Positive 2024 profit outlook for PAL, CebuPac
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The country’s local airlines – flag-carrier Philippine Airlines and Gokongwei-owned Cebu Pacific Air – are likely to register a profit this year, based on global projections of the International Air Transport Association (IATA). However, the IATA also warns of some risks posed by global economic developments that could involve war, continuing supply chain problems, regulatory risk, and public policy.
The IATA recently announced strengthened profitability projections for airlines this year compared with its June and December 2023 forecasts. It also highlighted the fact that an aggregate return above the cost of capital continues to elude the global airline industry.
According to IATA director general William Walsh, “In a world of many and growing uncertainties, airlines continue to shore-up their profitability. The expected aggregate net profit of $30.5 billion in 2024 is a great achievement considering the recent deep pandemic losses. With a record five billion air travelers expected in 2024, the human need to fly has never been stronger. Moreover, the global economy counts on air cargo to deliver the $8.3 trillion of trade that gets to customers by air. Without a doubt, aviation is vital to the ambitions and prosperity of individuals and economies. Strengthening airline profitability and growing financial resilience is important. Profitability enables investments in products to meet the needs of our customers and in the sustainability solutions we will need to achieve net zero carbon emissions by 2050.”
He added that “the airline industry is on the path to sustainable profits, but there is a big gap still to cover. A 5.7 percent return on invested capital is well below the cost of capital, which is over nine percent. And earning just $6.14 per passenger is an indication of just how thin our profits are – barely enough for a coffee in many parts of the world. To improve profitability, resolving supply chain issues is of critical importance so we can deploy fleets efficiently to meet demand. And relief from the parade of onerous regulation and ever-increasing tax proposals would also help. An emphasis on public policy measures that drive business competitiveness would be a win for the economy, for jobs, and for connectivity. It would also place us in a strong position to accelerate investments in sustainability.”
An inventory of 38.7 million flights is expected to be available this year, which is 1.4 million flights below previous estimates (December 2023) largely attributable to the slowing pace of deliveries in the face of persistent supply chain issues in the aerospace sector. For example, the IATA said, the number of aircraft deliveries scheduled for this year is expected to be 1,583, which is 11 percent less than the expectations published just months ago that anticipated 1,777 aircraft would join the global fleet this year. Thus, airlines are deploying larger aircraft as a mitigating strategy.
PAL and Cebu Pacific face the same problems as other international airlines which are waiting for aircraft manufacturers Airbus and Boeing to ramp up production amid a supply chain shortage for aircraft engines and parts.
Outlook drivers
According to IATA, profitability is expected to strengthen this year as revenues grow slightly faster than expenses (+9.7 percent vs. +9.4 percent respectively). Operating profits are expected to reach $59.9 billion (+14.7 percent from $52.2 billion estimated for 2023). Net profits, however, are expected to grow slightly more slowly at +11.3 percent, from $27.4 billion estimated for 2023 to $30.5 billion estimated for 2024.
Industry revenues are expected to reach an historic high of $996 billion in 2024 as passenger revenues are expected to reach $744 billion in 2024, up 15.2 percent from $646 billion in 2023. Revenue passenger kilometers (RPKs) growth is expected to be 11.6 percent year on year.
Passenger yields are expected to strengthen 3.2 percent over 2023.When measured in constant 2018 dollars, the real average return airfare this year is expected to be $252, significantly less than the $306 of 2019. This continues the trend of ever-increasing affordability for air travel, even if the figures are somewhat skewed by shorter journey distances in 2024 due to the slower pace of recovery in some long-haul markets. In line with this, IATA’s April 2024 polling data revealed that 77 percent of respondents agree that air travel is good value for money. The average passenger load factor is expected to be 82.5 percent this year, which is largely in line with pre-pandemic levels (82.6 percent in 2019) and reflects tight supply and demand conditions from ongoing supply chain issues for aircraft and engines.
IATA’s April 2024 polling data also aligned with expectations for continued strong performance in passenger markets. Some 39 percent of respondents expect to travel more over the next 12 months than they did in the previous 12-month period. The majority (54 percent) said that they expect to travel as much as they did in the previous 12 months. Only six percent reported that they expect to travel less. Some 46 percent of respondents expect to spend more on travel over the next 12 months than they did in the previous 12 months. An almost equal proportion (45 percent) expect to spend the same on travel over the next twelve months while only nine percent expect to spend less.
Expenses
Industry expenses, on the other hand, are expected to grow to $936 billion in 2024 (+9.4 percent in 2023). Fuel is expected to average $113.8/barrel (jet) in 2024 translating into a total fuel bill of $291 billion, accounting for 31 percent of all operating costs.
High crude oil prices are expected to continue to be further exaggerated for airlines as the crack spread (premium paid to refine crude oil into jet fuel) is expected to average 30 percent this year.
Sustainable aviation fuel (SAF) production could rise to satisfy 0.53 percent of global demand for fuel this year, the cost of which will be $3.75 billion. That is $2.4 billion additional to what it would cost to purchase the same quantity of jet fuel.
Non-fuel expenses have been well-controlled. Non-fuel unit costs are expected to be 39 cents per available ton kilometer (ATK), unchanged from 2023. This is slightly below the 39.2 cents/ATK reported in 2019. Labor costs have been tightly controlled with unit labor costs expected to be 12.9 cents/ATK, an improvement of 2.4 percent compared with 2023. Due to higher volumes, the overall cost of labor is expected to grow 7.6 percent to $214 billion in 2024. Total employment in airlines is expected to reach 3.07 million, which slightly exceeds the 2.93 million employed in 2019.
Risks
IATA acknowledged that industry profitability is fragile and could be affected positively or negatively by many factors such as global economic developments as airline prospects have historically been closely linked to global economic trends.
Economic developments in China should be closely watched, according to IATA.
Furthermore, IATA said, the operational impact of the Russia-Ukraine war and the Israel-Hamas war have been largely limited to the immediate vicinity of these conflicts.
On the regulatory front, IATA said, airlines could face rising costs of compliance, and additional costs pertaining to passenger rights regimes, regional environment initiatives and accessibility requirements.
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