Airline financial performance in 2023 is beating expectations
Airline financial performance in 2023 is "beating expectations," Willie Walsh, IATA's Director General explained during the organisation's AGM in Istanbul in Jun-2023, supported by several positive developments.
The return to net profitability, even with a 1.2% net profit margin, represents a major achievement for the embattled industry, especially as it was achieved at a time of significant economic uncertainties.
It follows the deepest losses in aviation's history (USD183.3 billion of net losses for 2020-2022 (inclusive) for an average net profit margin of -11.3% over that period).
The airline industry had entered the COVID-19 crisis at the end of a historic profit streak that saw an average net profit margin of 4.2% for the 2015-2019 period exaggerating the data.
Economic uncertainties have not dampened desire to travel
Mr Walsh says economic uncertainties "have not dampened the desire to travel, even as ticket prices absorbed elevated fuel costs". After deep COVID-19 losses, even a net profit margin of 1.2% is "something to celebrate," he notes.
But with airlines just making USD2.25 per passenger on average, repairing damaged balance sheets and providing investors with sustainable returns on their capital will continue to be a challenge for many airlines, a view that Mr Walsh shares.
A position of strengthening profitability
The IATA economic data shows a landscape of strengthening profitability with revenues rising faster than expenses. IATA predicts industry revenues will reach USD803 billion in 2023 (+9.7% on 2022 and -4.1% on 2019). An inventory of 34.4 million flights is expected to be available in 2023 (+24.4% on 2022, -11.5% on 2019).
Meanwhile, passenger revenues are expected to reach USD546 billion (+27% on 2022, -10% on 2019). With COVID-19 restrictions now removed in all major markets, the industry is expected to reach 87.8% of 2019 levels of revenue passenger kilometres (RPKs) for the year with strengthening passenger traffic as the year progresses, predicts IATA.
The high demand for travel in many markets is keeping yields strong with a modest 1.1% decline expected in 2023 compared to 2022 levels (following increases of 9.8% in 2022 and 3.7% in 2021), according to IATA.
Efficiency levels are high, says IATA, with an expected average passenger load factor of 80.9% for 2023. That is very near the 2019 record performance of 82.6%.
Traveller research supports this optimistic outlook
IATA's May-2023 passenger polling data supports this optimistic outlook, with 41% of travellers indicating they expect to travel more in the next 12 months than in the previous year and 49% expect to undertake the same level of travel. Moreover, 77% of respondents indicated that they were already travelling as much or more than they did pre-pandemic.
Expenses will grow but fuel costs will decline
IATA expects expenses to grow to USD781 billion (+8.1% on 2022 and -1.8% on 2019). Jet fuel costs are expected to average USD98.5/barrel in 2023 for a total fuel bill of USD215 billion. That is cheaper than the USD111.9/barrel previously expected by IATA in Dec- 2022 and the average cost of USD135.6 experienced in 2022.
High crude oil prices were "exaggerated" for airlines as the crack spread (premium paid to refine crude oil into jet fuel) averaged more than 34% for 2022 - significantly above the long-run average, notes IATA. As a result, fuel was responsible for almost 30% of total expenses.
In recent months, the crack spread has narrowed, and the full year average crack spread is expected to fall to around 23%, which is more closely aligned with the historical average rate. Fuel costs will account for 28% of the average cost structure for airlines in 2023, anticipates IATA, which is still above the 24% of 2019.
Non-fuel expenses controlled by airlines despite inflationary pressures
Non-Fuel expenses "have been controlled well by airlines" despite inflationary pressures, says IATA. With fixed costs being distributed over a larger scale of activity, non-fuel unit costs per available tonne kilometre (ATK) are expected to fall to 39 cents per ATK. That is -6.4% compared to 2022 (41.7 cents /ATK) and marks a return to about pre-COVID levels. Total non-fuel costs are expected to reach USD565 billion in 2023, anticipates IATA.
Economic and geopolitical environment presents several risks
The economic and geopolitical environment presents several risks to the outlook. With just USD22.4 billion of operating profit (2.8%) standing between USD803 billion of revenues and USD781 billion in expenses, industry profitability remains "fragile", says IATA, and could be affected (positively or negatively) by a number of factors.
Inflation fighting measures are maturing at different rates in different markets. "Central banks are calibrating the best levels for interest rates to have a maximum cooling effect on inflation while avoiding tipping economies into recession," says IATA.
An early or lower end to rate rises could stimulate markets for a stronger year-end outlook, but equally, the risk of recession remains. Should recession lead to job losses, the industry's outlook could shift negatively, warns IATA.
The War in Ukraine is not having a major impact on profitability for most airlines, according to IATA. A currently unanticipated peace could carry the potential for cost improvements with lower oil prices and efficiencies from the removal or easing of airspace restrictions. An escalation, however, would likely have "negative prospects" for global aviation, notes the organisation.
Supply chain issues continue to impact global trade and business
Supply chain issues continue to impact global trade and business. "Supply chains are shifting to fill gaps in resilience caused by current geopolitical tensions and the challenges experienced during COVID-19," says IATA.
"Airlines have been directly impacted by aircraft parts supply chain ruptures which aircraft and engine manufacturers have failed to sort out. This is negatively impacting the delivery of new aircraft and the ability of airlines to maintain and deploy existing fleets," notes IATA.
Regulatory cost burdens are also at risk of increase from increasingly interventionist regulators. In particular, the industry could face rising costs of compliance for increasingly punitive passenger rights regimes and regional environment initiatives," says IATA.
IATA: 'There are many good reasons for optimism'
"Resilience is the story of the day and there are many good reasons for optimism," says Mr Walsh. Achieving profitability at an industry level after the depths of the COVID-19 crisis opens up "much potential for airlines to reward investors, fund sustainability, and invest in efficiencies to connect the world even more effectively," he adds.
That's a big 'to do' list to achieve with just a 1.2% net profit margin, observes Mr Walsh. "That's why we call on governments to keep their focus on initiatives that will strengthen safe, sustainable, efficient, and profitable connectivity," he says.
Passengers are counting on a safe, sustainable, efficient and profitable airline industry
A recent IATA poll of travellers in 11 global markets revealed that 81% of those surveyed emerged from the pandemic with a greater appreciation of the freedom that flying makes possible. The same study also demonstrated the important role that travellers see the airline industry playing.
Nine in ten (90%) travellers said that connectivity by air is critical to the economy, while similar levels (91%) said that air travel is a necessity for modern life and (88%) that air travel has a positive impact on societies.
More than four in five (82%) said that the global air transport network is a key contributor to the UN Sustainable Development Goals (SDGs). Almost all (96%) expressed satisfaction with their last flight, and three-quarters (77%) said that flying was good value for money.
HEAR THE LATEST INDUSTRY VIEWS: IATA Director General Willie Walsh
You can learn more of the recovery and other key factors impacting the global airline sector in the CAPA TV interview with IATA Director General Willie Walsh during the IATA AGM in Istanbul in Jun-2023.
HEAR THE LATEST INDUSTRY VIEWS: IATA Chief Economist Marie Owens Thomsen
You can learn more of the revised economic outlook in the CAPA TV interview with IATA Senior Vice President Sustainability and Chief Economist Marie Owens Thomsen during the IATA AGM in Istanbul in Jun-2023.