The aviation industry is on track to make a record profit of $US39.4 billion this year as passengers continue to fly in increasing numbers despite a lack-lustre global economy.
And in good news for a sector historically plagued by low investor returns, the industry as a whole is tipped to make a return on invested capital that exceeds its cost for the only the second year in its history.
The prediction was announced at a recent financial conference in Singapore by new International Air Transport Association director general Alexandre de Juniac.
IATA estimates the profit will see industry make a 9.8 percent return on invested capital compared to a 6.8 per cent cost of capital. It comes as an IATA financial analysis argued that July's 5.9 percent growth in global traffic, the fastest in five months, showed the stimulatory impact of lower fares was outweighing headwinds such as the subdued global economy.
The former Air France-KLM chief executive acknowledged the result had been helped by low oil prices but argued it came from hard work, internal restructuring and process re-engineering. He hailed it as a sign that the airline industry was becoming “a normal business and earning normal returns for investors’’.
“Passenger demand is resilient beyond expectation in the face of global economic uncertainty (although the same cannot be said for cargo demand),’’ he told the IATA World Financial Symposium. “And while we and our customers have borne some horrific terror attacks, these last few years have not seen the kind of major global crises that marked the early part of this century.’’
However, the new IATA boss warned that the industry should not get too comfortable and that the profitability was not evenly spread, with almost 60 per cent of the windfall being generated by US carriers. Other parts of the world were experiencing varying degrees of success and some, such as Brazil, were in crisis, he said.
He also pointed to the cyclical nature of the business and potential threats such as quickly rising fuel prices, intensifying terrorist activity, a hard landing by a major economy and a potential impact of the current “protectionist rhetoric’’.
While he was not making any predications, the industry needed to be vigilant.
“I am a big believer in speed and innovation,’’ he said “We cannot predict the future. But we need to be prepared to react quickly when the environment changes. That’s not easy for any business—and it is a real struggle for process-driven and safety-focused industries like air transport.’’
De Juniac emphasised the need for airlines to be high performance organisations so that effective decisions could be made quickly and for finance departments to move away from primarily processing transactions to being "value managers". There was also an opportunity to use the information collected on customers — big data — to get to know them better.
“If you are going to be value managers, it is vital to know where the value is coming from,’’ he said. “We are in a service business. Value is what our customers perceive. At Thales and Air France, the most important person to me was the one who knew our customers and understood what motivated them to buy our products—and what it would take to get them to buy our products more often.’’
Other areas which would help airlines included smarter regulations, optimising the value chain, innovation and greater efficiency. Examples included the carbon offset regulation due to be considered by the 39th International Civil Aviation Organisation assembly, starting this week, as well as initiatives to improve passenger experiences at airports and security checkpoints, new settlement regimes and improved distribution systems.
The IATA boss said aviation was about freedom and had made global mobility ubiquitous.
“For 63 million people, aviation provides the freedom to earn their living,’’ he said. “For 3.8 billion travellers aviation means the freedom to explore the world, build understanding, develop business, make friendships, visit relatives and make their lives better.”
