Both commercial and business aviation have bounced back and expect much better performance in 2014.

Will 2014 bring cheer to the civil aviation industry? It is an emphatic “Yes” based on the mega deals worth $200 billion concluded in the opening days of the Dubai Airshow signalling that the sector was once again taking off. Surely, there is an upswing in the civil aviation industry and notwithstanding some bad patches, the overall outlook is positive. The International Air Transport Association (IATA), the Airports Council International (ACI) and the International Civil Aviation Organisation (ICAO) have understandably all been cautiously optimistic as the industry is emerging from a major recession. Then all of a sudden we see shifting of gears, a la Dubai, with nearly 500 airplanes, predominantly Boeing and Airbus, ordered by different carriers to be delivered in the next few years. If this is not an indication of resurgence, nothing else is.

Good Times Ahead

IATA’s assessment made before the Dubai Airshow had an undercurrent of caution. The Chief Executive Officer and Director General of IATA, Tony Tyler had stated that IATA was revising the industry outlook to a profit expectation of $11.7 billion, downgrade by $1 billion announced earlier in the year. “That is because the industry situation is not improving as quickly as we had expected. But, I should stress that it is an improvement on the 2012 profit of $7.4 billion. We expect a further strengthening by the year end that will set the industry up for $16.4 billion profit in 2014. This would make 2014 the second strongest year this century after the record breaking $19.2 billion profit in 2010.”

Similarly, ICAO has indicated that global air passenger traffic is expected to grow by 5.9 and 6.3 per cent in 2014 and 2015 respectively. In 2012, it grew by 4.9 per cent reaching 5.4 trillion passenger kilometres performed (PKPs). This year, it is expected to be a point lower at 4.8 per cent.

Forecasts Indicate Growth

Despite the regional turmoil and a pessimistic short-term economic outlook, airlines in the Middle East should continue to register the fastest traffic growth with a 10.2 per cent increase over 2012. This forecast is based on the strong performance of its largest air carriers in gaining market share on international routes.

The airlines of Latin America/Caribbean, Asia/Pacific and Africa are expected to register 7.6, 5.5 and 5.2 per cent growth in 2013, respectively. Passenger traffic in Europe and North America should increase by 4.4 and 2.3 per cent in 2013, respectively, leading to a slightly higher share of traffic for European carriers than for North American operators. The Asia/Pacific Region will remain the largest market. Current expectations of a 4.0 (2014) and 4.5 (2015) per cent annual GDP at PPP growth rate for the world economy over 2014–2015 should translate into global air traffic growth of 5.9 and 6.3 per cent respectively.

Passenger and Cargo Trafic

Optimism is on the passenger side of the business rather than in cargo. Tyler stated that, “Passenger business is showing robust growth in demand – about five per cent. This is slightly below the 5.3 per cent growth in 2012. In fact it is slightly disappointing that we are not maintaining that in 2013. Emerging market growth in India, Brazil and to an extent China, has been slower than anticipated. This has been somewhat balanced by improvements in the US economy as well as a stabilisation in the Eurozone. Although load factors are high (around 80 per cent), we have seen little improvement in yields.”

TyIer continued, “In 2014, we expect the pace of growth to pick-up to around 5.8 per cent. We do not, however, see any good news for passenger yields. In fact we expect a fall of about 0.5 per cent next year.

The cargo business is a completely different story. The market is flat – with demand growth of just 0.9 per cent this year. As the supply side of the equation is driven to a large extent by developments in the passenger business, we expect cargo yields to fall by 4.9 per cent this year. For 2014, we do see an uptick, largely resting on the indications of improving business confidence. The expectation is for demand growth of 3.7 per cent. But yields are expected to deteriorate by a further 2.1 per cent. To add some context to the cargo situation, cargo revenues peaked in 2011 at $67 billion. This year we expect revenues of only $59 billion. And that will increase to $60 billion in 2014. So basically revenues are back at 2007 levels.”

Fuel Costs

Tyler also stated, “If we look at the cost side of the business, the biggest item is fuel. We expect it to be 31 per cent of costs this year and 30 per cent in 2014. Jet fuel should fall slightly to $122.9 in 2014. A decline is good news, but the price is still high. The average price for jet fuel in 2004 was $49.70 per barrel.”

North America, Europe Bouncing Back

IATA expects North American carriers to deliver a combined profit of $4.9 billion this year - increasing to $6.3 billion in 2014. Consolidation and international joint ventures are driving efficiency gains. Consumers are benefitting from expanded networks as well as significant investments in product improvement. The stabilisation in the Eurozone and strength in longhaul markets should see profits rise to $1.7 billion this year and further to $3.1 billion in 2014. It is moving in the right direction, but that is far from being healthy, said Tyler.

