Listen in as Aviation Week Network's Karen Walker speaks with Marie Owens Thomsen, IATA chief economist and sustainability head, about new financial and traffic forecasts and alternative fuel production challenges.

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Rush Transcript

Karen Walker:

Hello everyone, and thank you for joining us for Wind Seat, our Aviation Week Air Transport Podcast. I'm Air Transport World and Aviation Week Network Air Transport Editor In Chief Karen Walker. Welcome on board. And this week I'm absolutely delighted to be joined by one of my favorite guests, Marie Owens Thomsen, who is the Senior Vice President Sustainability and Chief Economist at the International Air Transport Association, or IATA.

We are actually in IATA's headquarters office in Geneva where the executives are briefing media on the key issues and initiatives that they are working on for their some 320 airline members. In particular, we've been updated on the latest forecast figures for the industry so we'll be talking a little bit about that. And also about key outcomes from the recent CAAF/3 Aviation and Alternative Fuel Summit that's just happened in Dubai.

So, Marie, let's start with some of the key financial and traffic numbers that we've been hearing today for where you expect the industry to be by the end of this year and then into 2024. There's some good news there, yes?

Marie Owens Thomsen:

So in 2023, we expect the industry to return to profitability, which is absolutely no mean feat given the depths of the crisis, of course, that was caused by the COVID pandemic. In 2020 the industry made a loss of nearly 140 billion, and now we're looking at a profit for this year at about 24 billion. So that is obviously definitely worthy of admiration, I think, and a great testimony to how resilient and creative and agile the industry is. So that's all fabulous.

But the industry still struggles with robustness. If we are resilient, we are still not particularly robust. So our P&Ls, yeah, the results are now positive, but the balance sheets are still impaired and airlines are still more indebted today, even if they have repaid most of the state aid that they received because of the pandemic has been repaid. But in the aggregate, airlines still have more debt today than they did in 2019. This sort of balance sheet weakness is a sign of a lack of robustness, something that will make it hard for the industry to withstand all the shocks that come in. We tend to fall over and then bounce back, but it would be great if we could avoid falling over in the future.

And overall, the profit margins are still very slim, so about two and a half percent say, and this translates into a per passenger profit of about $5.50 per passenger, which sort of makes you want to stand there with a cup in hand when the passengers board the planes. So that sort of illustrates I think exactly this point, that we have great resilience but still lack robustness.

Karen Walker:

So yes, it's 23.3 billion net profit anticipated this year, 25.7 billion next year. It sounds like big numbers and you get a lot of media coverage of sort of saying, "oh, airlines are already massively profitable." But as you've just put it into context, and also what that means in terms of the very small amount of money that they make per passenger. Famously IATA keeps referring to the equivalent to a cup of coffee, buying a cup of coffee. And it's also so much lower than there's a margin than many of the other industries, including the big oil and gas companies, yes?

Marie Owens Thomsen:

For sure. I mean, there was one single oil company who in the third quarter of this year made half the amount of profits that we forecast for our whole industry for the whole year. And if we move out of oil, there was one single tech company who made all the same amount of profits that we forecast for our industry in that single quarter of the third quarter. So that totally puts things into perspective, doesn't it?

Karen Walker:

It really does. And, again, it's a incredible achievement given what happened to the airline industry with the pandemic, through no fault of its own. and was losing understandably so much money the industry came to a standstill. And as to say, is now celebrating the fact that it is returning to profitability. But of course it's not for every region. I mean, that's an overall figure. I think it's also important to remember that the recovery is still working it's way through in some regions, yes?

Marie Owens Thomsen:

Yes, absolutely. And of course, literally the airlines that are performing the best tend to be located in the countries that had the least amount of pandemic restrictions or that lifted those restrictions the earliest. And by the same token then, but on the other side, we have notably the Chinese market that didn't really lift restrictions until January this year. So they are the ones who are the most lagging in the return to profitability but we would think that that should happen in 2024.

Karen Walker:

We heard some of the key things that are under consideration when you're making your forecasts. Now this is a notoriously difficult industry to predict because outside events could change things, but there was some talk about GDP, global GDP, and how that's different between emerging economies and advanced economies. Can you talk about that related to aviation?

