IATA’s Global Media Days 2022 took place on 6th and 7th December 2022 at IATA's Geneva Headquarters. Aviation Turkey Magazine Editor in Chief, Ms. Ayşe Akalın is closely followed the conference where global aviation journalists attended to for our readers in Geneva.
The agenda included briefings on next year’s economic and traffic outlook, sustainability, EU/US regulatory and policy, diversity, infrastructure and airline industry retailing, among other subjects. In addition, There will be a deep dive into air cargo, covering lessons learned from Covid-19 Pandemic and challenges.
IATA Global Media Briefing started with the statements of Willie Walsh , Director General and Marie Owens Thomsen , Chief Economist.
During the press meeting, Willie Walsh, IATA’s Director General: “Resilience has been the hallmark for airlines in the COVID-19 crisis. As we look to 2023, the financial recovery will take shape with a first industry profit since 2019. That is a great achievement considering the scale of the financial and economic damage caused by government imposed pandemic restrictions. But a $4.7 billion profit on industry revenues of $779 billion also illustrates that there is much more ground to cover to put the global industry on a solid financial footing. Many airlines are sufficiently profitable to attract the capital needed to drive the industry forward as it decarbonizes. But many others are struggling for a variety of reasons. These include onerous regulation, high costs, inconsistent government policies, inefficient infrastructure and a value chain where the rewards of connecting the world are not equitably distributed.”
“There was at least triple the amount of SAF in the market in 2022 than in 2021. And airlines used every drop, even at very high prices! If more was available, it would have been purchased. That makes it clear that it is a supply issue and that market forces alone are insufficient to solve it. Governments, who now share the same 2050 net zero goal, need to put in place comprehensive production incentives for SAF. It is what they did to successfully transition economies to renewable sources of electricity. And it is what aviation needs to decarbonize,” said Willie Walsh, IATA’s Director General.
Following the Mr Willie Walsh’s speech, Marie Owens Thomsen , Chief Economist delivered a speech and mentioned that In 2023, airlines are expected to post a small net profit of $4.7 billion—a 0.6% net profit margin. It is the first profit since 2019 when industry net profits were $26.4 billion (3.1% net profit margin). In 2022, airline net losses are expected to be $6.9 billion (an improvement on the $9.7 billion loss for 2022 in IATA’s June outlook). This is significantly better than losses of $42.0 billion and $137.7 billion that were realized in 2021 and 2020 respectively. In 2022 the global economy slowed from 6% GDP growth to close to 3% - this is a sharp slowdown. Long-term average global GDP growth is in the around 3.0 – 3.5%.
2023 is likely to slow further. Pent-up demand for travel has so far protected the air traffic recovery in that demand has not been very sensitive to slowing growth, nor to high inflation.
This fortunate situation can be expected to wane gradually over the next year
IATA-McKinsey Study Shows Imbalanced Aviation Value Chain
IATA and McKinsey & Company published a study of profitability trends across the aviation value chain showing that profitability varies widely by sector. The study also shows that in aggregate, airlines underperform on the financial return that an investor would normally expect.
While there is no clear path to rapidly re-balance the value chain, the study concludes that there are some key areas—including decarbonization and data-sharing—where working together and burden-sharing will mutually benefit all value chain participants.
Highlights from the Understanding the Pandemic’s impact on the Aviation Value Chain study include:
Capital Destruction: Despite delivering consistent operating profits pre-pandemic (2012-2019), airlines collectively did not produce economic returns above the industry’s Weighted Average Cost of Capital (WACC). On average the collective Return in Invested Capital (ROIC) generated by airlines was 2.4% below the WACC, collectively destroying an average of $17.9 billion of capital each year.
Value Creation: Pre-pandemic, all sectors of the value chain except airlines delivered ROIC in excess of the WACC, with airports leading the pack in the absolute value of return by rewarding investors with an average of $4.6 billion annually above the WACC (3% of revenue). When viewed as a percentage of revenue, Global Distribution Systems (GDSs)/Travel Tech firms topped the list with average returns of 8.5% of revenues above the WACC ($700 million annually), followed by ground handlers (5.1% of revenue or $1.5 billion annually), and Air Navigation Service Providers (ANSPs) at 4.4% of revenues ($1.0 billion annually).
Pandemic Changes: Although the pandemic (2020-2021) saw losses across the value chain, in absolute terms airlines’ losses led the pack, with ROIC falling below the WACC by an average of $104.1 billion annually (-20.6% of revenues). Airports saw ROIC fall $34.3 billion below the WACC and generating the largest economic losses as a percentage of revenue (-39.5% of revenues).
This research reaffirms that airlines improved their profitability in the years following the Global Financial Crisis. But it also clearly shows that airlines, on average, were not able to benefit financially to the same degree as their suppliers and infrastructure partners. Rewards across the value chain are also disproportionate to risk. Airlines are the most sensitive to shocks but have limited profits with which to build a financial buffer,” said Willie Walsh, IATA’s Director General.
The pandemic saw all players fall into economic losses. As the industry recovers from the crisis, the study’s most important question is: can a more balanced distribution of economic returns and risk be realized in the post-pandemic world?” said Walsh.
Several changes in the profile of airline economic returns are noted in the study:
While network carriers underperformed the low-cost sector (LCCs) pre-pandemic, average economic returns by network carriers exceeded those of the LCCs during the pandemic. The gap between the two, however has narrowed as the recovery progressed.
