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Airlines Likely to Return to Profitability in 2023 Per IATA

It is no longer news that airlines were one of the hardest-hit corners during the pandemic. With passenger revenues dwindling, airlines incurred huge losses to the tune of $137.7 billion and $42 billion, in 2020 and 2021, respectively.

Airlines are now expected to incur a much narrower loss of $6.9 billion in the current year (earlier estimate was a loss of $9.7 billion) with an improvement in air-travel demand. Cargo revenues have also been impressive (expected to be $201.4 billion, which is way greater than the 2021 actual of $100.8 billion). High fuel costs have, however, hurt the current-year projection.

The scenario with respect to air-travel demand is expected to improve further in 2023. As a result, airlines are expected to return to profitability next year. Per the International Air Transport Association (IATA), net profits for airlines across the globe are likely to be $4.7 billion in 2023. The top line next year is anticipated to be $779 billion compared with the current-year estimate of $727 billion.

With people again taking to the skies, the greatest driver behind the top-line improvement is passenger revenues. Per IATA, passenger revenues for the next year are anticipated to be $522 billion (85.5% of 2019 [pre-coronavirus] levels). The 2023 projection is higher than the current-year estimate of $438 billion, despite economic uncertainties, with global GDP growth expected to slow down to 1.3% from 2.9% in 2022. Cargo revenues in 2023 are expected to be $149.4 billion, which is lower than the current-year projection but still $48.6 billion higher than 2019 actuals.

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Even though total costs next year are projected to be 5.3% higher than the current-year projection due to high labor and infrastructure costs apart from capacity shortages, oil price is likely to be lower. Per IATA, Brent crude is likely to come in at $92.3/barrel (down from an average of $103.2/barrel in 2022). Jet kerosene is expected to cost $111.9/barrel on an average, compared with $138.8 per barrel expected this year. Total fuel bill next year is expected to be $229 billion.

On a region-wise basis, North American carriers that include the likes of Delta Air Lines DAL, American Airlines AAL and United Airlines UAL are expected to reap profits of $11.4 billion next year, higher than the current-year expectation of $9.9 billion. Reflecting the improved air-travel demand scenario, passenger demand next year is likely to grow 6.4%, higher than the anticipated capacity growth of 5.5%.

United Airlines currently carries a Zacks Rank #2 (Buy), while Delta and American Airlines carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

To highlight the improving air-travel demand scenario, let’s recap the third-quarter 2022 results of the abovementioned North American carriers.

Delta's earnings (excluding 42 cents from non-recurring items) of $1.51 per share fell short of the Zacks Consensus Estimate of $1.56. Delta had reported earnings of 30 cents per share a year ago, dull in comparison to the current scenario, as air-travel demand was not so buoyant then.

Delta reported revenues of $13,975 million, which lagged the Zacks Consensus Estimate of $14,157.2 million. Driven by the high air-travel demand, total revenues increased more than 52% on a year-over-year basis. The buoyant air-travel demand scenario is also evident from the total operating revenue increase of 11% from third-quarter 2019 levels. The uptick in air-travel demand in the United States can be gauged from the fact that 71.1% of third-quarter 2022 passenger revenues came from the domestic markets. In the third quarter of 2022, passenger revenues, accounting for 82% of the total revenues, were flat with the levels recorded in the comparable quarter of 2019 at $11,464 million. The fourth-quarter 2022 revenue guidance is also encouraging and expected to increase in the 5-9% band from fourth-quarter 2019 actuals.

American Airlines’ third-quarter 2022 earnings of 69 cents per share surpassed the Zacks Consensus Estimate of 54 cents despite higher costs. The third quarter of 2022 was the second consecutive profitable quarter, excluding net special items, at AAL since the onset of the pandemic.

Operating revenues of $13,462 million skyrocketed 50.1% year over year and surpassed the Zacks Consensus Estimate of $13,457.5 million. Buoyant air-travel demand is also reflected in the total operating revenue increase of 13% from the third-quarter 2019 (pre-coronavirus) levels despite operating at 9.6% lower capacity. In the September quarter, passenger revenues, accounting for the bulk of the top line (92.1%), increased to $12,396 million from $7,957 million a year ago, driven by strong air-travel demand, mainly on the domestic front. Driven by soaring demand on healthy bookings, management expects total revenues in the fourth quarter of 2022 to be roughly 11-13%, higher than the level recorded in fourth-quarter 2019.

United Airlines’ third-quarter 2022 earnings (excluding 5 cents from non-recurring items) of $2.81 per share beat the Zacks Consensus Estimate of $2.21 and our estimate of $2.17. The third quarter of 2022 was the second consecutive profitable quarter at UAL since the onset of the pandemic.

Operating revenues of $12,877 million beat the Zacks Consensus Estimate of $12,709.5 million and our estimate of $12, 631.6 million. UAL’s revenues increased more than 66% year over year owing to upbeat air-travel demand. The optimistic air-travel demand scenario is also evident from the fact that total operating revenues increased 13.2% from third-quarter 2019 levels.

The massive year-over-year increase in the top line was driven by more than a 75% rise in passenger revenues (accounting for 90.5% of the top line) to $11,653 million. Moreover, passenger revenues increased 11.2% from the third-quarter 2019 reading. Nearly 39 million passengers traveled on UAL flights in the September quarter. This implied that passenger volume was 90% of the pre-pandemic volume. Owing to buoyant air-travel demand, UAL anticipates total unit revenues to increase in the 24%-25% band in the December quarter from fourth-quarter 2019 actuals.

Coming back to IATA’s forecast, carriers in the Asia Pacific and Latin America are expect to incur losses of $6.6 billion and $795 million, respectively in 2023. Carriers in the Middle East are expected to reap profits of $268 million in 2023.  European carriers, which include the likes of Ryanair Holdings RYAAY, are expected to be profitable in 2023 owing to improved air-travel demand. The profitability is expected to be $621 million as opposed to the anticipated current-year loss of $3.1 billion. In 2023, passenger demand is expected to grow 8.9%, outpacing capacity growth of 6.1%.

Reflecting the improved demand scenario, Ryanair’s revenues surged 207% year over year in first-half fiscal 2023 to €2.15 billion on the back of buoyant traffic. Scheduled revenues in the same period increased 250% to €4.42 billion.

The number of passengers who flew on RYAAY planes were 95.1 million in the first half, up 143% year over year. The traffic was 11% more than the pre-COVID levels. Load factor (% of seats filled by passengers) in first-half fiscal 2023 was 94% compared with 39% a year ago. Ryanair upped its traffic view for fiscal 2023 to 168 million from 165 million. The new guidance indicates 13% growth from the pre-COVID traffic numbers. Management expects profit after tax in fiscal 2023 in the range of €1 billion to €1.20 billion.

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