African Aviation industry set for a positive rebound in 2023

NAIROBI, Kenya - This is according to a new report by the African Airlines Association (AFRAA) indicates the pandemic hit Africa’s aviation industry in 2021, resulting in an estimated $8.6 billion loss.

AFRAA report indicates that the figure was less than the $10.21 billion loss recorded by the sector in 2020, but it was still a 49.8 percent decline when compared to the revenue recorded by the sector prior to the pandemic, in 2019.

The estimated revenue loss for 2022 is $3.5 billion, equivalent to 20 percent of 2019 full-year revenue. The projected revenue loss for the fourth quarter of 2022 is approximately $800 million.

This year is however expected to bring good tidings for the industry, albeit with low-profit margins.

The International Air Transport Association (IATA) expects a return to profitability for the global airline industry in 2023, as airlines continue to cut losses stemming from the effects of the pandemic on their business in 2022.

This year most airlines are expected to post a marginal net profit of $4.7 billion – a 0.6 percent net profit margin.

Carriers in the continent are expected to narrow losses to $213 million this year, from a projected loss of $638 million in 2022.

The passenger demand will rise by 27 percent, expected to outpace capacity growth of 21.9 percent. Over the year, the region is expected to serve 86.3 percent of pre-crisis demand levels with 83.9 percent of pre-crisis capacity.

“Africa is particularly exposed to macro-economic headwinds which have increased the vulnerability of several economies and rendered connectivity more complex,” IATA says.

Willie Walsh, IATA’s Director General opines that “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.”

“These include onerous regulation, high operational costs, inconsistent government policies, inefficient infrastructure, and a value chain where the rewards of connecting the world are not equitably distributed,” Walsh said.

Despite the economic uncertainties, there are plenty of reasons to be optimistic about 2023. Lower oil prices, inflation, and continuing pent-up demand should help to keep costs in check as the strong growth trend continues.

At the same time, with such thin margins, even an insignificant shift in any one of these variables has the potential to shift the balance into negative territory.

The global passenger business is expected to generate revenues of $522 billion. Passenger demand is expected to reach 85.5 percent of 2019 levels over the course of 2023.

Much of this expectation takes into account the uncertainties of China’s Zero Covid policies which are constraining both domestic and international markets. Nonetheless, passenger numbers are expected to surpass the four billion mark for the first time since 2019, with 4.2 billion travelers expected to fly.

Overall costs are expected to grow by 5.3 percent to $776 billion. That growth is expected to be 1.8 percentage points below revenue growth, thus supporting a return to profitability.

Cost pressures are expected to remain mainly from labour, skill, and capacity shortages. Infrastructure costs are also a concern. Nonetheless, non-fuel unit costs are expected to fall to 39.8 cents/available tonne kilometer (down from 41.7 cents/ATK in 2022 and nearly matching the 39.2 cents/ATK achieved in 2019).

Airline efficiency gains are expected to drive passenger load factors to 81.0 percent, just slightly below the 82.6 percent achieved in 2019. The total fuel spend for 2023 is expected to be $229 billion—consistent at 30 percent of expenses.

IATA’s forecast is based on Brent crude at $92.3 per barrel (down from an average of $103.2 per barrel in 2022). Jet kerosene is expected to average $111.9 per barrel (down from $138.8 per barrel).

This decrease reflects a relative stabilization of fuel supply after the initial disruptions from the war in Ukraine. The premium charged for jet fuel (crack spread) remains near historical highs.

Risks

Despite the projected good performance, the economic and geopolitical environment presents several potential risks to the 2023 outlook.

While indications are that there could be an easing of aggressive inflation-fighting interest rate hikes from early 2023, the risk of some economies falling into recession remains.

“Such a slowdown could affect demand for both passenger and cargo services. It would, however, likely come with some mitigation in the form of lower oil prices,” experts say.

The outlook anticipates a gradual re-opening of China to international traffic and the easing of domestic Covid-19 restrictions progressively from the second half of 2023.

A prolongation of China’s zero Covid policies would adversely affect the outlook, IATA says.

“The good news is that airlines have built flexibility into their business models to be able to handle the economic accelerations and decelerations impacting demand,” says IATA in its latest industry report.

GAROWE ONLINE