Airline profits take ‘small step in the right direction’

Profits in the airline industry are taking a "small step in the right direction", according to the latest report from the International Air Transport Association.

IATA is forecasting a modest improvement in 2013, primarily based on a $12 billion improvement in revenue.

It now expects airlines to produce a combined net post-tax profit margin of 1.6% (up from the previously forecast 1.3%) with a net post-tax profit of $10.6 billion (up from the previously projected $8.4 billion).

European carriers are expected to report an $800 million profit, an improvement on the previously projected breakeven performance and the $300 million profit in 2012.

"But at only 0.4% of revenues that’s barely different from breakeven, and it is the market that will be most affected by volatility caused by the Eurozone crisis," warned IATA.

"The European domestic market continues to be weak, reflecting recessionary conditions across the continent. However, airlines are expected to show stronger performance on long-haul routes to emerging markets.

"Overall demand for European carriers is expected to grow by 2.6%, which is in line with a capacity expansion of 2.5%."

IATA director general and CEO Tony Tyler said there are still considerable risks which could derail recovery.

"The outlook is based on evidence of growing business confidence. But the controversy over the draconian bailout proposal for Cypriot financial institutions is a clear indicator that the Eurozone crisis is not over and could take a turn for the worse, he said.

"European Central Bank commitments with respect to the Eurozone crisis and the slow economic recovery in the US should be pointing us towards a durable, if weak, upswing.

"But we have had two false starts already. Improving conditions in early 2011 and 2012 disintegrated as the Eurozone crisis intensified. And it could happen again. The impact of the unfolding situation in Cyprus is a risk factor that cannot be ignored."

Tyler warned that the industry’s fortunes are not being helped by the actions of governments.

"Too often governments throw us curve balls and in the last weeks we had some unpleasant reminders," he said.

He pointed to recent changes to passenger rights legislation in Europe and the imminent rise in the UK’s Air Passenger Duty on April 1.

"Airlines don’t want special treatment, but they do need a joined-up policy framework that enables them to meet the growing needs for connectivity sustainably. With a 1.6% net profit margin, there is very little buffer between profit and loss," he said.

Tyler said any improvements must be kept in perspective.

"We are projecting that airlines will make a net profit of $10.6 billion on $671 billion in industry revenues.

"By comparison last year Nestle, a single company, made over $11.5 billion in profit on revenues of about $100 billion.

"Chronic anemic profitability is characteristic across most of the aviation value chain when compared to other sectors. It will require more than improving economic conditions to fix. Neither the challenges nor the benefits of doing so should be underestimated."