Airlines solely operating cargo flights have a profitable financial performance with an ROI of nearly 10%. Thus, the profitability of all-cargo carriers was the reverse of airlines carrying both passengers and cargo. By comparison, the performance of all cargo carriers is still well below the average ROIC for freight forwarders which began the crisis at nearly 15% of revenues and grew to 40% of revenues by 2021.
Regionally, it was clear that in aggregate North American carriers entered the crisis with the healthiest balance sheets and strongest financial performance. The picture of recovery was less clearcut in 2021, but having fallen the deepest in the crisis, the trajectory of the region’s recovery is also the steepest.
Why do airlines generate insufficient economic returns?
An updated analysis of the forces shaping airline profitability originally done in 2011 with Harvard Business School’s Professor Michael Porter demonstrates there has been little positive change.
Competitive Fragmented Industry: The airline industry is intensely competitive, fragmented and subject to high barriers to exit with low barriers to entry.
Structure of suppliers, buyers and channels: A high concentration of powerful suppliers, the emergence of increasingly efficient alternatives to air travel, commoditized product offerings with low switching costs and a fragmented buyers’ community are characteristics of the operating environment.
“It is difficult to see how these entrenched forces will change significantly in the near term. In most cases the interests of those in the value chain are simply too divergent to work as partners to drive change that could meaningfully alter the profitability profile across the value chain. That is why IATA will continue to call on governments to better regulate our monopoly or near-monopoly suppliers like airports, ANSPs and GDSs,” said Walsh.
Recent IATA polling shows public understanding of the need to regulate monopoly suppliers. Some 85% of consumers polled in an 11-country survey agreed that the prices that airports charge should be independently regulated, like utilities.
The value chain study also revealed some areas of common interest where greater cooperation would deliver benefits for all. Two of the examples noted in the study include:
Data-driven efficiency gains: Aviation generates vast amounts of data. At the operational level, sharing data to build a more complete picture of how day-to-day decisions impact customers, airports terminals, airline schedules/crew movements, and runway utilization is already helping to drive efficiencies for all industry players at some airports. This same principle can be applied across the industry to make better long-term decisions in areas including infrastructure development, process improvements, and skills development.
Decarbonization: Achieving net zero carbon emissions by 2050 cannot be done by airlines alone. Fuel suppliers need to make sustainable aviation fuels available in sufficient quantities at affordable prices. ANSPs need to provide optimal routings that minimize emissions. Engine and aircraft manufacturers must bring to market aircraft that are more fuel efficient and take advantage of low or zero carbon propulsion means such as hydrogen or electricity. Those offering service in the airport environment will need to convert to electric vehicles.
There is no magic solution to rebalance the value chain. But it is clear that the interests of governments, travelers and other value chain participants are best served by financially healthy participants—and particularly airlines. A combination of better regulation and cooperation in areas of mutual interest could move the needle. And there are at least two areas ripe for collaboration and burden sharing—pursuing data-driven efficiency gains and decarbonization,” said Walsh.
IATA Establishes Modern Airline Retailing Program
IATA announced the establishment of the Modern Airline Retailing program to advance customer centricity and value creation in the airline industry. The transformation will be accelerated by a consortium of advanced airline adopters that will work together through IATA. Consortium participants include American Airlines, Air France-KLM, British Airways, Emirates, Finnair, Iberia, Lufthansa Group, Oman Air, Singapore Airlines and Xiamen Airlines.
In today’s environment, the customer experience is affected by decades old standards, processes and technology and the airline industry must adopt modern retailing practices that will create additional value for travelers and reduce the hassles of increasingly complex passenger document checking requirements.
Modern Airline Retailing will solve this dilemma and unleash value creation opportunities by transforming airline distribution to a system of “Offers and Orders” that will parallel what most other retailers use.
“Our aim is to create value for travelers by meeting their needs. We know that passengers want a seamless digital experience; and they expect consistent service irrespective of how they purchased their travel. With the strength of a global consortium of leading airlines behind us, the next few years are set to see an accelerated and comprehensive transformation of the customer experience,” said Muhammad Albakri, IATA’s Senior Vice President, Financial Settlement and Distribution Services.
2022 SAF Production Increases 200% - More Incentives Needed to Reach Net Zero
IATA estimates that Sustainable Aviation Fuel (SAF) production will reach at least 300 million liters in 2022—a 200% increase on 2021 production of 100 million liters. More optimistic calculations estimate total production in 2022 could reach 450 million liters. Both scenarios position the SAF industry on the verge of an exponential capacity and production ramp-up toward an identified tipping point of 30 billion liters by 2030, with the right supporting policies.
Airlines are committed to achieve net zero CO2 emissions by 2050 and see SAF as a key contributor. Current estimates expect SAF to account for 65% of the mitigation needed for this, requiring a production capacity of 450 billion liters annually in 2050.
Having agreed to a Long-Term Aspirational Goal (LTAG) on climate at the 41st Assembly of the International Civil Aviation Organization (ICAO) in October 2022, governments now share the same target for aviation’s decarbonization and interest in the success of SAF.
To date, over 450,000 commercial flights have been operated using SAF, and the growing number of airlines signing offtake agreements with producers sends a clear signal to the markets that SAF is needed in larger quantities, and so far in 2022, around 40 offtake agreements have been announced