IATA Predicts Enhanced Airline Profitability in 2023

Chinedu Eze

The International Air Transport Association (IATA) has upgraded its outlook for 2023 and expressed hope of improved airline industry profitability during the year. IATA added that airline industry net profits are expected to reach $9.8 billion in 2023 (1.2 per cent net profit margin), which is more than double the previous forecast of $4.7 billion in December 2022.

It also highlighted that airline industry operating profits were expected to reach $22.4 billion in 2023, much improved over the December forecast of a $3.2 billion operating profit. It is also more than double the $10.1 billion operating profit estimated for 2022.

It also declared that some 4.35 billion people are expected to travel in 2023, which is closing in on the 4.54 billion who flew in 2019, adding that cargo volumes are expected to be 57.8 million tonnes, which has slipped below the 61.5 million tonnes carried in 2019 with a sharp slowing of international trade volumes.

IATA also stated that total revenues are expected to grow 9.7 per cent year over year to $803 billion, noting that this is the first time that industry revenues will top the $800 billion mark since 2019 ($838 billion) and expense growth is expected to be contained to an 8.1 per cent annual increase.

“Airline financial performance in 2023 is beating expectations. Stronger profitability is supported by several positive developments. China lifted COVID-19 restrictions earlier in the year than anticipated. Cargo revenues remain above pre-pandemic levels even though volumes have not. And, on the cost side, there is some relief. Jet fuel prices, although still high, have moderated over the first half of the year,” said IATA’s Director General, Willie Walsh.

IATA said that the return to net profitability, even with a 1.2 per cent net profit margin, would be a major achievement. First, it was achieved at a time of significant economic uncertainties. And second, it follows the deepest losses in aviation’s history ($183.3 billion of net losses for 2020-2022 (inclusive) for an average net profit margin of -11.3% over that period). IATA recalled that the airline industry entered the COVID-19 crisis at the end of a historic profit streak that saw an average net profit margin of 4.2 per cent for the 2015-2019 period.

“Economic uncertainties have not dampened the desire to travel, even as ticket prices absorbed elevated fuel costs. After deep COVID-19 losses, even a net profit margin of 1.2 per cent is something to celebrate. But with airlines just making $2.25 per passenger on average, repairing damaged balance sheets and providing investors with sustainable returns on their capital will continue to be a challenge for many airlines,” Walsh further said.  

IATA also said industry revenues were expected to reach $803 billion in 2023. An inventory of 34.4 million flights is expected to be available in 2023.

“Passenger revenues are expected to reach $546 billion. With COVID-19 restrictions now removed in all major markets, the industry is expected to reach 87.8 per cent of 2019 levels of revenue passenger kilometers (RPKs) for the year with strengthening passenger traffic as the year progresses. The high demand for travel in many markets is keeping yields strong with a modest 1.1% decline expected in 2023 compared to 2022 levels (following increases of 9.8% in 2022 and 3.7% in 2021).

“Efficiency levels are high with an expected average passenger load factor of 80.9 per cent for 2023. That is very near the 2019 record performance of 82.6 per cent.

IATA’s May 2023 passenger polling data supports the optimistic outlook, with 41 per cent of travelers indicating they expect to travel more in the next 12 months than in the previous year and 49 per cent expect to undertake the same level of travel. Moreover, 77 per cent of respondents indicated that they were already traveling as much or more than they did pre-pandemic, “IATA said.

“Cargo revenues are expected to be $142.3 billion. While that is down sharply from $210 billion in 2021 and $207 billion in 2022, it is well above the $100 billion earned in 2019. Yields will be negatively impacted by two factors, which include the ramping-up of passenger capacity which automatically increases available belly capacity for cargo and the potential negative effects on international trade of economic cooling measures introduced to fight inflation.

“Yields are expected to correct with a 28.6 per cent decline this year, but still remain high by all historical comparisons. Note that yield increases of 54.7per centwere recorded in 2020, 25.9 per cent in 2021 and 7.4 per cent in 2022.

Expenses are expected to grow to $781 billion. Jet fuel costs are expected to average $98.5/barrel in 2023 for a total fuel bill of $215 billion. That is cheaper than the $111.9/barrel previously expected (December 2022) and the average cost of $135.6 experienced in 2022, “it added.

IATA stressed that high crude oil prices were exaggerated for airlines as the crack spread (premium paid to refine crude oil into jet fuel) averaged more than 34 per cent for 2022—significantly above the long-run average.

“As a result, fuel was responsible for almost 30 per cent of total expenses. In recent months, the crack spread has narrowed, and the full year average crack spread is expected to fall to around 23%, which is more closely aligned with the historical average rate.  Fuel costs will account for 28 per cent of the average cost structure, which is still above the 24 per cent of 2019, “IATA stated.

IATA observed that non-fuel expenses have been controlled well by airlines despite inflationary pressures.

It said, “With fixed costs being distributed over a larger scale of activity, non-fuel unit costs per available tonne kilometre (ATK) are expected to fall to 39 cents per ATK. That is -6.4 per cent compared to 2022 (41.7 cents /ATK) and marks a return to about pre-COVID levels. Total non-fuel costs are expected to reach $565 billion in 2023.”

According to IATA, the economic and geopolitical environment presents several risks to the outlook.

“With just $22.4 billion of operating profit (2.8%) standing between $803 billion of revenues and $781 billion in expenses, industry profitability is fragile and could be affected (positively or negatively) by a number of factors. In particular, consideration should be given to inflation fighting measures, which are maturing at different rates in different markets, “IATA stressed.

IATA explained that central banks are calibrating the best levels for interest rates to have a maximum cooling effect on inflation while avoiding tipping economies into recession.

“Another factor is war in Ukraine, which according to IATA, is not having a major impact on profitability for most airlines, but noted that a currently unanticipated peace could carry the potential for cost improvements with lower oil prices and efficiencies from the removal or easing of airspace restrictions.

“It remarked that supply chainissues continue to impact global trade and business. Supply chains are shifting to fill gaps in resilience caused by current geopolitical tensions and the challenges experienced during COVID-19. Airlines have been directly impacted by aircraft parts supply chain ruptures which aircraft and engine manufacturers have failed to sort out. This, IATA said, is negatively impacting the delivery of new aircraft and the ability of airlines to maintain and deploy existing fleets, “it stated.