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IATA Raises Airline Profit Forecast 20% on Seat Occupancy

IATA Chief Executive Officer Tony Tyler
IATA Chief Executive Officer Tony Tyler predicted U.S. airlines will go on an international offensive following mergers and job cuts that have delivered leaner companies better able to compete with rivals from Asia and the Middle East. Photographer: Nadine Hutton/Bloomberg

Airline earnings will be 20 percent higher this year than forecast just three months ago as capacity cuts help pack planes to record levels, the International Air Transport Association said today.

Carriers are likely to generate net income of $12.7 billion in 2013, the industry group said today. That compares with a forecast of $10.6 billion issued on March 20, and represents a 67 percent gain on last year’s profit of $7.6 billion.

Airlines, set to carry more than 3 billion people for the first time this year, have resisted adding seats to chase market share. The strategy should lift their average load factor, or seat occupancy, to a record 80.3 percent, IATA Chief Executive Officer Tony Tyler said at the group’s annual meeting.

“Airlines have done a pretty good job of being profitable in very difficult circumstances” that include rising oil prices and slowing economic growth, Tyler told airline executives assembled in Cape Town today. Even with the improved outlook, the industry’s earnings will equal just 1.8 percent of its $711 billion in revenue, trailing a profitability high for the past decade of 3.3 percent set in 2010.

Carriers in all regions should post a profit this year, led by airlines in Asia with projected earnings of $4.6 billion and North America with $4.4 billion, IATA said.

Africa Trails

Tyler predicted U.S. airlines will go on an international offensive following mergers and job cuts that have delivered leaner companies better able to compete with rivals from Asia and the Middle East. Carriers based in the world’s biggest travel market are ready to grab market share and make up for lost time in ordering more fuel-efficient jets to trim costs.

European airlines should accrue net income of $1.6 billion, with Middle Eastern operators generating $1.5 billion and those from Latin America about $600 million, according to the Geneva-and Montreal-based group, which represents 240 carriers accounting for 84 percent of global traffic.

Africa is likely to remain the industry’s poorest-performing region, with companies there returning a profit of just $100 million, the group predicted. Tyler cited safety concerns as the largest obstacle that needs to be tackled to improve the African market, the world’s least-developed travel region.

‘Hard Work’

“It’s going to be hard work for anybody, but there’s clearly an opportunity for investment,” said Phil Seymour, president of advisory firm International Bureau of Aviation. Carriers must get “airliners at the right age, the right specification and right cost, and I’m fearful that if the wrong assets go in it will create too high a cost base.”

U.S. and European airlines are leading moves to increase sales by charging for items such as checked bags and allocated seating. So-called ancillary revenue is set to account for 5 percent of the total in 2013, versus 0.5 percent in 2007, IATA projects.

An anticipated return on invested capital of about 4.8 percent for the year will trail the 7 percent to 8 percent average cost of capital required, giving cause for concern about the ability of airlines to fund new and more efficient plane models, IATA said.

“If airlines are to find the $4 trillion to $5 trillion needed to finance the projected fleet development over the next 20 years even more improvements are needed,” the association said in a statement.

While air passenger traffic continued its recovery from the global economic slump by growing 5.3 percent last year, boosted by the expansion of Middle Eastern carriers and demand from markets in Latin America and Africa, it is likely to face more crises going forward, Tyler said.

“The natural condition of this industry sometimes seems to be crisis,” he said. “Volcanoes and earthquakes, famine and disease, it’s almost been biblical, but we’ve come through.”

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