IATA downgrades 2019 airlines’ profit projection by $7.5 billion

Published June 4, 2019, 12:00 AM

by manilabulletin_admin

By Emmie V. Abadilla

SEOUL – In the wake of rising fuel prices and weakening of world trade, the International Air Transport Association (IATA) downgraded its 2019 profit outlook for the global air transport industry by $7.5 Billion from $35.5 billion in its end of last year forecast to $28 billion.

International Air Transport Association (IATA) Director General and CEO Alexandre de Juniac speaks during the Global Media Day in Geneva, Switzerland December 5, 2017. (Reuters)
International Air Transport Association (IATA) Director General and CEO Alexandre de Juniac.(Reuters file photo)

“This year will be the tenth consecutive year in the black for the airline industry but margins are being squeezed by rising costs right across the board — including labor, fuel, and infrastructure,” Director General and CEO Alexandre de Juniac explained during the opening of the 75th IATA Annual General Meeting in Seoul.

“Stiff competition among airlines keeps yields from rising. Weakening of global trade is likely to continue as the US-China trade war intensifies. This primarily impacts the cargo business, but passenger traffic could also be impacted as tensions rise. Airlines will still turn a profit this year, but there is no easy money to be made.”

This year, the industry expects its overall costs to grow by 7.4%, outpacing a 6.5% rise in revenues. As a result, net margins are expected to be squeezed to 3.2% (from 3.7% in 2018). Profit per passenger will similarly decline to $6.12 from $6.85 in 2018.

Return on invested capital earned from airlines is expected to be 7.4% , down from 7.9% in the comparative period. While this still exceeds the average cost of capital, estimated at 7.3%, the buffer is extremely thin. Furthermore, the job of spreading financial resilience throughout the industry is only half complete with a major gap in profitability between the performance of airlines in North America, Europe and Asia-Pacific and the performance of those in Africa, Latin America and the Middle East.

“The good news is that airlines have broken the boom-and-bust cycle. A downturn in the trading environment no longer plunges the industry into a deep crisis. But under current circumstances, the great achievement of the industry — creating value for investors with normal levels of profitability is at risk. Airlines will still create value for investors in 2019 with above cost-of-capital returns, but only just,” noted de Juniac.

Costs will continue to be up for the year. The high price of fuel from 2018 ($71.6/barrel Brent) will continue with an average cost of $70.00/barrel Brent expected. This is 27.5% higher than the $54.9/barrel Brent in 2017. Fuel costs will account for 25% of operating costs (up from 23.5% in 2018). Non-fuel unit costs are expected to rise to 39.5 cents per available tonne kilometer from 39.2 cents, because of higher labor, infrastructure and other costs. Overall expenses are expected to rise 7.4% to $822 billion.

Overall revenues are not keeping pace with the rise in costs. For 2019, total revenues of $865 billion are expected (+6.5% on 2018).

After an exceptional performance in 2017, with an over 9.7% growth, cargo demand growth slowed to 3.4% in 2018. It is anticipated to be flat in 2019 with cargo volumes of 63.1 million tonnes (63.3 million tonnes in 2018) because of the impact of higher tariffs on trade. Cargo yields are expected to be flat in 2019 after a 12.3% improvement in 2018, as cargo load factors fall further, and supply-demand conditions weaken.

Passenger demand growth is expected to be more robust because global GDP growth is expected to remain relatively strong at 2.7%, albeit slower than in 2018 (3.1%). Total passenger numbers are expected to rise to 4.6 billion (up from 4.4 billion in 2018) while total passenger yields are expected to remain flat in 2019 after a 2.1% fall in 2018.

All regions are expecting a reduction in profitability with the exception of North America and Latin America.

Asia-Pacific airlines will deliver a net profit of $6.0 billion, down from $7.7 billion in 2018. That represents a net profit per passenger of $3.51 and a net margin of 2.3%. The region is showing very diverse performance. Accounting for about 40% of global air cargo traffic makes the region the most exposed to weakness in world trade, and that, combined with higher fuel costs, is squeezing the regions’ profits.

Middle Eastern airlines will deliver a combined net loss of $1.1 billion (slightly worse than the $1.0 billion loss in 2018). The region has faced substantial challenges in recent years, both to the business environment and to business models. Performance is now improving but the worsening in the business environment is expected to prolong losses in 2019.