IATA Downgrades Profit Forecast on Syria Effect, Sluggishness in Developing World

 - September 30, 2013, 12:15 PM
Joint ventures, such as that recently approved between Delta Air Lines and Virgin Atlantic, have helped the airline industry to overcome the effects of higher costs, said IATA. (Photo: Delta Air Lines)

The effects on demand of a recent oil price spike associated with the crisis in Syria and weaker-than-expected growth in several key emerging markets have prompted the International Air Transport Association (IATA) to adjust its airline industry profit outlook for 2013 downward by $1 billion, to $11.7 billion. Still, 2013’s performance should prove considerably better than that of 2012, when the industry turned a net profit of $7.4 billion.

“Overall, the story is largely positive,” said IATA general director Tony Tyler. “Profitability continues on an improving trajectory. But we have run into a few speed bumps. Cargo growth has not materialized. Emerging markets have slowed. And the oil price spike has had a dampening effect. We do see a more optimistic end to the year. And 2014 is shaping up to see profit more than double compared to 2012.”

IATA expects airlines this year to post the same 3.2-percent operating margins they registered in 2006, even with a 54-percent hike in jet fuel prices. The industry has proved capable of absorbing the cost increases through consolidation and joint ventures, increased ancillary sales and a reduction of new airline entrants due to tight financial markets, said the report. What IATA called a relatively good year comes despite slow global economic growth, projected to amount to 2 percent this year. Previously, analysts considered 2-percent gross domestic product (GDP) growth the point below which airlines posted losses.

IATA projects a $16.4 billion net profit next year, making it the second strongest year this century after 2010, when the industry registered record-breaking profits of $19.2 billion.

Rising business and consumer confidence levels should indicate an improvement in the global business cycle, and projections for next year call for 2.7-percent growth in GDP–a direct indicator of airline profitability, said IATA. Meanwhile, analysts expect Brent crude oil prices to fall to $105 per barrel from a projected $109 this year based on reduced geopolitical tensions and an improved U.S. energy outlook.

For next year, IATA projects slightly more robust passenger growth, to 5.8 percent from 5 percent, and a significant improvement in cargo growth, to 3.7 percent from 0.9 percent. However, it expects yields for both passenger and cargo markets to continue to fall, by 0.5 percent and 2.1 percent, respectively.

Another development in the trend toward the consolidation IATA cites as one of the drivers of improved profitability surfaced last week, when the U.S. Department of Transportation granted Virgin Atlantic and Delta Air Lines antitrust immunity to allow for their planned joint venture on transatlantic routes. The airlines plan to start coordinating schedules in March.