iata financial forecast - june 2013

IATA Economics www.iata.org/economics 1

June 2013 FINANCIAL FORECAST PERFORMANCE IMPROVING DESPITE CONDITIONS Airline financial performance continues to improve slowly, despite difficult business conditions. In this forecast

we have further upgraded our forecast for industry profits in 2013. The lines in the chart below are pointing up a little more steeply in 2013. We now expected the industry to generate net post-tax profits of $12.7 billion, compared to the $10.6 billion forecast in March. The direction of change is positive, but thats a still very thin 1.8% margin on revenues of over $700 billion.

The reason for the upgrade is that we have seen further evidence that structural changes have taken place,

improving the ability of the industry to generate profits given economic conditions. In fact, recent economic conditions have been mixed. The outlook for global economic growth has deteriorated slightly as the recession in Europe proves to be deeper than expected. However, oil prices are lower this year, partly because of softer growth expectations but also because expectations of new supply from the USA are having a stronger impact on prices. These changes net out to have a slightly positive impact on the forecast for airline profits, but the more material influence has been a structural improvement in airline performance.

The improvement is most clearly seen in North America, where margins have been improving since 2011 despite continued high jet fuel prices and sluggish economic growth. Consolidation, on domestic markets through mergers and on the North Atlantic through joint ventures, has more than offset difficult market conditions. Asia-Pacific airlines continue to generate the highest margins, but they have fallen sharply since 2010 largely due to the weakness in cargo markets. A moderate upturn in cargo this year should help to improve profits in this region. European performance is also improving, from a low level.

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2007 2008 2009 2010 2011 2012 2013

Airline net post-tax profit margins

Asia-PacificN America

Europe

System-wide global commercial airlines2009 2010 2011 2012E 2013F 2009 2010 2011 2012E 2013F

Global 0.4% 5.0% 2.2% 2.2% 3.4% -4.6 19.2 8.8 7.6 12.7 Regions North America 1.2% 5.7% 3.0% 3.2% 4.2% -2.7 4.2 1.7 2.4 4.4 Europe -2.2% 2.4% 0.6% 0.7% 1.3% -4.3 1.9 0.4 0.3 1.6 Asia-Pacific 2.8% 8.0% 3.7% 3.5% 5.0% 2.7 11.1 5.5 3.7 4.6 Middle East -1.5% 3.7% 3.0% 2.8% 3.4% -0.6 0.9 0.9 1.0 1.5 Latin America 2.8% 5.1% 1.9% 2.1% 2.8% 0.5 1.0 0.2 0.3 0.6 Africa -1.2% 1.7% 0.7% -0.7% 0.9% -0.1 0.1 0.0 -0.1 0.1Source: ICAO revised data 2009-11. IATA estimates for regions in 2011. IATA estimate for 2012 and forecast for 2013. Note: bankruptcy reorganization costs are excluded. Also ICAO made some substantial revisions to historic data in their 2013 Annual Report to the Council.

Net profits, $ billionEBIT margin, % revenues

Source: ICAO, IATA


June 2013 Industry Financial Forecast

HESITANT UPTURN OF ECONOMIC CYCLE We are still expecting a moderate acceleration in economic growth this year after two consecutive years of

slowdown. But the expected pace of that acceleration has been cut and we now see structural change and airline efficiency measures to be the more important drivers of an improved financial performance this year.

The trajectory of business confidence has influenced not only the path of air freight volumes, but also industry profitability. Confidence and airline performance peaked in 2010 before declining over the following two years. There have been two false dawns, in early 2011 and early 2012. Both were followed by a fall in hopes for revived economic growth, largely due to renewed pessimism over the Eurozone. Since a low point towards the end of last year business confidence has risen once more. In recent months the improvement has stalled. At the moment the pattern of business confidence looks worryingly like a repeat of the 2011 and 2012 false dawns. However, export orders have continued to rise, which leads us to think the improvement in business confidence and economic growth is not over yet.

The ups and downs of business confidence and air cargo over the past three years have mirrored periods of optimism and pessimism over the Eurozone. Consumers in the developed markets of Europe and North America are important drivers of the high value/low volume goods shipped by air. However, in the past decade there has been a dramatic change in the pattern of trade, with far more growth from the emerging economies.

