U.S. carriers will lead a recovery in the global airline industry’s profits next year, the industry’s trade group forecast Thursday, mainly due to restructuring efforts, rather than an improvement in the overall economic climate, which will likely remain depressed.
The International Air Transport Association, whose 240 member airlines carry 84 percent of all passengers and cargo, raised its outlook for 2013, with industrywide profits now expected to tick in at $8.4 billion instead of the previously predicted $7.5 billion.
Despite talk of a “fiscal cliff” of automatic tax hikes and spending cuts that could tip the U.S. into recession, the organization remains confident that the airline industry will benefit from U.S. economic growth, which is forecast to be the strongest among developed economies.
North American airlines are expected to do best in 2013, posting a combined net profit of $3.4 billion, ahead of $3.2 billion in Asia Pacific, $1.1 billion in the Middle East and $700 million in Latin America, the IATA estimated. Hard-hit European carriers are only expected to break even this year. That is worse than the $400 million profit in 2011, but far better than the $1.2 billion loss IATA had expected in its October forecast.
Actions by airlines to cut costs, and improved industry structure, have generated better than expected financial performance.
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Consolidation is most obvious on the U.S. domestic market. Delta Air Lines Inc. (NYSE: DAL) announced Tuesday that it will buy 49 percent of the Virgin Atlantic airline and seek approval for the two carriers to cooperate on setting prices and schedules across the Atlantic. Separately, US Airways Group Inc. (NYSE: LCC) has been very publicly circling AMR Corporation (PINK: AAMRQ), the bankrupt parent of American Airlines.
AMR Corp. filed for bankruptcy protection in November 2011 and is working on a plan to exit bankruptcy as an independent company. US Airways Group Inc. has presented a merger plan that would put its executives in charge of the combined company.
Other domestic markets, such as India and Japan, have also seen capacity reduced recently. On long-haul markets, such as the North Atlantic, the development of several joint ventures also helped with the industry’s profitability.
For 2012, IATA now expects global airlines to make a collective profit of $6.7 billion, up from a previous forecast of $4.1 billion.
Despite high fuel prices and a slowing world economy, airline profits and cash flows held up at levels similar to 2006 when oil prices were about $45 a barrel lower and world economic growth was 4 percent. Historically, when gross domestic product growth has fallen below 2 percent, the airline industry has returned a collective loss.
“With GDP growth close to the ‘stall speed’ of 2 percent and oil at $109.5 a barrel, we expected much weaker performance,” said Tony Tyler, chief executive of the Geneva-based global trade group. “But airlines have adjusted to this difficult environment through improving efficiency and restructuring.”
However, the 2013 results would still be below the $8.8 billion the industry pocketed in 2011 and $15.8 billion in 2010. The net profit margin, at 1 percent, would also be well below the 7 percent to 8 percent officials say is needed to recover capital costs.
“It is good news that the outlook is moving in a positive direction. But let’s keep the figures in perspective,” Tyler said. “The industry is keeping its head above water. But only just.”
Separately, IATA said airlines are on track for their safest-ever year. Across the airline industry, the rate of accidents involving losses or damage for planes built by all manufacturers was 2.14 per million flights, continuing a downward trend since 2008.
Going forward, global passenger traffic is expected to rise by an average of 5.3 percent per annum between 2012 and 2016, resulting in a 28.5 percent increase in passenger numbers during the forecast period, according to IATA. If achieved, the figure would see almost 500 million new passengers traveling on domestic routes and 331 million new passengers on international services.
Globally, aviation supports some 57 million jobs and $2.2 trillion in economic activity.