Airlines expected to post small net profits in 2023 – IATA

LONDON – 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 COVID-19 pandemic to their business in 2022.

In 2023, airlines are expected to post a small net profit of $4.7 billion—a 0.6% net profit margin. It is the first profit since 2019 when industry net profits were $26.4 billion (3.1% net profit margin).

In 2022, airline net losses are expected to be $6.9 billion (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.

“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.”

” But a $4.7 billion profit on industry revenues of $779 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 costs, inconsistent government policies, inefficient infrastructure and a value chain where the rewards of connecting the world are not equitably distributed,” said Willie Walsh, IATA’s Director General.

2022

Improved prospects for 2022 stem largely from strengthened yields and strong cost control in the face of rising fuel prices.

Overall revenues are expected to grow by 43.6% compared to 2021, reaching an estimated $727 billion.

On the cost side, jet kerosene prices are expected to average $138.8/barrel for the year, considerably higher than the $125.5/barrel expected in June.

That reflects higher oil prices exaggerated by a jet crack spread that is well-above historic averages. Even with lower demand leading to reduced consumption, this raised the industry’s fuel bill to $222 billion (well above the $192 billion anticipated in June).

“That airlines were able to cut their losses in 2022, in the face of rising costs, labor shortages, strikes, operational disruptions in many key hubs and growing economic uncertainty speaks volumes about peoples’ desire and need for connectivity.”

“With some key markets like China retaining restrictions longer than anticipated, passenger numbers fell somewhat short of expectation.”

“We’ll end the year at about 70% of 2019 passenger volumes. But with yield improvement in both cargo and passenger businesses, airlines will reach the cusp of profitability,” said Walsh.

2023

In 2023 the airline industry is expected to tip into profitability. Airlines are anticipated to earn a global net profit of $4.7 billion on revenues of $779 billion (0.6% net margin).

This expected improvement comes despite growing economic uncertainties as global GDP growth slows to 1.3% (from 2.9% in 2022).

“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,” said Walsh.

Main Drivers

Passengers:

The passenger business is expected to generate revenues of $522 billion. Passenger demand is expected to reach 85.5% of 2019 levels over the course of 2023.

Despite the Covid19 impact, passenger numbers are expected to surpass the four billion mark for the first time since 2019, with 4.2 billion travelers expected to fly.

Cargo:

Cargo markets are expected to come under increased pressure in 2023. With economic uncertainty, cargo volumes are expected to decrease to 57.7 million tonnes, from a peak of 65.6 million tonnes in 2021.

Even the sizable and expected decline leaves cargo yields well-above pre-COVID levels.

Costs:

Overall costs are expected to grow by 5.3% to $776 billion. Cost pressures are still there from labor, skill and capacity shortages. Infrastructure costs are also a concern.

The total fuel spend for 2023 is expected to be $229 billion—consistent at 30% of expenses. IATA’s forecast is based on Brent crude at $92.3/barrel (down from an average of $103.2/barrel in 2022).

Jet kerosene is expected to average $111.9/barrel (down from $138.8/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:

The 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.
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.
If materialized, proposals for increased infrastructure charges or taxes to support sustainability efforts could also eat away at profitability in 2023.

Summary

Walsh observes that the global airline industry will still have a job on its hands in 2023 to balance all factors.

“The job of airline managements will remain challenging as careful watch on economic uncertainties will be critical.”

“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. Airline profitability is razor thin,” said Walsh.

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