According to the International Air and Transport Association (IATA) conference airlines were expected to make around £3.18 profit from each passenger in 2014. Although carriers were expecting net profits of £11 billion, margins were so thin the air industry was expected to make less money than the oil industry makes from selling the fuel it consumes. Tony Tyler, the director general of IATA, said the headline figures masked ‘a daily struggle for airlines to break even. The brutal economic reality is that on revenues of \($746\) billion (£445bn), we will earn an average net margin of 2.4 per cent.’
IATA research revealed that carriers would spend an estimated \($212\) billion (£126bn) on jet fuel over the next 12 months, representing almost 30 per cent of their total operating costs. Intense competition from low-cost carriers has seen air fares fall in real terms by 3.5 per cent this year, with the number of passengers worldwide reaching 3.3 billion. Planes are flying fuller than ever before but lower fares mean that a higher percentage of occupied seats is needed to break even. IATA’s chief economist, Brian Pearce, said, ‘It’s remarkable that the industry is generating any profit at all.’
Questions:
1 Is break even a good performance monitor over the longer term?
2 How do decreasing margins affect the break-even point and margin of safety?