Wednesday 30 July 2014
 
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ME CARRIERS DRIVING GROWTH

The global spend on air transport is set to reach $746 billion in
2014, said IATA chief Tony Tyler in Doha.

Airlines net profit to hit $18bn in 2014

Doha, June 2, 2014

The global airline companies are set to earn a net profit of $18 billion in 2014 for a net profit margin of 2.4 per cent compared to $10.6 billion last year and up from earnings of $6.1 billion in 2012, said a report.

Regionwise, Middle East airlines were 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 per cent, stated the International Air Transport Association (IATA) in its report..

IATA pointed out that the average yields were low but unit costs were even lower, partly driven by the strength of capacity growth; 13 per cent 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 co-ordinated approach to managing the region’s limited airspace is needed, it added.

The global spend on air transport is expected to reach $746 billion in 2014, which equals to one per cent of world GDP driven by a surge in passenger growth poised to hit 3.3 billion by year end.

IATA on Monday launched the 'Economic Performance of the Airline Industry' report outlining how air transport is adding value for consumers, the wider economy, governments, and investors.

The global aviation body in its report illustrates how the airline industry continues to improve profitability through efficiency gains while connecting more cities, lowering transport costs, supporting jobs, and making major investments.

The number of passengers is expected to reach 3.3 billion as travellers benefit from a growing global network and airfares that are expected to fall 3.5 per cent in real terms (after inflation). Businesses are also benefiting from the growth in connectivity and a four per cent 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, the IATA said, airlines were making enormous investments in modernizing fleets. This year, the industry will take delivery of 1,400 aircraft worth some $150 billion, it added.

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).

According to IATA, the investors will see more favourable returns from airlines in 2014. The industry average return on invested capital (ROIC) is expected to reach 5.4 per cent in 2014 (up from 3.7 per cent in 2012 and 4.4 per cent 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 per cent-8 per cent range.

Despite these relatively low returns, the industry is still forecast to make substantial investments and major contributions to jobs and economic development.

Commenting on the growth, Tony Tyler, IATA’s director general and CEO, said: "Aviation is a catalyst for economic growth. Airline revenues now total 1 per cent 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 per cent, 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," observed Tyler.

"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," he added.

The IATA said several key factors were impacting the industry’s profitability. These 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 per cent (below the 2.9 per cent anticipated in March) and growth in world trade of 3.6 per cent (down from 4.5 per cent). 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 per cent this year. At the same time, the number of unique city-pairs served is expected to reach 16,161 in 2014, up 2.4 per cent 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 per cent 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 per cent 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 per cent growth. Real freight rates are, however, expected to fall 4 per cent this year.

*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 per cent improvement in fuel efficiency.

Tyler said: "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 per cent 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," stated Tyler.

Axccording to Tyler, all regions were expected to see an improvement in profitability in 2014 over 2013. Local issues and economic conditions, however, mean that the improvement is not uniform, he warned.

Airlines in North America are delivering the strongest financial performance, while those in Europe continue to be burdened by high regulatory and infrastructure costs, he pointed out.

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 per cent, he explained.

"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 per cent on revenues," he added.

Despite relatively weak profitability, the airline industry continues to add value to its consumers, to the wider economy and to governments, said IATA in the report.

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.
 
Also the number of aviation jobs is rising, revealed the IATA report. 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).

The average unit labour costs are expected to fall 0.7 per cent this year as productivity improves a further 2.5 per cent. 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, the report added.-TradeArabia News Service




Tags: Iata | profit | Airlines |

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