Marie Owens Thomsen:

Basically we're looking at a global GDP growth rate of around 3% this year and next year. And they'll hover around that kind of magnitude I think for the foreseeable future. And around 3% GDP growth for the global economy is the global average since the 1970s. So it's this kind of lukewarm, not too hot, not cold environment, which sort of doesn't feel particularly exciting because it lacks a bit of fizz, but it's actually a decent rate of growth because it's in line with this long-term average.

But clearly the average hides the regional divergences that we have. And the general trend is that the advanced economies are slowing down structurally, actually, and of course we have also seen a slowdown in the emerging economies, but they still grow at a much faster clip. So if I round that off, we might have the advanced economies growing at something close to 2% and the emerging economies are growing at 4% or a little bit higher. So ideally we would obviously want all of these countries to grow another percentage point faster if such a thing were possible, but that looks unlikely. And the advanced economies, in particular, they are struggling with structural issues such as declining working age populations and things like that, which tends to lower their long-term growth potential.

And climate change I think is going to stymie this long-term growth potential for all of us. And that's of course most unfortunate because it comes just at the time when we need all that money to tackle climate change and those related issues. The circumstances are not as favorable as we would have usefully wanted them to be, given the magnitude of the challenges that we face going forward.

Karen Walker:

And we also heard interesting facts about the labor market, the global labor market, which is actually some record unemployment rates around the world. There's good and not so good sides to that. Can you explain that?

Marie Owens Thomsen:

Yes. I would say that the world economy is probably at full employment today. And I'm in my 60s now and been an economist all my life, and I have never seen a global economy at full employment, so this is a very unusual thing. And we have more people working in the global economy today than we've ever had in history. And that's obviously, as you said, associated with some of the lowest unemployment rates that we've ever seen. So this is sort of recession proofing the global economy because all of these people are working, they're earning incomes, and they can spend their incomes on purchasing goods and services, and obviously air transportation is a service, so that's good for our industry and for the global economy as a whole.

But the flip side of that coin is of course that it puts a certain amount of pressure on wages. And we have seen nominal wages increase. Now, we've also had high rates of inflation so real wages haven't necessarily been stunning, but going forward, if we think that inflation is going to come down, then real wages will rise. And again, it has this dual effect, that on the one hand it props up demand in the global economy, but on the other hand it increases wage costs. And given that wages are our second-largest cost component in our industry, then that's obviously a problem for us.

Karen Walker:

And then lastly on the outlook, the financial outlook, can you just talk a little bit about oil price and where you see that going in '24?

Marie Owens Thomsen:

The oil market is a market that is unusually sensitive to small variations in supply and demand. And obviously those small variations are hard to predict. But we understand that we now have obviously war in Ukraine and a war in the Middle East and wars tend to be something that pushes the oil price higher. And then we have this cartel that is OPEC, and we never really know what OPEC is going to be up to, but if they want to curb their production in order to keep prices up, well then obviously that's a factor that will help keep prices up. So if we assume that these wars are not necessarily going to spread and that there might not be additional wars to contend with, then I think that we should have an oil price around $85 on Brent and maybe next year in a range between 80 and $90 a barrel on Brent.

But we don't fly on brand. We fly on jet fuel. And there unfortunately, there's a scarcity of refining capacity in the world. And the aviation industry’s demand for kerosene, jet fuel, represents about 8% of refining output. So the other guys have a priority. We're the smaller players in that universe. And the refineries choose rather to produce diesel and heating oil because everybody uses those. So this has driven the wedge between the price of brand oil and jet fuel higher. And we think that that spread is probably going to remain in the vicinity of $30 a barrel more that we pay for our fuel than anybody else pays for theirs. Which I think might also add to a bit of a confusion about the ticket prices. People might see the brand price go down and wonder why airplane ticket prices don't go down and the answer lies in the higher price that we pay for jet fuel.

Karen Walker:

Yeah, we actually also heard that when it comes to airfares, if you're looking around the world, they're mostly, the increases have been either in line with inflation or in fact behind inflation, lagging inflation. So again, they're still very good value, I guess it's the way of putting it.

