The airline industry remains ‘on track’ to deliver a second consecutive year of improved profitability, says the International Air Transport Association (IATA), despite a downward revision to its industry outlook for 2014 of $1bn to an industry profit of $18.7bn.

 

The main driver of the downward revision is higher oil prices, which are now expected to average $108.0/barrel (Brent) which is $3.5/barrel above previous projections. The $3 billion added cost on the industry’s fuel bill is expected to be largely offset by stronger demand. Overall industry revenues are expected to rise to $745 billion ($2 billion greater than previously projected).

 

“In general, the outlook is positive,” said Tony Tyler, IATA’s Director General and CEO. “The cyclical economic upturn is supporting a strong demand environment. And that is compensating for the challenges of higher fuel costs related to geo-political instability. Overall industry returns, however, remain at an unsatisfactory level with a net profit margin of just 2.5%.”

 

The aviation industry retains on average $5.65/passenger in net profit. This is improved from $2.05 in 2012 and $4.13 in 2013. But it is below the $6.45 achieved in 2010.

 

IMPROVED EFFICIENCY

“The efficiencies of improved industry structure through consolidation and joint ventures is providing more value to passengers and helping airlines to remain profitable even in difficult trading conditions,” adds Tyler.

Tony Tyler, IATA’s Director General and CEO.

 

“But we still need governments to understand the link between aviation-friendly policies and broader economic benefits. In many parts of the world the industry’s innate power to drive prosperity through connectivity is compromised by high taxes, insufficient infrastructure and onerous regulation.

 

Passenger demand has been strong throughout the recovery process and IATA expects passenger demand growth of 5.8% this year. That is slightly weaker than previously forecast (6.0%), but an improvement on the 5.3% growth for 2013.

 

IATA says airlines continue to introduce new product options for passengers which are boosting ancillary revenues. The average fare per departing passenger is expected to be about $181. Ancillary services may add almost $14 on top of this. “Industry consensus continues to build on the need for New Distribution Capability,” says IATA.

 

GDP growth projections for 2014 have been raised to 2.9% (from 2.7%). Improvements in the global economic outlook are largely being driven by developed economies. Job creation in the US, the end of fiscal austerity in Europe and a much weaker yen are stimulating demand. While China appears to be continuing on a trajectory of impressive growth, key emerging economies such as India and Brazil face major economic challenges.

 

Emerging market volatility is further increased by the recent flow of capital into US dollar assets causing problems for emerging markets with current account deficits. Several emerging markets have taken steps to raise interest rates (despite soft economies) in order to stem larger currency exchange rate fluctuations. This is compounding their difficulties with economic growth.