provides and the growth and development it stimulates, not the tax receipts that can be extracted from it,” said Tyler.

Global Financial Performance

The global industry profit of $18.0 billion will continue an improving trend. It is, however, a slight downgrade from the previous forecast of $18.7 billion (March). The main factors impacting the industry’s profitability include:

Global economic performance: Since March the economic environment has deteriorated. World trade has slowed and business confidence has fallen with concerns over China’s economic growth and various geopolitical risks. The current profit forecast is built on expected global GDP growth in 2014 of 2.8% (below the 2.9% anticipated in March) and growth in world trade of 3.6% (down from 4.5%). Economic prospects are, however, expected to improve as the year progresses.

Improved airline performance: Airlines continue to improve their own performance through an improved industry structure. Consolidation and joint ventures on long-haul markets are delivering efficiency gains as seen through the load factor which is expected to reach a record industry-wide full-year high of 80.4% this year. At the same time, the number of unique city-pairs served is expected to reach 16,161 in 2014, up 2.4% on 2013 and nearly double the number served in 1994.

Passenger Trends: Air travel has been extremely robust in the face of relatively weak economic growth and persistently high fuel costs. Overall passenger growth is expected to remain strong in 2014 (5.9% up on 2013), but the premium component of that growth has slowed in line with the recent deterioration in business confidence. Aviation remains a very competitive business. Airfares, after adjusting for inflation and before surcharges and taxes, are expected to fall by some 3.5% in 2014 compared with the previous year.

Cargo Trends: In contrast to robust growth in passenger traffic, air cargo, has been in the doldrums since 2010. This is mainly the result of the unusual weakness of world trade that is related to a parallel trend of companies “on-shoring” production. Nonetheless, the strongest demand since 2010 is expected with a weaker-than-normal cyclical upturn estimated to produce 3.1% growth. Real freight rates are, however, expected to fall 4.0% this year. The divergence in growth trends between cargo (slow) and passenger (robust) is creating challenges for airlines in matching capacity to demand. Capacity added to meet passenger demand brings in cargo capacity as well. The industry continues to pursue process improvements to improve competitiveness. To boost competitiveness and revitalize trade growth, in addition to the e-freight initiative that will take paper out of back-office processes, the industry is working towards a goal of reducing shipping times by 48 hours from the current average of 6.5 days before 2020.

Fuel costs: Fuel costs are stable, but they have never before been so high for so long. Since 2011, average jet fuel costs have remained above $120/barrel and the expectation for this year is for an average jet fuel cost of $124.2/barrel. The total industry fuel bill is expected to reach $212 billion. Investments in fuel-efficient aircraft are among the drivers of a 1.7% improvement in fuel efficiency.

“It’s great that we are able to celebrate the industry’s centennial with the industry in the black. Making ends meet for airlines has always been a challenge. There is lots of evidence that the hard work of the industry to structure itself for profitability is beginning to pay off. We are increasing profitability even with jet fuel prices above $120/barrel. For the first time, the global load factor looks like it will average over 80% for the year. And fuel efficiency continues to rise. But, there are strong headwinds from rising infrastructure costs, inefficiencies in air traffic management, a heavy tax burden, and costly regulation,” said Tyler.

Regional Profitability

All regions are expected to see an improvement in profitability in 2014 over 2013. Local issues and economic conditions, however, mean that the improvement is not uniform.

Airlines in North America are delivering the strongest financial performance. Net post-tax profits are the highest at $9.2 billion this year. That represents a net profit of $11.09 per enplaned passenger, which is a marked improvement from just two years earlier when it was $2.83. But that’s still only a net margin of 4.3% on revenues. This improvement has been driven by consolidation and the contribution of ancillary revenues. Load factors have risen to record levels with the passenger load factor reaching 83.7% in April.

Airlines in Europe continue to be burdened by high regulatory and infrastructure costs. The region is expected to generate a net profit of $2.8 billion this year. which represents only $3.23 per passenger and a margin of just 1.3%. This is despite considerable efficiency gains as witnessed by the 80.7% load factor achieved in April. An example of the burden under which the airlines in the region work is the inefficiency of European airspace. The Performance Review Unit of the European Commission estimates that this cost European airlines $3.8 billion per year. On top of this, it is estimated that the consumer cost of time wasted in delays will amount to $7.7 billion this year.

Airlines in Asia-Pacific are expected to earn $3.2 billion in 2014. That is up on the $2.0 billion they made in 2013. Profit per passenger is below the industry average at $2.98, as is the net margin of 1.6%. A moderate improvement in cargo markets this year, however, is expected to give the region’s airlines a boost. Passenger demand is expected to experience a healthy growth of 7.4%. The region’s financial performance has also been dragged down by difficulties in the Indian market. It is hoped that the new government will address the persistent problems of high fuel taxes, insufficient capacity in Mumbai, high infrastructure costs, and onerous regulation.

