The International Air Transport Association (IATA) expects a return to profitability for the global airline industry only in 2023, as airlines continue to cut losses stemming from the effects of the Covid-19 pandemic to their business in 2022.
For this year, airlines’ 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. However, in 2023, airlines are expected to post a small net profit of $4.7 billion, with a 0.6% net profit margin. It will be the first profit since 2019, when industry net profits were $26.4 billion (3.1% net profit margin).
That airlines were able to cut their losses in 2022, in the face of rising costs, labour shortages, strikes, operational disruptions in many key hubs and growing economic uncertainty speaks volumes about peoples’ desire and need for connectivity.
Willie Walsh, Director General IATA
1. Outlook
Improved prospects for 2022 stem largely from strengthened yields and strong cost control in the face of rising fuel prices. Passenger yields are expected to grow by 8.4% (up from the 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. 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 be moderated to 98.4% of 2019 levels.
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.
Willie Walsh, Director General IATA
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).
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.
2. Main Drivers
Passenger: 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 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%).
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 2022 but still $48.6 billion stronger than 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.
Costs: Overall costs are expected to grow by 5.3% to $776 billion. That growth is expected to be 1.8% below revenue growth, thus supporting a return to profitability. Cost pressures are still there from labour, skill and capacity shortages, as well as concerning infrastructure costs.
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.
The expected profits for 2023 are razor thin. But it is incredibly significant that we have turned the corner to profitability.
Willie Walsh, Director General IATA
“The challenges that airlines will face in 2023, while complex, will fall into our areas of experience. The industry has built a great capability to adjust to fluctuations in the economy, major cost items like fuel prices, and passenger preference. We see this demonstrated in the decade of strengthening profitability following the 2008 Global Financial Crisis and ending with the pandemic. And encouragingly, there are plenty of jobs and the majority of people are confident to travel even with an uncertain economic outlook”, said Walsh.
3. 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 materialized, proposals for increased infrastructure charges or taxes to support sustainability efforts could also eat away at profitability in 2023. “The job of airline managements will remain challenging as careful watch on economic uncertainties will be critical. 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,” said Walsh.
4. Regional Round Up
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 IATA’s 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.
North American carriers are expected realize profits of $9.9 billion in 2022 and $11.4 billion in 2023. In 2023, passenger demand growth of 6.4% is expected to outpace capacity growth of 5.5%. Over the year, the region is expected to serve 97.2% of pre-crisis demand levels with 98.9% of pre-crisis capacity.
Carriers in the region benefitted from fewer and shorter-lasting travel restrictions than many other countries and regions. This boosted the large US domestic market, as well as international travel, notably across the Atlantic.
European carriers are expected to see a loss of $3.1 billion in 2022, and a profit of $621 million in 2023. In 2023, passenger demand growth of 8.9% is expected to outpace capacity growth of 6.1%. Over the year, the region is expected to serve 88.7% of pre-crisis demand levels with 89.1% of pre-crisis capacity.
The war in Ukraine has curtailed the activities of some of the region’s carriers. Operational disruptions at some of the continent’s hubs are being resolved, but labor unrest continues at various locations.
Asia-Pacific carriers are expected to post a loss of $10.0 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.
Asia-Pacific is critically held back by the impact of China’s zero Covid policies on travel and the region’s losses are largely skewed by the performance of China’s airlines who face the full impact of this policy in both domestic and international markets. Taking a conservative view of progressive easing of restrictions in China over the second half of 2023, we nevertheless expect strong pent-up demand to fuel a quick rebound in the wake of any such moves. The region’s performance receives a significant boost from profitable air cargo markets, in which it is the largest player.
Middle East carriers are expected to post a loss of $1.1 billion in 2022, and a profit of $268 million in 2023. In 2023, passenger demand growth of 23.4% is expected to outpace capacity growth of 21.2%. Over the year, the region is expected to serve 97.8% of pre-crisis demand levels with 94.5% of pre-crisis capacity.
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.
Latin American carriers are expected to post a loss of $2.0 billion in 2022, reducing to $795 million in 2023. In 2023, passenger demand growth of 9.3% is expected to outpace capacity growth of 6.3%. Over the year, the region is expected to serve 95.6% of pre-crisis demand levels with 94.2% of pre-crisis capacity.
Latin America has shown buoyancy over the year, largely owing to the fact that many countries began lifting their Covid-19 travel restrictions since mid-year.
African carriers are expected to post a loss of $638 million in 2022, narrowing to a loss of $213 million in 2023. Passenger demand growth of 27.4% is expected to outpace capacity growth of 21.9%. Over the year, the region is expected to serve 86.3% of pre-crisis demand levels with 83.9% of pre-crisis capacity.
Africa is particularly exposed to macro-economic headwinds which have increased the vulnerability of several economies and rendered connectivity more complex.
