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- This year is however expected to bring good tidings for the industry, albeit low profit margins.
- IATA expects a return to profitability for the global airline industry in 2023, as airlines continue to cut losses stemming from the effects of the pandemic to their business in 2022.
The global aviation industry is set for a bounce back this year as airlines navigate turbulence that has shaken the industry since 2020, threatening to bring down carriers in the market.
Major African airlines have been hard hit since the Covid-19 pandemic struck.
A report by the African Airlines Association (AFRAA) indicates the pandemic hit Africa’s aviation industry in 2021, resulting in an estimated $8.6 billion loss.
While the figure was less than the $10.21 billion loss recorded by the sector in 2020, it was still a 49.8 per cent decline when compared to the revenue recorded by the sector prior to the pandemic, in 2019.
The estimated revenue loss for 2022 is $3.5 billion, equivalent to 20 per cent of 2019 full year revenue. The projected revenue loss for the fourth quarter of 2022 is approximately $800 million.
This year is however expected to bring good tidings for the industry, albeit low profit margins.
The International Air Transport Association (IATA) expects a return to profitability for the global airline industry in 2023, as airlines continue to cut losses stemming from the effects of the pandemic to their business in 2022.
In 2023, airlines are expected to post a marginal net profit of $4.7 billion – a 0.6 per cent net profit margin.
This will be the first profit since 2019 when industry net profits were $26.4 billion (3.1 per cent net profit margin). This is from net losses of $6.9 billion in IATA’s projections (an improvement on the $9.7 billion loss for 2022 in IATA’s June outlook).
This is significantly better than losses of $42.0 billion and $137.7 billion that were realized in 2021 and 2020, respectively, IATA.
African carriers
Carriers in the continent are expected to narrow losses to $213 million this year, from a projected loss of $638 million in 2022.
This, as passenger demand rises by 27.4 per cent, expected to outpace capacity growth of 21.9 per cent. Over the year, the region is expected to serve 86.3 per cent of pre-crisis demand levels with 83.9 per cent of pre-crisis capacity.
“Africa is particularly exposed to macro-economic headwinds which have increased the vulnerability of several economies and rendered connectivity more complex,” IATA says.
Resilience has been the hallmark for airlines in the Covid-19 crisis.
“As we look to 2023, the financial recovery will take shape with a first industry profit since 2019. That is a great achievement considering the scale of the financial and economic damage caused by government imposed pandemic restrictions,” says Willie Walsh, IATA’s Director General.
But a USD4.7 billion profit on industry revenues of USD779 billion also illustrates that there is much more ground to cover to put the global industry on a solid financial footing.
Many airlines are sufficiently profitable to attract the capital needed to drive the industry forward as it decarbonizes. But many others are struggling for a variety of reasons.
“These include onerous regulation, high operational costs, inconsistent government policies, inefficient infrastructure and a value chain where the rewards of connecting the world are not equitably distributed,” Walsh said.
Despite the economic uncertainties, there are plenty of reasons to be optimistic about 2023. Lower oil price, inflation and continuing pent-up demand should help to keep costs in check as the strong growth trend continues.
At the same time, with such thin margins, even an insignificant shift in any one of these variables has the potential to shift the balance into negative territory.
“Vigilance and flexibility will be key,” Walsh notes.
Main drivers
The global passenger business is expected to generate revenues of $522 billion. Passenger demand is expected to reach 85.5 per cent of 2019 levels over the course of 2023.
Much of this expectation takes into account the uncertainties of China’s Zero Covid policies which are constraining both domestic and international markets. Nonetheless, passenger numbers are expected to surpass the four billion mark for the first time since 2019, with 4.2 billion travelers expected to fly.
Passenger yields, however, are expected to soften (-1.7%) as somewhat lower energy costs are passed through to the consumer, despite passenger demand growing more quickly (+21.1%) than passenger capacity (+18.0%).
Cargo
Cargo markets are expected to come under increased pressure in 2023. Revenues are expected to be $149.4 billion, which is $52 billion less than 2022, but still $48.6 billion stronger than 2019.
With economic uncertainty, cargo volumes are expected to decrease to 57.7 million tonnes, from a peak of 65.6 million tonnes in 2021. As belly capacity grows in line with the recovery in passenger markets, yields are expected to take a significant step back.
