African airlines outlook still bleak as industry returns to profit

In Summary

The outlook for African airlines remains clouded even as the global airline industry bounces back into […]

The outlook for African airlines remains clouded even as the global airline industry bounces back into profitability in 2023. IATA, the International Air Transport Association released its latest industry outlook today projecting that the global airline industry will net USD9.8bn in profits this year off gross revenues of USD803bn -a 1.2pc net profit margin.

It is a mixed picture however, with African airlines expected to continue their loss making run, albeit with a positive trend overall. African carriers will lose a combined –USD 0.5 billion loss this year, an improvement on the –USD 0.8bn combined loss in 2022.

IATA says Africa remains a difficult market in which to operate an airline, “with economic, infrastructure and connectivity challenges” impacting the industry’s performance.  This despite a robust demand for air travel in the region which underpins the continued move towards a return to overall industry profitability.

“Airline financial performance in 2023 is beating expectations. Stronger profitability is supported by several positive developments. China lifted COVID-19 restrictions earlier in the year than anticipated. Cargo revenues remain above pre-pandemic levels even though volumes have not. And, on the cost side, there is some relief. Jet fuel prices, although still high, have moderated over the first half of the year,” Willie Walsh, IATA’s Director General said in his report to delegates to the lobby’s 79th AGM in Istanbul earlier today.

The airline lobby’s latest projection is more than double the previous forecast of USD 4.7 billion. Operating profits are expected to reach USD22.4 billion in 2023, more than double the USD 10.1 billion operating profit estimated for 2022.

As passenger traffic continues its robust recovery, 4.35 billion people are expected to travel in 2023, just below the 4.54 billion who flew in 2019.

Although cargo is slowing down in tandem with a decline in international trade, volumes are expected to reach 57.8 million tonnes, compared to the 61.5 million tonnes carried in 2019.

The industry revenues of USD803 billion will mark the first time that industry revenues cross the USD800 billion mark since 2019, when the industry logged USD838 billion. Revenue growth is projected at 9.7pc YoY while expense growth is expected to 8.1pc over the same period.

Walsh says the return to net profitability, even with a modest 1.2pc net margin is a major achievement because it was achieved “at a time of significant economic uncertainties,” and “it follows the deepest losses in aviation’s history ($183.3 billion of net losses for 2020-2022 (inclusive) for an average net profit margin of -11.3% over that period).”

The airline industry went into a steep dive when Covid-19 slammed the world’s border shut in March 2020, just months after a historic profit streak that saw an average net profit margin of 4.2pc for the 2015-2019 period. But the market is looking up again, especially after China, the last major market to open up removed its Covid-19 mandate at the end of 2022.

“Economic uncertainties have not dampened the desire to travel, even as ticket prices absorbed elevated fuel costs. After deep COVID-19 losses, even a net profit margin of 1.2pc is something to celebrate! But with airlines just making USD2.25 per passenger on average, repairing damaged balance sheets and providing investors with sustainable returns on their capital will continue to be a challenge for many airlines,” said Walsh.

The industry is once again flying nose-up with revenues rising faster than expenses at 9.7pc vs 8.1pc. This year’s projected revenues of USD803 billion will be just 4.1pc below 2019).  A total of 34.4 million flights is expected to be available in 2023, a 24.4pc increase over 2022, and -11.5pc below on 2019.

Passenger revenues are expected to increase 27pc over 2022, to reach USD546 billion and -10pc relative to 2019. With COVID-19 restrictions now removed in all major markets, the industry is expected to reach 87.8pc of 2019 levels of revenue passenger kilometers (RPKs) for the year with strengthening passenger traffic as the year progresses. The high demand for travel in many markets is keeping yields strong with a modest 1.1pc decline expected in 2023 compared to 2022 levels (following increases of 9.8pc in 2022 and 3.7pc in 2021).

Efficiency levels are high with an expected average passenger load factor of 80.9pc for 2023, very close the 2019 record performance of 82.6pc.

According to IATA’s May 2023 passenger polling data, 41pc of travelers expect to travel more in the next 12 months than in the previous year and 49pc expect to undertake the same level of travel. Significantly however, 77pc of respondents indicated that they were already traveling as much or more than they did pre-pandemic.

Cargo revenues are expected to close the year at USD142.3 billion. While that figure is lower than the USD210 billion earned in 2021 and USD207 billion in 2022, it is well above the $100 billion earned in 2019. The return of passenger capacity and consequent increase in belly capacity for cargo as well as the effects of economic tightening in major economies, is expected to erode cargo yields. Yields are expected to correct with a 28.6% decline this year, but still remain high by all historical comparisons.

Expenses are projected to grow to USD781 billion, but will be moderated by a decline in the cost of jet fuel to an average USD98.5/barrel in 2023, taking the total fuel bill to USD215 billion. That is cheaper than the USD111.9 / barrel previously expected (December 2022) and the average cost of USD135.6 experienced in 2022.

The economic and geopolitical environment however presents several risks to the outlook. With just USD22.4 billion of operating profit (2.8pc) standing between USD803 billion of revenues and USD781 billion in expenses, industry profitability is fragile and could be affected (positively or negatively) by a number of factors. Inflation fighting measures are maturing at different rates in different markets as central banks calibrate the optimal levels for interest rates to have a maximum cooling effect on inflation while avoiding tipping economies into recession. An early or lower end to rate rises could stimulate markets for a stronger year-end outlook. Equally, the risk of recession remains. Should recession lead to job losses, the industry’s outlook could shift negatively.

War in Ukraine is not having a major impact on profitability for most airlines. A currently unanticipated peace could carry the potential for cost improvements with lower oil prices and efficiencies from the removal or easing of airspace restrictions. An escalation, however, would likely have negative prospects for global aviation. Already broader geopolitical tensions are weighing upon international trade and any escalation of such tensions represents a downside risk to the industry outlook.

Supply chain issues continue to impact global trade and business. Supply chains are shifting to fill gaps in resilience caused by current geopolitical tensions and the challenges experienced during COVID-19. Airlines have been directly impacted by aircraft parts supply chain ruptures which aircraft and engine manufacturers have failed to sort out. This is negatively impacting the delivery of new aircraft and the ability of airlines to maintain and deploy existing fleets.

Regulatory cost burdens are at risk of increase from increasingly interventionist regulators. In particular, the industry could face rising costs of compliance for increasingly punitive passenger rights regimes and regional environment initiatives.

Related Posts