IBA Forecasts Airline Margins To Average 9% By 2025

28^th September 2023: In its post-summer aviation market update webinar, IBA, the leading aviation market intelligence and consultancy company, forecast improving airline profits with a global average EBIT (Earnings Before Interest and Tax) margin of 9% in the 2025 financial year, compared to just 2% in 2022 and 7% in 2019 prior to the Covid pandemic.

IBA’s ISTAT-certified experts forecast a mixed picture across global regions, with North American carriers set to have a slower path back to 2019 margins (of 12%) with a predicted margin of 11% in the 2025 financial year. By comparison, European carriers’ pre-Covid margin of 6% has already been surpassed and will reach 9% by 2025, while fewer Latin American carriers are expected to be in heavy losses in the year ahead with predictions of 6% EBIT margin in 2023 reaching 8% in 2025.

Overall, IBA forecasts that the average net profit per passenger will be US$3.50 in 2023, rising to US$8.20 in 2024.

Macro environment outlook

Overall airline capacity globally was at 98% of 2019 levels in August 2023, with the only restraints coming from the largest markets which continue to lag behind 2019 levels. Specifically, Asia Pacific is slightly lower and was at 94% of pre-Covid ASKs (available seat kilometres) by August 2023 while Europe sits at 96% ASKs. The US remains close to 2019 levels. Airline traffic is expected to recover to pre-Covid levels by 2024 and surpass the five billion passenger mark (passengers carried) by 2030.

Looking at GDP, IBA believes the outlook for the aviation sector is improving despite tighter monetary policy restraining economic growth, and wage inflation fuelling higher labour costs. IBA does not expect a reduction of monetary policy and estimates that average year-on-year GDP growth from 2023-2030 will be 3.0%.

Aircraft utilisation and orders

During the summer of 2023, the continuing recovery in demand rapidly boosted narrowbody aircraft utilisation but widebodies still have some ground to recover. According to IBA Insight and IBA Research, annual average narrowbody aircraft utilisation will rise to 475 billion ASKs in 2023 compared to 450 billion ASKs in 2019, whereas widebody utilisation for 2023 is set to be 310 billion ASKs compared to 400 billion in 2019.

Aircraft storage levels are decreasing steadily, with 17% of the global fleet inactive in September 2023. This is a year-on-year improvement of six percentage points, from a 23% storage level in September 2022.

Looking at aircraft in storage, in September 2023 narrowbodies made up 38%, widebodies 17%, turboprops 17% and regional jets 28%. This is compared to September 2019 when the mix was 46%, 14%, 18% and 22% respectively. 38% of parked or stored aircraft are in North America, 22% in Europe, 19% in Asia Pacific, 8% in Africa, 6% in the Middle East and 6% in Latin America.

High interest rates and recessionary fears have not deterred landmark aircraft orders, with over 1,500 new commitments thus far in 2023, with Indian carriers leading the way. There have been 465 Airbus and 313 Boeing passenger aircraft deliveries so far in 2023. IBA predicts that Airbus and Boeing will deliver 400 aircraft for the remaining four months of the year.

Passenger demand and airline profitability

For 2023, costs and resources are the major issues for airlines, with the rapidly increasing price of fuel (up 37% from June to September) a point of concern, but revenue remains strong for now.

Operators have continued to increase capacity in Q2 2023 with ASKs up 28% on 2022 levels but still below that of 2019. Regionally, Europe and North America are both 11% up year-on-year, with Latin America just ahead at 12%. The Middle East and Africa are up 15% and 28% respectively, whilst Asia Pacific has the biggest movement at 88% up following the removal of restrictions.

IBA predicts that capacity growth will slow over the coming winter season but remain above last year’s levels with capacity set to reach 2,485 billion ASKs in Q4 2023 compared to 2,064 billion in Q4 2022. Asia Pacific leads the year-on-year growth following the lifting of travel restrictions, with a jump from 1,234 billion ASKs in 2022/23 to 1,510 billion in 2023/24.

Turning to profits, IBA forecasts a positive outlook with improvements in all regions in 2023. EBIT margins in Europe are set to double from 4% to 8% between the financial years of 2022 and 2023 whilst North America will more than double from 3% to 7%. Africa is still negative but will see an improvement from -7% to -4% this year. Predictably, Asia Pacific has seen the biggest improvement of 12 percentage points from -5% in 2022 to 7% in 2023. Many carriers in Europe, the Middle East and Latin America have used their profitability to lower their net debt.

This healthier financial outlook for airlines in their results and balance sheets is predicted to improve the overall industry risk rating. In 2022, the global weighted average was 74% and for the financial year in 2023, IBA predicts this will rise to 78%. However, there are some airlines that remain in the ‘risk’ zone as they sit under 65%.

Aircraft values and lease rates

The final section of the webinar looked at aircraft values and lease rates. IBA stated that passenger aircraft trades follow a downward trend due to slow new aircraft supply and portfolio trades. For the most part, sales off-lease are close to pre-2020 levels and flat compared to the 10-year average.

In Q2 2023, the number of lease starts was close to double the number of lease ends, and IBA forecasts that passenger aircraft leases will continue this positive trend. This is supported by rising orders by operators who will become more reliant on lessors to finance future deliveries. Following this, IBA expects demand for new leases to accelerate as the delivery mix shifts.

When looking at aircraft market values, IBA forecasts that these are set to grow for new narrowbodies as escalation takes effect and supply remains constrained. For instance, an A321-200NX had a market value of US$63.4m in July 2023 and IBA forecasts this will be US$64.8m by January 2024. The Boeing 737 MAX 8 was at US$52.7m in July 2023 but is set to rise to US$55m by January 2024.

This slow supply of new aircraft is supporting the value and lease rate recovery of previous-generation narrowbodies too. For instance, an A321-200 market value was at US$25.5m in July 2023 and is expected to rise to US$26.3m by January 2024.

Widebody aircraft market values are set to grow in 2024 according to IBA with the support of long-haul demand recovery and low production rates. The market value of a new A350-1000 was US$170.5m in July 2023, with a rise to US$173.9m forecast by January 2024. For mid-life widebodies, an A330-300 is forecast to rise significantly from US$14.9m in July 2023 to US$20m in January 2024.