IATA expects a fall of 22.6 per cent in cargo yields, mostly in the latter part of the year when the impact of inflation-cooling measures are expected to bite. To put the yield decline in context, cargo yields grew by 52.5 per cent in 2020, 24.2 per cent in 2021 and 7.2 per cent in 2022.
Even the sizable and expected decline leaves cargo yields well-above pre-Covidlevels.
Costs
Overall costs are expected to grow by 5.3 per cent to $776 billion. That growth is expected to be 1.8 percentage points below revenue growth, thus supporting a return to profitability.
Cost pressures are expected to remain mainly from labour, skill and capacity shortages. Infrastructure costs are also a concern. Nonetheless, non-fuel unit costs are expected to fall to 39.8 cents/available tonne kilometer (down from 41.7 cents/ATK in 2022 and nearly matching the 39.2 cents/ATK achieved in 2019).
Airline efficiency gains are expected to drive passenger load factors to 81.0 per cent, just slightly below the 82.6 per cent achieved in 2019. The total fuel spend for 2023 is expected to be $229 billion—consistent at 30 per cent of expenses.
IATA’s forecast is based on Brent crude at $92.3 per barrel (down from an average of $103.2 per barrel in 2022). Jet kerosene is expected to average $111.9 per barrel (down from $138.8 per barrel).
This decrease reflects a relative stabilization of fuel supply after the initial disruptions from the war in Ukraine. The premium charged for jet fuel (crack spread) remains near historical highs.
Risks
Despite the projected good performance, economic and geopolitical environment presents several potential risks to the 2023 outlook.
While indications are that there could be an easing of aggressive inflation-fighting interest rate hikes from early 2023, the risk of some economies falling into recession remains.
“Such a slowdown could affect demand for both passenger and cargo services. It would, however, likely come with some mitigation in the form of lower oil prices,” experts say.
The outlook anticipates a gradual re-opening of China to international traffic and the easing of domestic Covid-19 restrictions progressively from the second half of 2023.
A prolongation of China’s zero Covid policies would adversely affect the outlook, IATA says.
If materialized, proposals for increased infrastructure charges or taxes to support sustainability efforts could also eat away at profitability in 2023. With this, the job of airline managements will remain challenging as careful watch on economic uncertainties will be critical, experts say.
“The good news is that airlines have built flexibility into their business models to be able to handle the economic accelerations and decelerations impacting demand,” says IATA in its latest industry report.
Each passenger carried is expected to contribute on average just USD1.11 to the industry’s net profit. In most parts of the world, that’s far less than what is needed to buy cup of coffee.
Airlines hence must remain vigilant to any increases in taxes or infrastructure fees, industry players have been cautioned.
Other regions’ round up
All regions’ financial performance continues to improve since the depth of the pandemic losses seen in 2020.
North America is the only region to return to profitability in 2022, based on IATA’s estimates.
Two regions will join ranks with North America in this respect in 2023: Europe and the Middle East, while Latin America, Africa, and Asia-Pacific will remain in the red, North American carriers are expected realize profits of USD9.9 billion in 2022 and USD11.4 billion in 2023.
In 2023, passenger demand growth of 6.4 per cent is expected to outpace capacity growth of 5.5 per cent.Over the year, the region is expected to serve 97.2 per cent of pre-crisis demand levels with 98.9 per cent of pre-crisis capacity.
“Carriers in the region benefitted from fewer and shorter-lasting travel restrictions than many other countries and regions. This boosted the large US domestic market, as well as international travel, notably across the Atlantic,” IATA says.
European carriers are expected to see a loss of USD3.1 billion in 2022, and a profit of USD621 million in 2023. In 2023, passenger demand growth of 8.9 per cent is expected to outpace capacity growth of 6.1 per cent. Over the year, the region is expected to serve 88.7 per cent of pre-crisis demand levels with 89.1 per cent of pre-crisis capacity.
The war in Ukraine has curtailed the activities of some of the region’s carriers. Operational disruptions at some of the continent’s hubs are being resolved, but labor unrest continues at various locations,” IATA notes.
Asia-Pacific carriers are expected to post a loss of USD10.0 billion in 2022, narrowing to a USD6.6 billion loss in 2023.
Middle East carriers are expected to post a loss of USD1.1 billion in 2022, and a profit of USD268 million in 2023.
Latin American carriers are expected to post a loss of USD2.0 billion in 2022, reducing to USD795 million in 2023.