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Business confidence and air freight volumesSource: Markit/JP Morgan, IATA

Business Confidence

FTKs

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International trade in gooods

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Source: Netherland CPB

Source: IATA, JP Morgan/Markit



Air transport is much more closely linked to trade developments than GDP. A boom in domestic construction or even government spending usually does little to support air travel or air cargo. The pattern of trade in recent years has been reflected in air transport developments. Trade by the developed economies has not recovered to pre-recession levels, and has recently deteriorated because of the recession in Europe. By contrast, emerging economy trade has boomed. Much of the growth in air travel is currently being driven by markets linked to emerging economies.

China is no longer expected to grow at a 10%+ pace. But the 7 to 8% being targeted remains a relatively strong source of growth. Other emerging economies are expected to continue to expand at a much faster pace than the mature Western economies. Largely for this reason, we are forecasting that air travel continues to expand at a pace close to its trend of the past 20 years.

The table above shows our forecasts for air travel, measured by RPKs (a change from previous versions of this table, which merged passenger and cargo flows in RTKs). The pace of forecast growth in RPKs has been cut fractionally from our previous forecast, due to a similar reduction in forecast economic growth and trade. Air freight volumes have been similarly lowered, though we still expect this to be the first year of positive growth, after two years of decline.

SOME WAY TO GO BEFORE RETURNS ADEQUATE

Travel markets have been expanding faster than the historic

relationship with global GDP because growth has been concentrated in the emerging economies, where economic activity generates proportionately more air passengers than the mature developed markets. The industry has also changed the historic relationships between airline profits and global GDP. In the past, whenever global economic growth (aggregated using market exchange rates) slowed to the rates seen last year, airline industry profits would slip into loss. The fact that airlines continue to generate profits, albeit at a relatively low rate, is evidence of a structural improvement in financial performance.

Improved financial performance has followed the consolidation most evident in North American markets. But there have also been changes in other markets. New entry has fallen since the financial crisis made access to capital harder. Exit has increased in the new entrant point-to-point market and in the small and medium-sized network airline markets. All of this has allowed the industry to raise load factors further despite rising numbers of new aircraft delivered.

Of course, if seats are filled at fares less than the full cost of a seat then high load factors will not improve profitability. In fact, airlines have managed to keep passenger yields rising, albeit at a much slower pace than last year. The second change helping to improve financial

System-wide global commercial airlines2009 2010 2011 2012 2013F 2009 2010 2011 2012 2013F

Global -1.6 7.7 5.9 5.3 5.3 -1.7 4.4 6.3 4.2 4.3 Regions North America -5.2 4.1 2.3 1.4 1.7 -6.1 2.1 2.5 0.5 0.7 Europe -3.7 5.0 9.0 4.4 4.0 -3.4 2.5 9.5 2.7 2.7 Asia-Pacific 1.0 10.6 5.4 6.9 6.3 0.0 5.2 5.9 6.1 5.6 Middle East 11.8 16.7 8.5 13.9 15.0 14.5 12.5 8.9 11.3 12.6 Latin America 2.7 15.8 11.4 8.6 9.8 4.4 10.4 9.8 8.1 7.8 Africa -3.4 10.5 0.3 5.9 7.5 -0.8 8.2 2.6 4.6 6.7Source: IATA. Domestic and international traffic.

Passenger traffic (RPK), % change over year Passenger capacity (ASK), % change over year

Net profitCostsRevenues

2012 worldwide airline financial results per departing passenger

Sources: Ancillary revenues from Idea Works 2012 estimate, other data IATA. Costs includeoperating items and debt interest.

$2.54$225.72$228.26

Costs $225.70

Air fare $181.91

Ancillary $12.09

020406080

100120140160180200220240

Cargo & other $34.26



performance has been the introduction of ancillary revenue streams, Fares have not kept pace with the rise in unit costs over the past two years. However, unit revenues have done, with weaker fares offset by higher load factors and rising ancillary revenues.

