Seoul: The International Air Transport Association (IATA) on Sunday downgraded its 2019 outlook for the global air transport industry to a 28 billion dollar profit from 35.5 billion dollars forecast in December 2018.
The business environment for airlines has deteriorated with rising fuel prices and a substantial weakening of world trade. In 2019, overall costs are expected to grow by 7.4 percent, outpacing a 6.5 percent rise in revenues.
As a result, net margins are expected to be squeezed to 3.2 percent from 3.7 percent in 2018. Profit per passenger will similarly decline to 6.12 dollars from 6.85 dollars in 2018.
“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,” said IATA’s Director General and CEO Alexandre de Juniac.
“Stiff competition among airlines keeps yields from rising. The 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,” he said.
In 2019, the return on invested capital earned from airlines is expected to be 7.4 per cent, down from 7.9 per cent in 2018. While this still exceeds the average cost of capital (estimated at 7.3 percent), the buffer is extremely thin.
Moreover, 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,” said de Juniac.
“Airlines will still create value for investors in 2019 with above cost-of-capital returns, but only just,” he added.
The high price of fuel from 2018 71.6 dollars a barrel Brent will continue in 2019 with an average cost of 70 dollars a barrel Brent expected. This is 27.5 percent higher than the 54.9 dollars a barrel Brent in 2017. Fuel costs will account for 25 percent of operating costs, up from 23.5 percent 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 percent to 822 billion dollars.
Overall revenues are not keeping pace with the rise in costs. For 2019, total revenues of 865 billion dollars are expected (plus 6.5 percent in 2018).
After an exceptional performance in 2017 (plus 9.7 percent growth), cargo demand growth slowed to 3.4 percent 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 percent improvement in 2018, as cargo load factors fall further and supply-demand conditions weaken.
Total passenger numbers are expected to rise to 4.6 billion, up from 4.4 billion in 2018. Passenger yields are expected to remain flat in 2019 after a 2.1 percent fall in 2018.
Downside risks are significant. Political instability and the potential for conflict never bodes well for air travel. Even more critical is the proliferation of protectionist measures and the escalation of trade wars.
As the US-China trade war intensifies, the immediate risks to an already beleaguered air cargo industry increase.
And, while passenger traffic demand is holding up, the impact of worsening trade relations could spillover and dampen demand.
“Aviation needs borders that are open to people and to trade. Nobody wins from trade wars, protectionist policies or isolationist agendas. But everybody benefits from growing connectivity. More inclusive globalization must be the way forward,” said de Juniac.