Airlines to earn record profits next year as mergers pay off

Staff Writer
Columbus CEO

(c) 2013, Bloomberg News.

FRANKFURT, Germany — Airlines will post record earnings next year as a wave of consolidation and streamlining prompted by the global slump helps rein in capacity and support prices, the International Air Transport Association said.

Carriers will earn a combined $19.7 billion in net income in 2014, up from a September projection of $16.4 billion, with passenger numbers topping 3 billion for the first time this year and cargo markets boosted by a World Trade Organization agreement to smooth commerce, the industry group said today.

"Fortunes are improving," Chief Executive Officer Tony Tyler said in a briefing in Geneva, where IATA is based. "Airlines have shown that they can rise to the challenges of a difficult trading environment. Efficiencies gained through mergers and joint ventures are delivering value."

Mergers among some of the world's biggest airlines have eliminated thousands of excess jobs and integrated networks to pare route duplication, giving companies more control over ticket tariffs. Other carriers have also reined in capacity on weaker services while entering into joint venture deals with former rivals to boost their exposure to the strongest markets.

North American carriers will be the most profitable and make the biggest contribution to global earnings, generating $5.8 billion this year and $8.3 billion in 2014, IATA said.

Consolidation in the world's biggest airline market culminated this month in the formation of American Airlines Group Inc. from a merger of AMR Corp. and US Airways Group Inc. The deal, which created the world's largest carrier, followed the earlier combinations of Delta Air Lines Inc. and Northwest Airlines Corp. and UAL Corp. with Continental Airlines Inc.

North America carriers can look forward to a good year as a stronger U.S. economy coincides with the benefits of a consolidated industry, IATA chief economist Brian Pearce said.

European airlines will post net income of $1.7 billion in 2013 and $3.2 billion next year, while Asia-Pacific operators should lift earnings to $3.2 billion this year and $4.1 billion — the smallest regional gain — in 2014, the trade body said.

"The North American airlines are clearly setting the benchmark for consolidation and capacity discipline and will reap the benefits," said Oliver Sleath, an analyst at Barclays in London. "Europe is heading in the right direction, while Asia still looks vulnerable to overcapacity."

Even with the benefits of cost cuts and mergers, global earnings next year will amount to only 2.6 percent of revenue — equal to $5.94 per passenger — a margin that would be wiped out altogether without "product innovations" that are delivering $13 per head in ancillary revenues, Tyler said.

The cost of jet fuel will fall to an average $120.6 per barrel next year from $124 in 2013 as tensions related to Iranian nuclear development ease and North America adds supply, IATA forecast. That's still more than double the 2009 low.

Airlines in Latin American will more than double their net income to $1.5 billion next year, and carriers in Africa will earn money for the first time since 2010, IATA forecast.

The number of airline passengers will rise an average 5.4 percent per year through 2017, led by growth in the Middle East and Asia-Pacific, IATA said Dec. 10, taking the total to 3.91 billion travelers, a quarter more than the estimate for 2013.

Growth in air freight will slow to an average 3.2 percent annually in coming years, IATA forecast yesterday, with China overtaking Germany as the No. 2 market by 2017, behind the U.S.

Many cargo planes have been parked amid low demand, contrasting with generally high utilization and occupancy levels in the passenger business. Oversupply of freight capacity is most extreme in Asia, where there's a glut of belly space on passenger jets coming into service, it said.

Some relief may come from the WTO accord unveiled in Bali on Dec. 7 and featuring provisions to cut red tape at borders, as sought by air-freight operators including FedEx Corp. and United Parcel Service Inc.

Airlines will generate sales of $708 billion in 2013 and $743 billion in 2014, IATA said. Net income this year will reach $12.9 billion, versus a prior forecast of $11.7 billion.

Taking the gloss off gains is a continued slide in yields, a measure reflecting ticket prices, which are forecast to fall 0.2 percent this year and 0.6 percent in 2014.

"It's a tough environment in which to run an airline," Tyler said. "Competition is intense and yields are deteriorating. We must temper our optimism."

Airlines need to resist the temptation to add in supply at the first signs of economic recovery.''

_ With assistance from Kari Lundgren in London.