With a forecast of 5 billion air travelers in 2024, the airline industry is heading for another prosperous year, with record profits predicted for global airlines. Recent data from the International Air Transport Associationrepresenting more than 330 airlines, predicts revenue For all of 2024, it will reach almost a trillion dollars, an increase of 9.7% compared to 2023.
The global airline industry has demonstrated continued resilience post-COVID, despite headwinds from inflation, high interest rates and slowing economic growth in China and Europe, as evidenced by an 11% increase in net profits by 2024. But despite the profit increase, the industry-wide average return on invested capital of 5.7%, or ROIC, remains below the cost of capital of 9%.
“The airline industry is on the path to sustainable profits, but there is still a big gap to fill. Earning just $6.14 per passenger is an indication of how meager our profits are,” said IATA Director General Willie Walsh.
“To improve profitability, resolving supply chain issues is vitally important so we can efficiently deploy fleets to meet demand. And relief from the parade of burdensome regulations and ever-increasing tax proposals would help,” Walsh added.
And to increase profitability, airlines need to control costs, with expenses expected to rise 9.4% to a record level of $936 billion, keeping net margins at just over 3%.
Driving record revenue growth is rising passenger traffic, which is forecast to increase 10.4% in 2024, while capacity, measured in revenue passenger miles, is estimated to increase 11.6 %.
Regionally, North America once again leads air travel demand with an expected 7% increase year-over-year and an 8.1% increase in capacity, resulting in an industry-wide net gain. 14.8 billion dollars. “North America remains the most important driver of industry profits, supported by high passenger load factors, solid yields and strong consumer spending,” according to IATA.
While North America generates the most profits for the industry, Asia-Pacific will likely show the largest increase in air travel demand with a 17.1% gain over 2023 and a 14.1% increase in capacity. %, led by demand in China, Japan and Australia. .
Demand in Europe is expected to increase by 11.1% with a capacity increase of 11.5%, followed by a 9.3% increase in demand in the Middle East and 8.2% in Latin America, with capacity increases of 10.8% and 8.1%, respectively.
Increased demand for air travel will continue to support domestic airlines, although considerable obstacles to profitability remain. Significant challenges presented by Boeing's (BA) aircraft delivery delays and onerous regulatory issues have stifled United's (BA) expansion plans.NASDAQ:UAL), while American Airlines (NASDAQ:AAL) lowered its second-quarter profit forecast, as total revenue per seat mile is now expected to fall 5% to 6% from last year. and southwest (New York Stock Exchange:LUV), once considered the most efficient and profitable U.S. airline, suffered a larger-than-expected loss in the first quarter as operating expenses remained an anchor of profitability.
Ultimately, these high operating expenses lead to heavy debt obligations, exacerbated by rising interest rates. As a capital-intensive industry, higher financial costs make it more difficult to replace an aging fleet with more fuel-efficient aircraft, creating a snowball effect on an airline's bottom line.
That leaves airline investors with the unenviable task of finding the least dirty sock of the bunch. Alpha's Quant Rating Search does most of the heavy lifting by ranking operators in terms of valuation, growth, profitability, momentum, debt, and performance. Among traditional airlines, United Airlines (UAL) achieves a Quant Score of 4.78 compared to JetBlue (JBLU)'s 2.67. By comparison, low-cost airline Spirit Airlines (SAVE), on the verge of bankruptcy, is near the bottom at 1.16.
