The International Air Transport Association (IATA) expects a return to profitability for the global airline industry in 2023 as airlines continue to cut losses stemming from the effects of the COVID-19 pandemic.
IATA said in 2022, airline net losses are expected to be US$6.9 billion (an improvement on the US$9.7 billion loss for 2022 in IATA's June outlook. This is also significantly better than the losses of US$42.0 billion and US$137.7 billion recorded in 2021 and 2020 respectively.
In 2023, airlines are expected to post a small net profit of US$4.7 billion for a 0.6% net profit margin which IATA said is the first profit since 2019 when industry net profits were US$26.4 billion (3.1% net profit margin).
"Resilience has been the hallmark for airlines in the COVID-19 crisis. As we look to 2023, the financial recovery will take shape with a first industry profit since 2019," said Willie Walsh, IATA's director-general. "That is a great achievement considering the scale of the financial and economic damage caused by government-imposed pandemic restrictions."
Walsh noted, that a US$4.7 billion profit on industry revenues of US$779 billion also illustrates that there is "much more ground to cover" to put the global industry on a solid financial footing.
"Many airlines are sufficiently profitable to attract the capital needed to drive the industry forward as it decarbonizes. But many others are struggling for a variety of reasons. These include onerous regulation, high costs, inconsistent government policies, inefficient infrastructure and a value chain where the rewards of connecting the world are not equitably distributed," the IATA chief added.
Airlines cut losses in 2022
IATA said in a statement that improved prospects for 2022 stem largely from strengthened yields and strong cost control in the face of rising fuel prices.
Air cargo revenues also played a key role in cutting losses with revenues expected to reach US$201.4 billion in 2022.
IATA said that is an improvement compared with the June forecast, largely unchanged from 2021, and more than double the US$100.8 billion earned in 2019.
"Overall revenues are expected to grow by 43.6% compared to 2021, reaching an estimated US$727 billion," IATA said, noting that most other factors evolved in a negative manner following a downgrade of GDP growth expectations (from 3.4% in June to 2.9%), and delays in removing COVID-19 restrictions in several markets, particularly China.
IATA noted that its June forecast anticipated that passenger traffic would reach 82.4% of pre-crisis levels in 2022, but said it now appears that the industry demand recovery will reach 70.6% of pre-crisis levels.
Cargo, on the other hand, was anticipated to exceed 2019 levels by 11.7%, but that is now more likely to be moderated to 98.4% of 2019 levels.
"Airlines were able to cut their losses in 2022, in the face of rising costs, labour shortages, strikes, operational disruptions in many key hubs and growing economic uncertainty speaks volumes about peoples' desire and need for connectivity," Walsh said.
"With some key markets like China retaining restrictions longer than anticipated, passenger numbers fell somewhat short of expectation. We'll end the year at about 70% of 2019 passenger volumes. But with yield improvement in both cargo and passenger businesses, airlines will reach the cusp of profitability," the IATA chief added.
Return to profitability in 2023
"In 2023 the airline industry is expected to tip into profitability," Walsh said.
The IATA director-general noted that airlines are anticipated to earn a global net profit of US$4.7 billion on revenues of US$779 billion (0.6% net margin).
This expected improvement comes despite growing economic uncertainties as global GDP growth slows to 1.3% (from 2.9% in 2022).
"Despite the economic uncertainties, there are plenty of reasons to be optimistic about 2023. Lower oil price inflation and continuing pent-up demand should help to keep costs in check as the strong growth trend continues. At the same time, with such thin margins, even an insignificant shift in any one of these variables has the potential to shift the balance into negative territory. Vigilance and flexibility will be key," Walsh added.
Despite its positive expectations for next year, IATA also warned of an economic and geopolitical environment that presents several potential risks to the 2023 outlook.
It added that while indications are that there could be an easing of aggressive inflation-fighting interest rate hikes from early 2023, the risk of some economies falling into recession remains.
"The outlook anticipates a gradual re-opening of China to international traffic and the easing of domestic COVID-19 restrictions progressively from the second half of 2023. A prolongation of China's Zero COVID policies would adversely affect the outlook," Walsh said.
If materialized, proposals for increased infrastructure charges or taxes to support sustainability efforts could also eat away at profitability in 2023.
"The job of airline management will remain challenging as careful watch on economic uncertainties will be critical. The good news is that airlines have built flexibility into their business models to be able to handle the economic accelerations and decelerations impacting demand," the IATA chief said, adding that airline profitability is "razor-thin."
"Airlines must remain vigilant to any increases in taxes or infrastructure fees. And we'll need to be particularly wary of those made in the name of sustainability. Our commitment is to net zero CO2 emissions by 2050. We'll need all the resources we can muster, including government incentives, to finance this enormous energy transition. More taxes and higher charges would be counter-productive," Walsh added.
North America to return to profitability in 2022
IATA said all region's financial performance continues to improve since the depth of the pandemic losses seen in 2020 but only North America will return to profitability in 2022, based on its estimates
"Two regions will join ranks with North America in this respect in 2023: Europe and the Middle East, while Latin America, Africa, and Asia-Pacific will remain in the red," IATA said.
It added that Asia-Pacific carriers are expected to post a loss of US$10.0 billion in 2022, narrowing to a US$6.6 billion loss in 2023.
"Asia-Pacific is critically held back by the impact of China's zero COVID policies on travel and the region's losses are largely skewed by the performance of China's airlines who face the full impact of this policy in both domestic and international markets," Walsh said.
"Taking a conservative view of progressive easing of restrictions in China over the second half of 2023, we nevertheless expect strong pent-up demand to fuel a quick rebound in the wake of any such moves. The region's performance receives a significant boost from profitable air cargo markets, in which it is the largest player," the IATA chief added.
Walsh said the expected profits for 2023 are "razor thin."
"But it is incredibly significant that we have turned the corner to profitability," he added.
"The challenges that airlines will face in 2023, while complex, will fall into our areas of experience. The industry has built a great capability to adjust to fluctuations in the economy, major cost items like fuel prices, and passenger preference."