IATA sees global aviation sector returning to profitability in its 2023 outlook

The trade association of world airlines, the International Air Transport Association (IATA), has forecast a return to profitability for the global airline industry in 2023, a good two years since the industry which has been reeling from the aftereffects of Covid-19 pandemic.

The Geneva-headquartered association also expects airlines to post a small net profit of $4.7 billion at a 0.6 per cent net profit margin. It will be the first profit earned by the airline industry since 2019 when net profits stood at $26.4 billion or 3.1 per cent net profit margin.

The airline industry losses for 2022 are expected to be $6.9 billion, which is an improvement from the $9.7 billion loss for 2022 in IATA’s June 2022 outlook. This is significantly better than losses of $42 billion and $137.7 billion realised in 2021 and 2020, respectively.

“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,” said IATA director general, Willie Walsh, in an official statement.

He, however, was quick to caution that a $4.7 billion profit on industry revenues of $779 billion also illustrated that a lot of ground remained to be covered to return the industry to a sound financial footing.

“Many airlines are sufficiently profitable to attract the capital needed to drive the industry forward as it decarbonises. But many others are struggling for a variety of reasons. These include onerous regulation, high costs, inconsistent government policies, inefficient infrastructure and a value chain where the rewards of connecting the world are not equitably distributed,” opined Walsh.

The prospect of some economies entering into a recession, a prolongation of China’s Zero Covid policies and proposals for increased infrastructure charges or taxes to support sustainability efforts pose significant risks to the outlook.

The findings are based on an opinion survey commissioned by IATA in November in 11 markets including Chile, the US, Canada, the UK, France, Germany, the UAE, India, Singapore, Australia and Japan. It was conducted independently by the UK-based market research agency Motif and polled a total of 4,700 respondents.

IATA represents some 300 airlines comprising 83 per cent of global air traffic.

Key growth drivers

In 2023, the 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 forecast takes into account the uncertainties of China’s Zero Covid policies, constraining both domestic and international markets. Nonetheless, passenger numbers are expected to surpass 4 billion for the first time since 2019, with 4.2 billion travellers expected to fly.

Passenger yield, however, is expected to soften by -1.7 per cent as somewhat lower energy costs are passed through to passengers, despite demand growing more quickly at (+)21.1 per cent than passenger capacity at (+)18.0 per cent.

Interestingly, cargo markets are predicted to come under increased pressure in 2023. Revenues are expected to be $149.4 billion, which is $52 billion less than in 2022, but still $48.6 billion stronger than in 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 decline of 22.6 per cent in cargo yields, mostly in the latter part of the year when the impact of inflation-cooling measures is expected to bite. To put the 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-pandemic levels.

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 still there 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 (ATK) from 41.7 cents/ATK in 2022 and nearly match the 39.2 cents/ATK achieved in 2019.

Moreover, 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 jet fuel or aviation turbine fuel (ATF) spend for 2023 is expected to be $229 billion, which is consistent at 30 per cent of expenses. In India, however, the various surcharges and levies take this up to 40 per cent for domestic carriers.

IATA’s forecast is based on Brent crude at $92.3/barrel, down from an average of $103.2/barrel in 2022. Jet fuel is expected to average $111.9/barrel, down from $138.8/barrel. This decrease reflects a relative stabilisation of fuel supply after the initial disruptions from the ongoing conflict in Ukraine. The premium or crack spread charged for jet fuel remains near historical highs.

Growth in the Asia-Pacific region, which also includes India, is restricted by the impact of China’s zero Covid policies on travel. Taking a conservative view of the progressive easing of restrictions in China over the second half of 2023, IATA expects strong pent-up demand to fuel a quick rebound. The region’s performance would receive a significant boost from profitable air cargo markets, in which it is the largest player.

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