The airline industry's growth and impact on economic prosperity (Part 15 of 16)
North American airlines outperform peers
The airline industry in North America experienced significant synergy gains from mergers, joint ventures, and other structural improvements. It posted a net margin of 3.4% in 2013 compared to 1.1% in 2012. It’s expected to increase to 5.5% in 2014 and 6% in 2015. Consolidation has resulted in reduced competition and higher load factors.
North American airlines utilize ~65% of their capacity, which is higher than the break-even load factor of 60%. Increased capacity utilization and growing ancillary revenue have lowered the break-even load factor. The average net profit margin of major US airlines, including Delta Air Lines, Inc. (DAL), United Continental Holdings Inc. (UAL), American Airlines (AAL), JetBlue Airways Corporation (JBLU), and Southwest Airlines Co. (LUV), was 6.5% in 2013. Improved margins of these airlines are favorable for ETFs such as iShares Transportation Average ETF (IYT) and SPDR S&P Transportation ETF (XTN).
Profitability in other regions
The following describes profitability for airlines in other regions:
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Asia-Pacific carriers have performed well due to lower fuel costs and strong cargo demand. It has the largest market share in global cargo markets of ~40%. Margins are estimated to improve to 1.6% in 2014, from 1.2% in 2013.
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The Middle East region, whose economy is supported by strong oil reserves, posted a net margin of 0.9% in 2013. Profitability is expected to increase to 1.9% in 2014 and 2.5% in 2015. Due to lower unit costs, the region has one of the lowest break-even load factors in spite of a lower average yield.
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A slowdown in the Eurozone economy has resulted in low margins in the region, with 0.2% in 2013 and 1.3% in 2014. The region has the second-highest load factor of ~67%. Due to high regulatory costs and low yield in a highly competitive market, margins have been lower and the break-even load factor is higher than in other regions.
Margins in the Latin American market are low due to a weak domestic market. African airlines struggle with high operating costs, heavy taxation, and a lack of adequate infrastructure. Airlines in the region reported losses in 2013 but have turned profitable in 2014.
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