Rebuilding Airline Profitability

IATA has upgraded its outlook for the airline industry’s 2022 financial performance as the pace of recovery from the COVID-19 crisis quickens.

Forecast highlights include:

• Industry losses are expected to reduce to -$9.7 billion (improved from the October 2021 forecast for an $11.6 billion loss) for a net loss margin of -1.2%. That is a huge improvement from losses of $137.7 billion (-36.0% net margin) in 2020 and $42.1 billion (-8.3% net margin) in 2021.
• Industry-wide profitability in 2023 appears within reach with North America already expected to deliver an $8.8 billion profit in 2022.
• Efficiency gains and improving yields are helping airlines to reduce losses even with rising labor and fuel costs (the latter driven by a +40% increase in the world oil price and a widening crack spread this year).
• Industry optimism and commitment to emissions reductions are evident in the expected net delivery of over 1,200 aircraft in 2022.
• Strong pent-up demand, the lifting of travel restrictions in most markets, low unemployment in most countries, and expanded personal savings are fueling a resurgence in demand that will see passenger numbers reach 83% of pre-pandemic levels in 2022.
• Despite economic challenges, cargo volumes are expected to set a record high of 68.4 million tonnes in 2022.

Willie Walsh, IATA’s Director General, said that: “Airlines are resilient. People are flying in ever greater numbers. And cargo is performing well against a backdrop of growing economic uncertainty. Losses will be cut to $9.7 billion this year and profitability is on the horizon for 2023. It is a time for optimism, even if there are still challenges on costs, particularly fuel, and some lingering restrictions in a few key markets.”

In its outlook, IATA pointed out that revenues are rising as COVID-19 restrictions ease and people return to travel. The challenge for 2022 is to keep costs under control.

Walsh said that: “The reduction in losses is the result of hard work to keep costs under control as the industry ramps up. The improvement in the financial outlook comes from holding costs to a 44% increase while revenues increased 55%. As the industry returns to more normal levels of production and with high fuel costs likely to stay for a while, profitability will depend on continued cost control. And that encompasses the value chain. Our suppliers, including airports and air navigation service providers, need to be as focused on controlling costs as their customers to support the industry’s recovery.”

Industry revenues are expected to reach $782 billion (+54.5% on 2021), 93.3% of 2019 levels. Flights operated in 2022 are expected to total 33.8 million, which is 86.9% of 2019 levels (38.9 million flights).

Overall expenses are expected to rise to $796 billion. That is a 44% increase on 2021, which reflects both the costs of supporting larger operations and the cost of inflation in some key items.

War in Ukraine is keeping prices for Brent crude oil high. Nonetheless, fuel will account for about a quarter of costs in 2022. A particular feature of this year’s fuel market is the high spread between crude and jet fuel prices. This jet crack spread remains well above historical norms, mostly owing to capacity constraints at refineries. Under-investments in this area could mean that the spread remains elevated into 2023. At the same time, high oil and fuel prices are likely to see airlines improve their fuel efficiency—both through the use of more efficient aircraft and through operational decisions.

Labour is the second highest operational cost item for airlines. Direct employment in the sector is expected to reach 2.7 million, up 4.3% on 2021 as the industry rebuilds from the significant decline in activity in 2020. Employment is still, however, somewhat below the 2.93 million jobs in 2019 and is expected to remain below this level for some time. Unit labor costs are expected to be 12.2 cents/available tonne kilometer (ATK) in 2022, which is essentially back to 2019 levels when it was 12.3 cents/ATK.

The time required to recruit, train, complete security / background checks, and perform other necessary processes before staff are “job-ready” is presenting a challenge for the industry in 2022. In some cases, employment delays may act as a constraint on an airline’s ability to meet passenger demand.

In countries where the economic recovery from the pandemic has been swift and the unemployment rate is low, tight labour markets and skill shortages are likely to contribute to upward pressure on wages. The industry’s wage bill is expected to reach $173 billion in 2022, up 7.9% on 2021, and disproportionate to the 4.3% increase in total jobs.

The global macroeconomic backdrop is critical for the industry outlook. The forecast incorporates an assumption for solid global GDP growth of 3.4% in 2022, down from the strong 5.8% rebound last year. Inflation has risen and is expected to remain elevated throughout 2022, waning over the course of 2023. And, while nominal interest rates are rising, real interest rates are expected to remain low or negative for a sustained period.

Go to www.iata.org for more.