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IATA, the airlines’ global trade association, erased its December forecast and now envisions airlines making more than $2 billion in additional profits at a modestly higher profit margin in 2013.
IATA now forecasts that airlines will earn $10.6 billion in profits at a profit margin of 1.6%, compared with $8.4 billion at a 1.3% profit margin in the forecast released in December for 2013.
While individual airlines can operate with a substantial profit margin, often bolstered by ancillary revenue, it is a testament to the tough nature of the business that IATA’s forecast is for just a 1.6% after-tax profit margin for airlines globally. That, of course, includes plenty of airlines that are piling up losses.
Increased passenger demand and growth in the cargo industry are largely responsibile for the boost, IATA states.
“Industry profits are taking a small step in the right direction,” says Tony Tyler, IATA’s Director General and CEO. “Against a backdrop of improved optimism for global economic prospects passenger demand has been strong and cargo markets are starting to grow again. The economic optimism is also pushing fuel prices higher. We are seeing a $12 billion improvement in revenue, and a $9-10 billion increase in costs — most of which is related to fuel.”
IATA places airlines in six geographic regions, and the revised forecast shows an improved profit outlook for five of them, while Latin America’s profit forecast has been rewritten downward by $100 million, as it now points to $600 million in profits for the year.
From IATA’s press release, the following is the trade association’s outlook by region:
“Asia-Pacific airlines are expected to deliver the largest absolute contribution to industry performance with a $4.2 billion net profit expected for 2013 (up from $3.2 billion previously projected and from the $3.9 billion reported for 2012). Asian carriers comprise about 40% of the air cargo market and will be the biggest beneficiaries of the expected upturn in cargo demand. Carriers in the region are expected to see average demand growth of 4.9%, slightly outpaced by a 5.0% capacity expansion.
“North American airlines are expected to report a $3.6 billion profit. This is slightly ahead of the $3.4 billion previously projected and the $2.3 billion profit reported in 2012. The region is a mature market (particularly for domestic operations). Tight management of capacity in response to the high fuel cost environment will see a 1.3% expansion in demand leading a 1.1% expansion in capacity.
“European carriers are expected to report an $800 million profit. This is an improvement on the previously projected breakeven performance and the $300 million profit in 2012, but at only 0.4% of revenues that’s barely different from breakeven. And it is the market that will be most affected by volatility caused by the Eurozone crisis. The European domestic market continues to be weak, reflecting recessionary conditions across the continent. However, airlines are expected to show stronger performance on long-haul routes to emerging markets. Overall demand for European carriers is expected to grow by 2.6% which is in line with a capacity expansion of 2.5%.
“Middle Eastern airlines are expected to post a profit of $1.4 billion. This is up slightly from the $1.1 billion previously forecast and stronger than the $900 million profit recorded in 2012. The growing role of the region’s airlines in providing connectivity to developing markets is reflected in strong traffic growth. The region’s airlines are expected to add 12.8% in capacity in 2013 and this will be outpaced by demand growth of 13.7%. The region’s carriers rank third in terms of operating profitability with an Earnings Before Interest and Taxes (EBIT) margin of 3.4%, after Asia-Pacific (5.3%) and North America (4.1%).
“Latin American airlines will post a $600 million profit. It is the only region to see a decline ($100 million) compared to the December forecast. This will, however, represent a doubling of profit compared to 2012. The continent’s growth has slowed in response to earlier losses in volatile domestic markets. Nonetheless, the region will see the second highest growth in demand (8.1%) and that will be 1.4 percentage points ahead of expected capacity expansion.
“African airlines are expected to post a $100 million profit in 2013. That is ahead of the break even performance previously projected and the $100 million loss of 2012. African carriers are expected to see a 6.5% increase in demand during 2013 which they will meet with a 6.4% expansion in capacity. The continent continues to be a focal point for growth by those carriers located in the region and those providing services into the region. Competition between the two remains fierce.”