Asia-Pacific

It is the only region where IATA expects profits to decline in 2013 compared to 2012. In 2012 Asia-Pacific carriers made $4.0 billion. That will decline to $3.1 billion this year and partially recover to $3.6 billion in 2014. IATA notices a strengthening of the Japanese industry as a result of re-structuring and domestic market strength in China. Asia-Pacific carriers are the biggest players in air cargo. Consequently, they are suffering the most from the stagnation in cargo markets. And the weakness in India is also a drag on the region’s prospects.

Growth in Middle East

The Middle East – particularly the Gulf – is on an improvement trend. IATA expects a $1.6 billion collective profit in 2013 to increase to $2.1 billion in 2014. Demand, driven by long-haul connections through the region’s hubs, continues to expand at a double digit pace.

In Latin America, the $600 million 2013 profit is expected to grow to $1.1 billion next year. Long-haul markets to North America are doing well. Connections to both Asia and Africa show promise. But growth has been affected adversely by economic weakness in Brazil. Africa is facing stiff competition in long-haul markets and is unable to efficiently develop intra-Africa markets. The region’s carriers are hovering around break-even with a $100 million loss in 2013 expected to improve to a $100 million profit in 2014.

Profits Anticipated

Tyler said “I must remind everyone that even with the overall improvement expected in 2014, the buffer between profit and loss is very small. If we divide a $16.4 billion profit among 3.3 billion travellers, you will see that airlines will make about $5 per passenger. New taxes and more onerous regulation can quickly erode that. So things are improving, but we are not yet at sustainable levels of profitability.”

“Overall, the story is largely positive. Profitability continues on an improving trajectory. But we have run into a few speed bumps. Cargo growth has not materialised. Emerging markets have slowed. And the oil price spike has had a dampening effect. We do see a more optimistic end to the year. 2014 is shaping up to see profit more than double compared to 2012,” he added.

Airlines are expected to see a significant boost in 2014 with profits of $16.4 billion in revenues totalling $743 billion. Rising business and consumer confidence levels should indicate an uptick in the global business cycle (2.7 per cent GDP growth is expected) which has a direct impact on airline profitability.

Profitability in All Regions

IATA expects slightly more robust passenger growth (5.8 per cent) and a significant improvement in cargo growth to 3.7 per cent. Yields, however, for both passenger and cargo markets are expected to continue to fall by 0.5 per cent and 2.1 per cent respectively.

All regions will see improved profitability, but divergence in performance will remain.

• 2014 is expected to be particularly strong for North American carriers ($6.3 billion net profit, the industry’s strongest) as the economy improves. Capacity discipline is expected to see yields improve, bucking the global trend.
• European carriers are also expected to see a near doubling of profits to $3.1 billion (although even this will only generate an EBIT margin of 1.9 per cent with only African carriers being lower).
• Asia-Pacific is expected to see a modest improvement in profitability to $3.6 billion, largely on the back of improved cargo performance, the growing Chinese domestic market and the benefits of restructuring in Japan.
• Middle East carriers are expected to post a $2.1 billion profit (their highest ever).
• Carriers in Latin America are expected to see profits rise to $1.1 billion.
• African airlines are also expected to return a combined profit of $100 million.

Even with the significant improvements expected for 2014, an industry profit of $16.4 billion implies a return on invested capital of just 5.2 per cent. That remains significantly below the industry’s weighted average cost of capital which is hovering between seven and eight per cent.

Modest Jump for Business Aviation

In its 22nd Annual Business Aviation Outlook, Honeywell forecasts 9,250 new business jet deliveries worth over $250 billion in the period 2013 to 2022.

The outlook reflects an approximate three to four per cent increase in projected delivery value over the 2012 forecast. Despite slightly lower unit deliveries, the expected value comes from price increase and change in expected business jet delivery mix, which reflects preference for larger business jet models.

“2014 industry deliveries are anticipated to be up modestly, reflecting recovery in supply-side constraints and some gains linked to the projected pace of global economic recovery,” said Rob Wilson, President, Honeywell Business and General Aviation.

Honeywell found that the operators plan to make new jet purchases equivalent to about 28 per cent of their fleets over the next five years either as a replacement or additions. This level of interest has been largely stable for the past four survey cycles and compares favourably with results of 25 per cent or less that was the norm until 2006. Of those new business jet purchases, 19 per cent are intended to occur by 2014, with larger shares of more than 22 per cent each year scheduled for 2015 and 2016.

Higher purchase expectations continue to focus on larger cabin aircraft classes ranging from super-midsize through the ultra-long range and business liner, implying these types of aircraft will command the bulk of the value billed from now until 2023.

Avinode Business Intelligence forecasts a positive year for the business aviation markets in Europe and the US in 2014. The company projects a 0.7 per cent increase in business jet flights in the US next year, with positive numbers across most of the regions. In Europe, despite several years of negative growth, Avinode predicts that the market will remain flat in 2014 with a marginal 0.1 per cent growth. In conclusion, both commercial and business aviation have bounced back and expect much better performance in 2014. Emerging markets of India, China, Brazil and a few African and Latin American countries, will be the key drivers of growth. The industry has shown resilience and optimism, hence the positive outlook.