Marie Owens Thomsen:

Yeah. I totally agree with that.

Karen Walker:

One of the things that was mentioned, Marie, you talked about this, you point out that sustainable aviation fuel, or SAF as we tend to call it, that you said it's hard to actually get all the data on this specifically, but you said the estimate is that airlines will spend an additional almost two and a half billion dollars next year for the SAF that they can buy, there's very limited supply, but they're using as much as they can. But it's more expensive than jet fuel. And like I say, you put that figure I think at 2.4 billion next year. So that's another huge extra costs that the airlines are having to take on. You've just been in Dubai for the CAAF/3 summit on this. What was the key things to you that came out of that?

Marie Owens Thomsen:

Well, I mean, I think it has to be regarded as a positive that the member states have agreed on some kind of global vision for the necessity of increasing this production, so that's good. And even more important almost, I would argue, is the fact that the member states also recognized that the SAF production has to happen absolutely everywhere. So today it's basically only Europe and the US that produces sustainable aviation fuel. And we know that these two regions will not be able to satisfy global demand in 2050. So we really need the other parts of the world to participate in producing SAF and that was totally recognized.

And it's also very important, of course, for airlines that they can use the SAF purchases that they make to claim those against their decarbonization obligations that they have under ICAO and CORSIA and also under the EU regulation, and we can imagine that there might be more such obligations popping up in the future. So all of those things were recognized, the importance to produce SAF everywhere, the importance for airlines to be able to claim their purchases, and I think that's really, yeah, that sums it up.

Karen Walker:

And the industry, the aviation industry, I think is also increasingly keen to see governments put pressure on the oil and gas industries to do their part, they're the ones making, as we've said, making a lot of money and to make sure that they're investing in that transition to clean fuel, yes?

Marie Owens Thomsen:

Yes. And here I think that we have, maybe I'm going too esoteric in this conversation, but I think we really have a big problem because climate change is obviously a systemic problem, meaning that everybody's affected. And of course systemic problems should ideally be solved by providing systemic solutions but we're just not organized in the world to be able to do that. So ICAO is the International Civil Aviation Organization, an agency within the UN family that focuses on civil aviation. And that's great, but that obviously doesn't include energy, and it doesn't necessarily include the money.

So this is a problem I believe. It's like how can we come together, not only under ICAO, although that was fantastic and I applaud that outcome, but the missing bits are sort of glaring with their absence. And those missing bits are, of course, how do we engineer the global energy transition? How do we wean the global economy of fossil fuels? And how can we make everybody understand that where public money goes, private money will follow. And if the governments ask for the private money to come while they themselves are giving the public money to the oil companies, that is, for me, really the crux of the whole problem here.

Karen Walker:

So just basically in summary, do you feel the forecast seems what I would call cautiously optimistic? Is that sort of a fair summary about how you feel where the industry is heading for next year?

Marie Owens Thomsen:

Yes. I think that we also have various passenger surveys and so on that bear this out, but it's somewhat marvelous to see how passengers have voted with their wallets. The passengers have told us that we need to fly. And again, forgive me for going a bit long-term view on this, but I would say that the two elements that brought us this exceptional prosperity of the 20th century were transportation, innovations in transportations, and how the cost of transportation became democratized. That's number one. And number two was indeed the expansive use of fossil fuel everywhere in our global economy.

And now we've understood that we've come to the end of that economic model. And we have replacements for the fossil fuel, but we don't have replacement for flying airplanes until some new amazing technology comes up. This is what needs to happen. We need to all of us together, in a single-minded way, focus on the global energy transition, and we wean the whole global economy off the fossil fuel use, and then we will try to defend our right to receive our 8% share or so of the total.

Karen Walker:

Very good point. Marie, thank you so much again for your time today. And of course, thank you to all our listeners. And thank you to our producer, Cory Hitt. Listeners, make sure you don't miss us each week by subscribing to the Window Seat Podcast on Apple Podcasts or wherever you listen. Until next week, this is Karen Walker, disembarking from Window Seat.