IATA Raises Outlook for Airline Profit in FY13; Capacity May Undercut Demand (FAA) (DAL) (LCC)

Traders are keeping watch on the iShares Dow Jones Transportation Average (NYSE: IYT) and Guggenheim Airline (NYSE: FAA) ETFs today amid raised expectations for the airline segment issued today.

The International Air Transport Association (IATA) upgraded its global outlook for the airline industry to a $12.7 billion profit in 2013 on $711 billion in revenues. This is $2.1 billion better than the $10.6 billion profit projected in March of this year and an improvement on the $7.6 billion profit generated in 2012.

Margins remain weak. On revenues that are expected to total $711 billion this year, the net profit margin is expected to be 1.8 percent. Indicative of the characteristically razor thin profits of the airline industry, even this small margin will make 2013 the third strongest year for airlines since the events of 2001.

IATA's key drivers include:

• Passengers - The industry load factor is expected to average 80.3 percent, which is a record high. Overall passenger capacity is expected to expand 4.3 percent, which is under the 5.3 percent anticipated growth in demand for the year.
  
  
• Cargo: The cargo business continues to suffer the brunt of the impact of the weak outlook in developed economies. Freight volumes are expected to be basically stagnant at 52.1 million tonnes. Effectively, there has been no significant growth since 2010 when freight volumes were 50.7 million tonnes. After a 6.3 percent fall in yields in 2012, we expect a further contraction of 2.0 percent in 2013 as capacity conditions remain much more challenging than in passenger markets.
  
  
• Oil Prices: Following the recent softening in oil prices, the average price for Brent crude oil is expected to be $108/barrel for the year. This is a slight downward revision from the $109.5/barrel previously forecast and it is below the $111.8 average in 2012. Nonetheless, this still is nearly twice as high as it was in 2006 when the average price/barrel was $65.1.
  
  
• Economic Growth: Overall economic performance remains weak. GDP is expected to grow 2.2 percent this year, which is only slightly above the 2.1 percent growth in 2012. And it is about half the 4 percent growth recorded in 2006. Trade, however, is the more important driver of air transport demand and airline profitability, and prospects are a little better here with an acceleration forecast from 2.5 percent growth last year to 4 percent in 2013.
  
  
• Structural Changes: Structural changes have improved the ability of the industry to generate profits. Improved financial performance has followed consolidation that is most evident in North American markets. Additionally, the financial crisis has made access to capital more difficult, limiting new market entrants. And market exits for less robust carriers have increased across all business models.

Airlines are a little sluggish today with Delta (NYSE: DAL), United (NYSE: UAL), Southwest (NYSE: LUV), U.S. Air (NYSE: LCC), and others lower on the session.

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