ANALYSIS: Stronger demand drives improved profit picture

Stronger passenger growth and signs the cargo market might be over the worst are key to the improved outlook for the industry outlined by IATA in its profits forecast today.

IATA lifted its collective profits forecast by $2.2 billion from its outlook three months ago and has improved its yield projections for both cargo and passenger markets. But if there is some cheer from the slightly improved picture, the familiar concerns over high fuel costs and the Eurozone crisis continue to cloud the horizon.

"This is a small step in the right direction," said IATA director general Tony Tyler, during a conference call outlining the improved profits picture. IATA is projecting collective industry profits of $10.6 billion. This compares to estimated profits of $7.6 billion for 2012 and the $8.8 billion generated by the industry in 2011.

Specifically it is a $2.2 billion improvement on what IATA was expecting three months ago. "Demand in the first quarter has been stronger than we thought," says Tyler. "Against a backdrop of improved optimism for global economic prospects passenger demand has been strong and cargo markets are starting to grow again."

That has fed through on both the passenger and air freight side. IATA has lifted passenger demand expectations nearly one percentage point from its December forecast to 5.4% in 2013. On the cargo side it now sees traffic growth of 2.7% - turning round two years of declining numbers.

"We were expecting a decline in yields in 2013. We now expect a very modest improvement in yields of 0.4%," explains Tyler. It sees cargo yields for the year flat, as opposed to the 1.5% decline it predicted just three months ago and passenger yields up 0.4% rather than 0.2%.

"The result of improved demand is increased revenues," says Tyler. IATA has lifted its industry revenue projections for the year by $12 billion to $671 billion. That confidence is underlined by an increase in GDP growth expectations to 2.4% in 2013.

But much of that extra revenue will be lost through higher fuel costs before it can reach airline bottom lines. "The slightly better economic outlook has led to an increase in our forecast for jet fuel prices in 2013," says IATA. This in part stems from projections that the price of Brent Crude oil will average $109 per barrel in 2013 rather than easing slightly to $104.

After traffic growth of 3.2% in 2012, IATA sees this rising to 4.7% this year. But crucially it believes this will be ahead of extra capacity. "One important development in the past year has been that, despite the further slowdown in traffic growth, airlines increased capacity by less than the increase in traffic - boosting load factors and underpinning supply-demand conditions," IATA says. "An important part of our forecast for a further improvement in profitability this year is that we expect capacity growth to be similarly subdued in 2013."

The picture across all the regions is for improved profits over 2012 levels and for them all to be in the black in 2013. The most significant change in IATA's projections since December is that it now sees Asia-Pacific carriers as the most profitable region in 2013 generating $4.2 billion in profits. In December it was projecting $3.2 billion profits for the region, just behind North American carriers.

IATA collective net profits forecast

Source: based on IATA December 2012 and March 2013 forecasts. IATA 2012 estimates restated in Marc 2013

"The Asia-Pacific airlines will benefit most from the expected uptick in cargo," says Tyler, as carriers from the region account for the largest share of the air freight market.

"We are seeing some encouraging signs," adds IATA chief economist Brian Pearce, pointing to signs the bottom of the global industrial production cycle may have been reached.

He also points to the improved picture for the passenger business among Asia-Pacific carriers. "We see further growth in the market there," he says. "The growth for major economies is concentrated disproportionately in Asia-Pacific and other emerging markets and that is certainly going to help [Asia-Pacific carriers]."

He also sees positive signs from domestic consumerr spending in the crucial Chinese economy. "From what we see from the outside...the soft point in the Chinese market seems to have been passed," says Pearce.

If the picture for Asian carriers and those from North America - which benefitting from consolidation and tight capacity are expected to continue their profits streak - it remains hard going for those in Europe. IATA now at least projects a profit - of around $800 million - for European carriers for 2013. Just three months ago it saw them only at breakeven. Citing profit margins of 0.4%, Tyler describes profits as "very thin" among Europeaan operators. "And the European carriers are most exposed to any worsening in the Eurozone crisis," he adds.

Indeed overall it is Europe, as it has been ever since the eurocrisis began, which is at the heart of the big risks to the industry profit hopes.

"European Central Bank commitments with respect to the Eurozone crisis and the slow economic recovery in the US should be pointing us towards a durable, if weak, upswing," says Tyler. "But we have had two false starts already. Improving conditions in early 2011 and 2012 disintegrated as the Eurozone crisis intensified. And it could happen again. The impact of the unfolding situation in Cyprus is a risk factor that cannot be ignored."

Source: Air Transport Intelligence news