The region’s efficient hubs continue to support strong performance on long-haul markets. And the impact of the Syrian crisis has been limited. Passenger demand is expected to grow by 10.5%, the strongest among all regions. But this will be slightly outstripped by capacity growth of 11.3%.
Africa region’s carriers will fall into losses of $100 million (down from a previously projected profit of $100 million). Long-haul markets face stiff competition, while intra-Africa market development remains constrained by a restrictive regulatory environment. Although African economies are among the world’s fastest growing, the region’s airlines face the significant impediments of high costs, onerous taxes, government interference, inefficient fleets, and poor infrastructure. Demand growth is expected to be a robust 7.8% ahead of a capacity expansion of just 5.5%.
Overall, airlines are expected to see a significant boost in 2014 with profits of $16.4 billion on revenues totaling $743 billion. Rising business and consumer confidence levels should indicate an uptick in the global business cycle (2.7% GDP growth is expected) which has a direct impact on airline profitability. Oil prices are expected to fall to $105/barrel (Brent, from $109 expected this year) on the back of reduced geo-political tensions and an improved US energy outlook. A fall to below $100 would be expected from normal market forces. But the OPEC cartel is preventing the full realization of the benefits of better supply prospects. Furthermore, the benefits of improving market structures on several regions are expected to continue to drive performance and consumer benefits.
“We expect slightly more robust passenger growth (5.8%) and a significant improvement in cargo growth to 3.7%. Yields, however, for both passenger and cargo markets are expected to continue to fall by 0.5% and 2.1% respectively,” IATA in a statement said.
All regions will see improved profitability, but divergence in performance will remain.
“The year 2014 is expected to be particularly strong for North American carriers ($6.3 billion net profit, the industry’s strongest) as the economy improves. Capacity discipline is expected to see yields improve, bucking the global trend.
European carriers are also expected to see a near doubling of profits to $3.1 billion (although even this will only generate an EBIT margin of 1.9% with only African carriers being lower).
Asia-Pacific is expected to see a modest improvement in profitability to $3.6 billion, largely on the back of improved cargo performance, the growing Chinese domestic market and the benefits of restructuring in Japan.
Carriers in Latin America are expected to see profits rise to $1.1 billion.
African airlines are also expected to return a combined profit of $100 million.
Even with the significant improvements expected for 2014, an industry profit of $16.4 billion implies a return on invested capital of just 5.2%. That remains significantly below the industry’s weighted average cost of capital which is hovering between 7% and 8%.
“Airlines are demonstrating that they can be profitable in adverse business conditions. Efficiencies are being generated through myriad actions including consolidation, joint ventures, operational improvements, new market development, product innovations and much more. When market forces drive action, we get results that both strengthen the industry and benefit the consumer. Quite simply, stronger airlines can invest more in improving connectivity and service innovations. If more policy makers incorporated that into the cost-benefit analysis when developing regulations, we would have a much healthier industry generating even broader economic benefits,” Tyler, said.
The balance between profit and loss remains delicate despite the forecast improvement for 2014. “A $16.4 billion profit for transporting some 3.3 billion passengers means that airlines will retain an average of about $5.00 per passenger. That very simple calculation demonstrates that even a small change in the operating environment—a new tax or other cost increase for example—could change the outlook quite significantly,” Tyler, added.