Middle East airlines are expected to deliver a net profit of $1.6 billion, representing a profit per passenger of $8.98 and a margin on revenues of 2.6%. Average yields are low but unit costs are even lower, partly driven by the strength of capacity growth; 13% this year. The strong growth is being accommodated by major developments of airport infrastructure, particularly in the Gulf region. Airspace capacity in the Gulf, however, is not keeping pace with the growth of the industry. The resulting days are a burden to the efficiency of the connectivity that the Gulf carriers are providing over their hubs. A more coordinated approach to managing the region’s limited airspace is needed.

Latin American airlines have faced a mixed environment, with weak home markets hampering performance, but a degree of consolidation and some long-haul success is boosting net profit above $1 billion this year, which is $4.21 per passenger and a margin of 3%. Demand growth in the region has tapered slightly to the 6% range. Governments are struggling to accommodate demand with efficient airport infrastructure and are increasingly turning to partnerships with the private sector to fund development. The airline industry is cautioning governments in the region to ensure that such arrangements are properly structured and to ensure that there is robust and independent economic regulation in place.

Africa is the weakest region, as in the past two years. Profits are barely positive ($100 million), and represent just $1.64 per passenger and a margin of just 0.8% on revenues. Performance is improving, but slowly. Intercontinental markets are increasingly opening to stiff competition, but barriers to development of intra-Africa connectivity remain high. The region’s airlines also suffer from high taxation, high infrastructure costs, and high fuel costs (often related to taxation).

Connectivity, Jobs, Taxes and Environmental Performance

Despite relatively weak profitability, the airline industry continues to add value to its consumers, to the wider economy and to governments:

Aviation’s global connectivity now spans 16,161 city-pairs, which is nearly double the number in 1994. This connectivity is a catalyst for broad economic benefits. Over that same period, airlines have halved the cost of air transport, after inflation, which has been major stimulus for trade, tourism, and foreign direct investment associated with global supply chains.

The number of aviation jobs is rising. The total airline payroll in 2014 is expected to reach $140 billion (up from $134 billion in 2013) for its 2.39 million direct employees (up from 2.33 million in 2013). Average unit labor costs are expected to fall 0.7% this year as productivity improves a further 2.5%. These employees are extremely productive for the economies in which they work, generating on gross value added (GVA – which is the company level equivalent to GDP) of $100,540 per employee.

Airlines’ environmental performance continues to improve. Airlines are expected to use some 271 billion liters of fuel in 2014. In doing so, the industry will emit 722 million tonnes of carbon. While that is a 3.2 % increase on the previous year, it is decoupled from the 5.2% increase in overall operations to meet consumer demand. Fuel efficiency is expected to improve 1.7% in 2014 per ATK (and 1.9% per RTK) driven by investments in new aircraft (airlines will take delivery of 1,400 new aircraft in 2014 worth $150 billion and retire or park some 800 less fuel-efficient older aircraft).

The industry remains committed to achieving carbon-neutral growth from 2020. This is in addition to a 1.5% average annual improvement in fuel efficiency to 2020 and complements the long-term goal of cutting net emissions in half by 2050 (compared with 2005 levels).

Key Statistics

2012 2013 2014
Spend on Air Transport (Revenues) $679 billion $710 billion $746 billion
Tax Revenues Contributed $106 billion $113 billion $121 billion
Net Post Tax Profit (margin) $6.1 billion (0.9%) $10.6 billion (1.5%) $18.0 billion (2.4%)
Average post-tax profit/passenger $2.05 $3.37 $5.42
Average one-way air fare (2014$) $256 $239 $231
Return on Invested Capital 3.7% 4.4% 5.4%
Freight rates ($/tonne) $2.44 $2.28 $2.18
Passengers 2.977 billion 3.141 billion 3.320 billion
Passenger Demand Growth (RPK) +5.3% +5.7% +5.9%
Freight Demand Growth (FTK) -1.0% +1.8% +3.1%
Fleet Size (aircraft) 24,494 25,628 25,851
Passenger Load Factor 79.3% 79.7% 80.4%
Fuel efficiency (negative = improvement) -1.5% -1.9% -1.7%
Carbon Emissions (tonnes) 682 million 700 million 722 million
Direct Employment (people) 2.27 million 2.33 million 2.39 million
Unique City Pairs 15,412 15,782 16,161
Value of Trade Carried $6.4 trillion $6.5 trillion $6.8 trillion

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