With 5 billion air travelers expected in 2024, the airline sector is set for yet another prosperous year, with record profits forecasted for global carriers. Recent data from the International Air Transport Association, which represents more than 330 airlines, predicts revenue for all of 2024 to reach nearly a trillion dollars, an increase of 9.7% from 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, evidenced by an 11% gain in net profits for 2024. But despite the increased profits, the 5.7% industry-wide average return on invested capital, or ROIC, remains below the 9% cost of capital.
“The airline industry is on the path to sustainable profits, but there is a big gap still to cover. Earning just $6.14 per passenger is an indication of just how thin our profits are,” said Willie Walsh, Director General of the IATA.
“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,” Walsh added.
And to boost profitability, airlines have to control costs, with expenses expected to increase by 9.4% to a record high $936B, keeping net margins to just over 3%.
Fueling record revenue growth is increased passenger traffic, forecasted to increase by 10.4% in 2024 while capacity, measured in revenue passenger miles, is estimated to increase by 11.6%.
Regionally, North America again leads in demand for air travel with a 7% increase expected from a year ago and capacity up 8.1%, resulting in a net profit across the industry of $14.8B. “North America continues to be the most significant factor to industry profits, supported by high passenger load factor, robust yields, and strong consumer spending,” according to IATA.
While North America generates the most profits for the industry, Asia-Pacific will likely show the greatest increase in demand for air travel with a gain of 17.1% over 2023, and capacity up 14.1%, led by demand in China, Japan, and Australia.
Demand in Europe is expected to increase 11.1% with capacity up 11.5%, followed by a 9.3% increase in demand in the Middle East, and 8.2% in Latin America, with capacity gains of 10.8% and 8.1%, respectively.
Increased demand for air travel will continue to underpin domestic carriers, although considerable headwinds to profitability remain. Significant challenges presented by Boeing (BA) aircraft delivery delays and burdensome regulatory issues have stifled expansion plans for United (NASDAQ:UAL), while American Airlines (NASDAQ:AAL) lowered its Q2 profit guidance as total revenue per seat mile is now expected to fall by 5% to 6% from last year. And Southwest (NYSE:LUV), once considered the most efficient and profitable American airline, suffered a wider-than-expected loss in the first quarter as operating expenses remained an anchor on profitability.
Ultimately, these high operating expenses lead to heavy debt obligations, exacerbated by rising interest rates. As a capital-intensive industry, increased financing costs make it more difficult to replace an aging fleet with more fuel-efficient aircraft, creating a snowball effect on a carrier’s bottom line.
That leaves airline investors with the unenviable task of finding the least dirty sock in the bunch. Seeking Alpha’s Quant Rating does most of the heavy lifting by ranking carriers in terms of valuation, growth, profitability, momentum, debt, and performance. Among the legacy carriers, United Airlines (UAL) achieves a Quant score of 4.78 compared to JetBlue (JBLU) at 2.67. By comparison, low-cost carrier Spirit Airlines (SAVE), teetering on the brink of bankruptcy, ranks near the very bottom at 1.16.
