Middle East airlines to reap $2.4 billion profit in 2014

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Middle East airlines are expected to return a net profit of $1.6 billion in 2013, increasing to $2.4 billion in 2014, says IATA in their latest report. 

Middle East airlines to reap $2.4 billion profit in 2014
Emirates Airlines at Dubai International Airport. Middle East airlines are expected to return a net profit of $1.6 billion in 2013, increasing to $2.4 billion in 2014, says IATA in their latest report. Photo courtesy-Dubai Airports

The International Air Transport Association (IATA) announced an upward revision to its industry financial outlook. For 2013 airlines are expected to return a global net profit of $12.9 billion. This is expected to improve to a net profit of $19.7 billion in 2014. Both are improvements on the September forecast which anticipated an industry net profit of $11.7 billion in 2013 increasing to $16.4 billion in 2014.

The upward revision reflects lower jet fuel prices over the forecast period as well as improvements to the industry’s structure and efficiency already visible in quarterly results this year. Passenger markets continue to outperform the cargo business which remains stagnant both on volumes and revenues.

IATA expects 2014 to be a second consecutive year of strengthening profitability (beginning from 2012 when airlines posted a net profit of $7.4 billion). Industry net profit margins, however, remain weak at 1.1% of revenues in 2012, 1.8% in 2013 and 2.6% in 2014. Within this aggregate forecast for the entire industry, performance of individual airlines and regions will vary considerably.

The anticipated $19.7 billion profit in 2014 would come on projected revenues of $743 billion. While this would be the largest absolute profit for the airline industry—outstripping the $19.2 billion net profit that the industry returned in 2010 – it is important to note that 2010 revenues were $579 billion. The net profit margin in 2010 was 3.3%, some 0.7 percentage points higher than the 2.6% expected for 2014.

“Overall, the industry’s fortunes are moving in the right direction. Jet fuel prices remain high, but below their 2012 peak. Passenger demand is expanding in the 5-6% range—in line with the historical trend. Efficiencies gained through mergers and joint ventures are delivering value to both passengers and shareholders. And product innovations are growing ancillary revenues,” said Tony Tyler, IATA’s Director General and CEO.

“We must temper our optimism with an appropriate dose of caution. It’s a tough environment in which to run an airline. Competition is intense and yields are deteriorating.  Cargo volumes haven’t grown since 2010 and cargo revenues are back at 2007 levels.  The passenger business is expanding more robustly. Some airlines will out-perform our estimates and others will under-perform. But, on average, airlines will only make a net profit of about $5.94 per passenger in 2014,” said Tyler.

IATA outlook forecasts are estimates of the aggregate performance of the global air transport sector and should not be taken as in indicator of individual airline performance which can vary greatly from the global outlook, including variations from its directional shifts.

Forecast Drivers

Economic Cycle: Global GDP is expected to expand by 2.0% in 2013 and 2.7% in 2014. This is unchanged from the September forecast. The general trend of improvement in developed economies – particularly for the US – and relatively disappointing growth in the BRICS countries is expected to continue into 2014.

Passenger Demand: Passenger demand is robust and passenger numbers are expected to reach 3.1 billion in 2013 and rise by 6% to 3.3 billion in 2014. Nonetheless, competition remains intense and industry-wide average yields are expected to fall by 0.2% in 2013 and by 0.6% in 2014.

Ancillary Revenues: Ancillary revenues are a key driver of improved financial performance. Worldwide ancillary revenues have risen to an estimated $13/passenger. Airlines are underpinning their profitability with innovative products and services. On a per passenger basis, ancillary revenues are greater than the $5.94/passenger profit that airlines are expected to earn in 2014. Without ancillaries, the industry would be making a loss from its core seat and cargo products.

Improved Industry Structure: Improved industry structure and efficiency gains should allow the industry to leverage the improving economic cycle to boost profitability significantly in 2014. Airlines in North America, where consolidation has progressed the furthest, are expected to generate the largest profits and best margins in both 2013 and 2014. European airlines, still suffering from the weak European economy, are expected to see some improvements in profitability from successful joint ventures over the North Atlantic.

