ROUTES EUROPE: The Seat Belt Sign is off, but has the Turbulence Passed?

The seat belt sign is off, but has the turbulence passed, questions Aidan Mooney, VP Consulting, Airport Strategy and Marketing Limited (ASM) in a special editorial market insight from the consultancy for this year’s Routes Europe, which is reproduced below…

When we look back over the past five years, the aviation industry has come through a particularly turbulent time, facing issues from all angles. First was the rising cost of fuel which hit levels that the airlines thought unsustainable. Although they have dropped, they are today only marginally lower than the unsustainable peak of 2008. Then the global economic downturn really took hold in 2009, economies crashed, currencies struggled and the consumer stopped spending.

Yet despite the unthinkable actually happening, the airline industry, as like any other industry sector, had to quickly react and come to terms with these factors that have had such a significant impact on their business. They have had to adapt their business models to survive and grow in this new world. Mergers and Acquisition, Joint Ventures and Antitrust Immunity are all phrases that are now common place in the aviation news as airlines seek to change and evolve their structures to work together to sustain their business.

So, as we travel through 2013, has the outlook now started to turn the corner? The International Air Transport Association (IATA) announced a modest improvement in its outlook for the 2013 financial performance of the global airline industry, primarily based on stronger revenues. IATA now expects airlines to produce a combined net post-tax profit margin of 1.6% (up from the previously forecast 1.3%) with a net post-tax profit of $10.6 billion (up from the previously projected $8.4 billion).

Their measure is based on an increase in confidence within the airline industry, having looked at several factors. Firstly, the GDP growth forecast for 2013 has been upgraded to 2.4% – a significant improvement from the 2.1% in 2012. The global industrial production cycle has seen six months of increasing output and improvements to business confidence and the structural improvement in the airline industry’s financial performance, which is recognised by a 7% increase in share prices since the beginning of 2013, and this is despite a 5% increase in fuel costs.

Although the signs currently might be looking good, they were also looking good in 2011 and 2012, but these soon disappeared as the Eurozone crisis intensified. There is nothing to say this might not happen again. There remains a considerable risk which could impact on the progress of recovery, already demonstrated earlier this year with the on-going situation in Cyprus, demonstrating the Eurozone crisis is not over and could still take a turn for the worse.

However, the airlines continue to show how they have become much more efficient in their running and cost structures. This is demonstrated when a comparison is made between the conditions and expected profitability in 2013 compared to 2006, before all the issues being faced today. The industry’s aggregate operating margin in both years was at a similar level of 3.2% in 2006 and 3.3%, expected for 2013 but achieved from very different trading conditions.

In 2006, GDP growth was at 4% which is well above the (improved) 2.4% expected this year and the cost of a barrel of Brent crude was $65.1 in 2006, which is 40% less than the price expected this year of $109.5. The drivers behind these similar operating margins in the extremely different trading conditions are directly attributed to the significant gains in cost efficiencies the airlines have achieved. These cost efficiencies are the result of actions such as consolidation of frequencies and services in over supplied markets to the acquisitions, mergers and JVs, that we’ve already mentioned.

The other outcome of these changes, which is having a positive effect, is the global rise in the load factors, increasing from 76.1% in 2006 to an expected 79.8% in 2013. So, as the new breed of more efficient airlines looks to develop and grow, understanding their business and the factors that could affect them is more critical than ever.