Last year was a bumper year for equities, but it wasn't a great one for the economy. However, the commercial aerospace sector stood out, because according to the International Air Transport Association, or IATA, end market conditions progressively improved through 2013. Moreover, the IATA is forecasting an even better year in 2014, so prospects for commercial aerospace plays like Boeing (NYSE: BA) , cabin manufacturer BE Aerospace (NASDAQ: BEAV) ,aviation services company AAR Corp (NYSE: AIR) and airframe product manufacturer Precision Castparts (NYSE: PCP) are looking good, too. <\/p>\n
IATA Industry Forecasts The following graph demonstrates how the IATA's expectations for commercial airline profitability in 2013 progressively got better through the year. Meanwhile, its forecast for world economic growth actually declined over the period. In September of 2012, the IATA forecasted world economic growth in 2013 to be 2.5%, while the latest forecast from December of this year was just 2%. http:\/\/www.iata.org\/whatwedo\/Documents\/economics\/IATA-Economic-Briefing-Financial-Forecast-December-2013.pdf<\/a> <\/p>\n Source: IATA. <\/p>\n Moreover, its latest forecast for 2014 sees global net profits expanding to $19.7 billion from 2013, an increase of 52%. Among these improvements, there is a remarkable turnaround taking place in terms of regional prospects. <\/p>\n Back in 2010, Asia-Pacific airlines generated $11.1 billion in profit, while North American airlines only made $4.2 billion. However, the IATA is forecasting North American airline commercial airline profits to increase to $8.3 billion in 2014 from $5.8 billion this year. Meanwhile, Asia-Pacific commercial airline profits are forecast to be only $4.1 billion in 2014. <\/p>\n The obvious answer would be that passenger traffic growth must have gone up, but according to the IATA, North American growth isn't going up by much, and is still noticeably less than in the Asia-Pacific region. <\/p>\n Source: IATA. <\/p>\n So how and why have North American (and to a lesser extent European) airlines suddenly become more profitable, and how can Foolish investors take advantage? <\/p>\n More pricing power, more efficiency There are two primary reasons for this increased profitability. First, North American airlines are seeing greater pricing power thanks to a slowly improved economy. Second, they are taking substantive productivity measures to increase profitability. These two factors will combine to drive growth in the future. <\/p>\n You can see the pricing power in the fact that the IATA forecasts that global net profit per departing passenger in 2014 will be at $5.94 in 2014 -- a level not seen since the peak of 2007. Western airlines' willingness to improve productivity includes buying more modern and efficient planes from Boeing and Airbus. It's significant that the airlines placing the largest orders for Boeing planes as of mid-December this year were American Airlines and European budget carrier Ryanair, with 143 and 175, respectively, out of Boeing's total of 1074. Furthermore, Boeing can look forward to a strong order book in 2014 because the IATA predicts that overall passenger load factors (a measure of airplane capacity utilization) will rise to 81.3% in 2014. In other words, capacity pressures are likely to encourage more investment in new airplanes. <\/p>\n <\/p>\n More:<\/p>\n 4 Commercial Aerospace Plays for 2014<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" Last year was a bumper year for equities, but it wasn't a great one for the economy. Continue reading