Flying back into profit after pandemic

Flying back into profit after pandemic

Covid-19 taught airlines to be resilient and cut losses. Those efforts are starting to pay off

Brighter times: A Thai Smile aircraft lands at Suvarnabhumi Airport. The end of Covid-19 travel restrictions have brightened up business prospects for airlines and airports around the world. Air travel is on course to gradually return to pre-Covid levels.
Brighter times: A Thai Smile aircraft lands at Suvarnabhumi Airport. The end of Covid-19 travel restrictions have brightened up business prospects for airlines and airports around the world. Air travel is on course to gradually return to pre-Covid levels.

The outlook for the aviation industry worldwide is chiefly positive this year although the path ahead is not without risks, according to the International Air Transport Association (IATA).

2022: Airlines cut losses

For the global aviation industry, improved prospects for 2023 stem largely from strengthened yields and strong cost controls in the face of rising fuel prices, according to the IATA.

In 2022, airline net losses were expected to be US$6.9 billion (239 trillion baht) -- an improvement on the $9.7 billion loss in IATA's June outlook. This is significantly better than losses of $42 billion and $137.7 billion in 2021 and 2020, respectively.

Passenger yields are expected to grow by 8.4% (up from 5.6% anticipated in June). Propelled by that strength, passenger revenues are expected to grow to $438 billion (up from $239 billion in 2021).

Air cargo revenues played a key role in cutting losses with revenues expected to reach $201.4 billion. That is an improvement compared with the June forecast, largely unchanged from 2021, and more than double the $100.8 billion earned in 2019.

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

Most other factors evolved in a negative manner following a downgrade of GDP growth expectations (from 3.4% in June to 2.9%), and delays in removing Covid-19 restrictions in several markets, particularly China.

The IATA's June forecast anticipated that passenger traffic would reach 82.4% of pre-crisis levels in 2022, but it now appears that the industry demand recovery will reach 70.6% of pre-crisis levels. Cargo, on the other hand, was anticipated to exceed 2019 levels by 11.7%, but that is now more likely to be moderated to 98.4% of 2019 levels.

2023: Flying back to the black

The 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 on 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).

"Resilience has been the hallmark for airlines in the Covid-19 crisis. As we look to 2023, financial recovery will take shape with a first industry profit since 2019," said Willie Walsh, the IATA's director-general.

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, he said.

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, Mr Walsh added.

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. Much of this expectation takes into account the uncertainties of China's Zero Covid-19 policies which are constraining both domestic and international markets.

Nonetheless, passenger numbers are expected to surpass the four billion mark for the first time since 2019, with 4.2 billion travellers expected to fly. Passenger yields, however, are expected to soften (-1.7%) as somewhat lower energy costs are passed through to the consumer, despite passenger demand growing more quickly (+21.1%) than passenger capacity (+18.0%).

Asia-Pacific carriers are expected to post a loss of $10 billion in 2022, narrowing to a $6.6 billion loss in 2023. In 2023, passenger demand growth of 59.8% is expected to outpace capacity growth of 47.8%. Over the year, the region is expected to serve 70.8% of pre-crisis demand levels with 75.5% of pre-crisis capacity.

Overall, all regions' financial performance continues to improve since the depth of the pandemic losses seen in 2020. North America is the only region to return to profitability in 2022, based on our estimates. Two regions will join ranks with North America in this respect in 2023: Europe and the Middle East, while Latin America, Africa, and Asia-Pacific will remain in the red.

Airlines watch out

The job of airline management will remain challenging as a careful watch on economic uncertainties will be critical, said Mr Walsh.

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. Each passenger carried is expected to contribute on average just $1.11 to the industry's net profit. In most parts of the world that's far less than what is needed to buy a cup of coffee.

"Airlines must remain vigilant to any increases in taxes or infrastructure fees. And we'll need to be particularly wary of those made in the name of sustainability.

"Our commitment is to net zero CO2 emissions by 2050. We'll need all the resources we can muster, including government incentives, to finance this enormous energy transition. More taxes and higher charges would be counter-productive," said Mr Walsh.

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