Cargo Demand: Cargo demand remains largely stagnant. Airlines are expected to carry 51.6 million tonnes of cargo in 2013, increasing to 52.5 million tonnes in 2014. This modest increase in demand is expected to be offset by a decline in yields (-2.1% in 2014). Despite the stagnation in the air cargo industry, belly capacity continues to be introduced as airlines seek to maximize on the robust passenger demand. Cargo revenues are expected to be $60 billion in both 2013 and 2014. While revenues peaked in 2011 at $67 billion, for 2013 and 2014 they are basically unchanged from 2007 levels.

The “on-shoring” of production is having an adverse impact on the cargo business. This is being driven by two forces. Since the recession we have seen a rise in protectionist measures by governments aiming to stimulate domestic economies. In tandem the effects of earlier liberalization are fading as costs rise in previously low labor-cost locations. These conditions are likely to extend over several years.

The World Trade Organization’s Bali agreement to liberalize markets and improve trade facilitation is expected to be good news for the air cargo industry. “Removing the red tape that restricts and slows trade is a positive goal. It aligns well with our own efforts to bring efficiency to air cargo through e-Freight,” said Tyler.

Fuel: A slight reduction in jet fuel prices is a major driver of the improved outlook. Following easing of tensions in Iran, oil prices are expected to see a slight downward movement from $108.2/barrel (Brent) in 2013 to $104.5/barrel in 2014. This is $0.80 and $0.50 less per barrel than previously forecast in September for 2013 and 2014 respectively. This positive trend will be amplified by a reduction in the crack spread of jet fuel resulting in savings of $2 billion in 2013 (to $211 billion) and $5 billion in 2014 (to $210 billion) for the overall industry fuel bill compared to the September forecast.

According to IATA estimates, all regions are expected to see improvements in profitability in 2014 compared to 2013. With the exception of Africa (which remains unchanged), all regions are expected to see better profitability in 2014 than previously forecast.

Middle East airlines are expected to return a net profit of $1.6 billion in 2013, increasing to $2.4 billion in 2014. EBIT margins also continue to improve—from 3.8% in 2013 to 4.7% in 2014.The region’s hubs, particularly in the Gulf, continue to expand in support of growing long-haul connectivity. Strong oil revenues—as oil prices stay high—continue to support travel generated by domestic activity and the development of the tourist industry. The Syrian crisis has not impacted traffic beyond its borders.

Risks

Airlines have made great strides at improving their businesses in the face of very adverse business conditions. Where they have been able to improve the industry structure through mergers and joint ventures, consumers have benefitted with more efficient connectivity and this has translated to improved financial results.

Fuel consumption provides a good example of the efficiencies that airlines are putting in place. In the face of rapidly rising fuel costs, airlines have dramatically improved fuel efficiency. In 2004 airlines transported two billion passengers and 38 million tonnes of cargo using 65 billion gallons of fuel. In 2014 we expect some 3.3 billion travelers and 52 million tonnes of cargo—increases of 64% and 37% respectively. Over the same period fuel uplift has grown by only 17% to 76 billion gallons.

“Airlines have shown that they can rise to the challenges of a difficult trading environment. That’s good news for economies and consumers that depend on global connectivity. But I am increasingly concerned that governments have not fully appreciated the critical role that aviation plays in our connected world. Regulatory and tax burdens incrementally, but significantly, rise year-on-year. Some governments even appear to be backtracking on deregulation and are micro-managing in areas such as passenger rights,” said Tyler.

“In 2014 we will mark 100 years since the first scheduled commercial air service was inaugurated. Over aviation’s first century, our world has changed for the better in many ways. The industry evolved into a powerful draft horse connecting people and growing economies. Governments should keep this in mind when developing policies or deciding taxes. Supporting aviation’s enabling capabilities pays big economic dividends,” said Tyler.

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