These changes are in the right direction. This level of profitability in

2013 represents a return on invested capital of 4.8%. This would enable the industry to pay for its debt interest costs and pay equity investors a small dividend. However, returns of 4.8% are still materially lower than the 7-8% investors should expect to earn at a minimum (the cost of capital).

With $4-5 trillion of new capital estimated to be required to buy the aircraft needed to serve the expansion in demand from emerging markets over the next 20 years, this level of return is still inadequate. Structural improvements in financial performance have taken place. More are needed.

Source: ICAO data to 2009-11 (note revisions to 2009 and 2010 data). IATA estimate for 2012 and forecast for 2013. Passenger and freight numbers are global system-wide collected by IATA, including some non-ICAO states. Bankruptcy reorganization charges excluded.

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Return on invested capital in airlines and their WACC

Investor value losses

WACC

ROIC

Source: IATA

System-wide global commercial airlines 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013FREVENUES, $ billion 322 379 413 465 510 570 476 579 636 680 711 % change 5.2 17.7 9.1 12.5 9.6 11.7 -16.5 21.8 9.7 6.9 4.6 Passenger 249 294 323 365 399 444 374 445 497 542 572 Cargo 40 47 48 53 59 63 48 66 67 62 62 Traffic volumes Passenger growth, tkp, % 1.8 13.6 8.1 6.2 7.5 2.7 -2.4 8.8 6.2 5.3 5.3 Sched passenger numbers, millions 1,805 2,014 2,157 2,277 2,478 2,515 2,479 2,681 2,845 2,977 3,128 Cargo growth, tkp, % 4.7 10.3 2.5 6.3 4.7 -0.7 -8.8 19.4 -0.1 -1.1 1.5 Freight tonnes, millions 35.0 38.4 39.4 41.8 44.4 42.9 42.6 50.7 51.4 51.4 52.1 World economic growth, % 2.8 4.2 3.4 4.0 3.8 1.7 -2.3 3.9 2.6 2.1 2.2 Passenger yield, % 2.9 3.7 1.7 6.6 1.7 8.2 -13.7 9.6 5.0 3.5 0.3 Cargo yield % 1.2 5.1 0.3 4.4 5.6 7.0 -15.2 14.4 1.3 -6.3 -2.0

EXPENSES, $ billion 323 376 409 450 490 571 474 550 622 665 687 % change 4.0 16.2 8.9 10.1 8.8 16.5 -16.9 16.1 12.9 7.0 3.3 Fuel 44 65 91 117 134 188 123 139 176 210 214 % of expenses 14 17 22 26 27 33 26 25 28 32 31 Crude oil price, Brent, $/b 28.8 38.3 54.5 65.1 73.0 99.0 62.0 79.4 111.2 111.8 108.0 Jet kerosene price, $/b 34.7 49.7 71.0 81.9 90.0 126.7 71.1 91.4 127.5 129.6 127.4 Non-Fuel 279 311 318 333 356 383 351 412 446 455 473 cents per atk (non-fuel unit cost) 39.6 40.1 38.9 38.9 38.9 40.8 39.0 43.3 44.5 44.3 44.3 % change 0.4 1.4 -3.0 0.0 0.1 4.8 -4.4 11.2 2.8 -0.5 0.0

Break-even weight load factor, % 59.8 60.6 60.8 60.3 59.9 61.8 61.4 62.0 63.2 63.8 63.2 Weight load factor achieved, % 59.6 61.1 61.5 62.3 62.4 61.7 61.6 65.3 64.7 65.2 65.4 Passenger load factor achieved, % 70.2 72.0 73.5 74.3 74.9 76.0 76.0 78.4 78.4 79.2 80.3 OPERATING PROFIT, $ billion -1.4 3.3 4.4 15.0 19.9 -1.1 1.9 28.9 14.1 14.8 23.9 % margin -0.4 0.9 1.1 3.2 3.9 -0.2 0.4 5.0 2.2 2.2 3.4

NET PROFIT, $ billion -7.5 -5.6 -4.1 5.0 14.7 -26.1 -4.6 19.2 8.8 7.6 12.7 % margin -2.3 -1.5 -1.0 1.1 2.9 -4.6 -1.0 3.3 1.4 1.1 1.8

iata financial forecast - june 2013

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