Muscat: Middle East carriers are predicted to report a profit of $268 million in 2023 from an expected loss of $1.1 billion in 2022, according to a new report.
“In 2023, passenger demand growth of 23.4 per cent is expected to outpace capacity growth of 21.2 per cent. Over the year, the region is expected to serve 97.8 per cent of pre-crisis demand levels with 94.5 per cent of pre-crisis capacity,” the International Air Transport Association (IATA) said in its new report.
The region has benefitted from a certain degree of re-routing resulting from the war in Ukraine, and more significantly so from the pent-up travel demand using the region’s extensive global networks as international travel markets re-opened, the report further added.
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 per cent net profit margin. It is the first profit since 2019 when industry net profits were $26.4 billion (3.1 per cent 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 realised 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 the 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 Willie Walsh, IATA’s Director General.
“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 decarbonises,” he added.
“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,” Walsh said.
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.
Passenger: The passenger business is expected to generate revenues of $522 billion. Passenger demand is expected to reach 85.5 per cent of 2019 levels throughout 2023. Much of this expectation takes into account the uncertainties of China’s Zero COVID 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 per cent) as somewhat lower energy costs are passed through to the consumer, despite passenger demand growing more quickly (+21.1 per cent) than passenger capacity (+18.0 per cent).
Cargo: Cargo markets are expected 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 fall 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 yield 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-COVID levels.
Costs: 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 kilometre (down from 41.7 cents/ATK in 2022 and nearly matching the 39.2 cents/ATK achieved in 2019). 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 fuel spending for 2023 is expected to be $229 billion — consistent at 30 per cent 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 stabilisation 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. It would, however, likely come with some mitigation in the form of lower oil prices.
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. A prolongation of China’s Zero COVID policies would adversely affect the outlook.
If materialised, proposals for increased infrastructure charges or taxes to support sustainability efforts could also eat away at profitability in 2023.
“The job of airline management 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,” Walsh said.
“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,” he added.
“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 counterproductive,” Walsh said.