The New State of Logistics: Air

Air: Marginal growth, freight volumes stagnant
In the air sector, the numbers tell the story. The International Air Transport Association (IATA) recently upgraded its global outlook for the airline industry to a $12.7 billion profit in 2013 on $711 billion in revenues. That rings in $2.1 billion better than the $10.6 billion profit projected in March of this year and an improvement on the $7.6 billion profit generated in 2012.

However, margins remain weak. On revenues that are expected to total $711 billion this year, the net profit margin is expected to be 1.8%. Indicative of the characteristically razor thin profits of the airline industry, even this small margin will make 2013 the third strongest year for airlines since the events of 2001. In 2007, the industry earned 2.9 percent net profit margin ($14.7 billion), and in 2010 airlines generated a 3.3 percent net profit margin ($19.2 billion).

“This is a very tough business,” says Tony Tyler, IATA’s director general and CEO. “The day-to-day challenges of keeping revenues ahead of costs remain monumental, and it’s not surprising many airlines are struggling.”

Profitability is thin, but there’s a solid performance improvement story over the last seven to eight years, with a more efficient use of assets as the main contributor. In fact, the industry load factor is expected to average a record high of 80.3 percent in 2013—6.0 percentage points above 2006 levels. Additionally, airlines have found new sources of value that have increased the contribution of ancillary revenues from 0.5 percent in 2007 to over 5 percent in 2013.

Macro-economic factors have also contributed. Oil prices are expected to average $108 per barrel (Brent), a little below the $111.8 average for 2012 in part due to increasing supply from North America. Meanwhile, the outlook for global economic growth has deteriorated slightly since March as the recession in Europe proves to be deeper than expected. The beneficial impact of lower fuel prices is expected to offset the adverse effect of weaker economic growth, providing a moderate boost to industry profitability.

“Generating even small profits with oil prices at $108 per barrel and a weak economic outlook is a major achievement,” says Tyler. “Improved performance is what’s keeping airlines in the black.”

The $12.7 billion profit that the IATA projects represents a return on invested capital of 4.8 percent. This will enable the industry to pay for its debts and pay equity investors a small dividend.

“However, returns of 4.8 percent are still materially lower than the 7 percent to 8 percent average cost of capital required for the industry,” adds Tyler. “If airlines are to find the $4 trillion to $5 trillion needed to finance the projected fleet development over the next 20 years, even more improvements are needed.”

The air cargo business continues to suffer the brunt of the impact of the weak outlook in developed economies. Freight volumes are expected to be basically stagnant at 52.1 million tons, and there has been no significant growth since 2010 when freight volumes were 50.7 million tons.

“After a 6.3 percent fall in yields in 2012, we expect a further contraction of 2.0 percent in 2013 as capacity conditions remain much more challenging than in passenger markets,” Tyler concludes.

Editors Note: This article segment is related to “Modal Agnostic” - Seeking Capacity When and Where it Makes the Most Economic Sense