Airline industry profitability strengthens in 2023, with net profits expected to reach $9.8 billion (1.2 percent net profit margin) which is more than double the previous forecast of $4.7 billion (December 2022), according to the latest projection of the International Air Transport Association (IATA)

On the other hand, the industry's operating profits are expected to reach $22.4 billion in 2023, much improved over the December forecast of a $3.2 billion operating profit.

It is also more than double the $10.1 billion operating profit estimated for 2022.

Some 4.35 billion people are expected to travel in 2023, which is closing in on the 4.54 billion who flew in 2019.

Cargo volumes are expected to be 57.8 million tonnes, which has slipped below the 61.5 million tonnes carried in 2019 with a sharp slowing of international trade volumes.

Total revenues are expected to grow 9.7 percent year over year to $803 billion.

This is the first time that industry revenues will top the $800 billion mark since 2019 ($838 billion).

Expense growth is expected to be contained to an 8.1 percent annual increase.

“Airline financial performance in 2023 is beating expectations," says Willie Walsh, IATA’s Director General.

"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,” he elaborated.

The return to net profitability, even with a 1.2 percent net profit margin, is a major achievement.

First, it was achieved at a time of significant economic uncertainties.

And second, 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 percent over that period).

It should be noted that the airline industry entered the COVID-19 crisis at the end of a historic profit streak that saw an average net profit margin of 4.2 percent for 2015-2019.

“Economic uncertainties have not dampened the desire to travel, even as ticket prices absorbed elevated fuel costs," Walsh maintained.

"After deep COVID-19 losses, even a net profit margin of 1.2 percent is something to celebrate. But with airlines just making $2.25 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,” he noted.

Significantly, industry revenues are expected to reach $803 billion in 2023 (+9.7 percent on 2022 and -4.1 percent on 2019).

An inventory of 34.4 million flights is expected to be available in 2023 (+24.4 percent on 2022, -11.5% on 2019).

Passenger revenues are expected to reach $546 billion (+27 percent on 2022, -10 percent on 2019).

With COVID-19 restrictions now removed in all major markets, the industry is expected to reach 87.8 percent 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 1.1 percent decline expected in 2023 compared to 2022 levels (following increases of 9.8 percent in 2022 and 3.7 percent in 2021).

Efficiency levels are high with an expected average passenger load factor of 80.9 percent for 2023. That is very near the 2019 record performance of 82.6 percent .

IATA’s May 2023 passenger polling data supports the optimistic outlook, with 41 percent of travelers indicating they expect to travel more in the next 12 months than in the previous year and 49 percent expect to undertake the same level of travel.

Moreover, 77 percent of respondents indicated that they were already traveling as much or more than they did pre-pandemic.

Cargo revenues are expected to be $142.3 billion.

While that is down sharply from $210 billion in 2021 and $207 billion in 2022, it is well above the $100 billion earned in 2019.

Yields will be negatively impacted by the ramping-up of passenger capacity which automatically increases available belly capacity for cargo and the potential negative effects on international trade of economic cooling measures introduced to fight inflation.

Yields are expected to correct with a 28.6 percent decline this year, but still remain high by all historical comparisons. Note that yield increases of 54.7 percent were recorded in 2020, 25.9 percent in 2021 and 7.4 percent in 2022.

Expenses are expected to grow to $781 billion (+8.1 percent on 2022 and -1.8 percent on 2019).

Jet fuel costs are expected to average $98.5/barrel in 2023 for a total fuel bill of $215 billion.

That is cheaper than the $111.9 / barrel previously expected (December 2022) and the average cost of $135.6 experienced in 2022.

High crude oil prices were exaggerated for airlines as the crack spread (premium paid to refine crude oil into jet fuel) averaged more than 34 percent for 2022—significantly above the long-run average.

As a result, fuel was responsible for almost 30 percent of total expenses. In recent months, the crack spread has narrowed, and the full year average crack spread is expected to fall to around 23 percent, which is more closely aligned with the historical average rate.

Fuel costs will account for 28 percent of the average cost structure, which is still above the 24% of 2019.

Non-Fuel expenses have been controlled well by airlines despite inflationary pressures.

With fixed costs being distributed over a larger scale of activity, non-fuel unit costs per available ton kilometer (ATK) are expected to fall to 39 cents per ATK.

That is -6.4 percent compared to 2022 (41.7 cents /ATK) and marks a return to about pre-COVID levels. Total non-fuel costs are expected to reach $565 billion in 2023.

The economic and geopolitical environment presents several risks to the outlook.

With just $22.4 billion of operating profit (2.8 percent) standing between $803 billion of revenues and $781 billion in expenses, industry profitability is fragile and could be affected (positively or negatively) by a number of factors. In particular, consideration should be given to:

Inflation fighting measures are maturing at different rates in different markets.

Central banks are calibrating the best 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.