Tuesday, August 9

IATA foresees solid airline profits despite rising costs


KUCHING: The International Air Transport Association (IATA) expects airlines to achieve a collective net profit of US$33.8 billion (4.1 per cent net margin) in 2018.

This is a solid performance despite rising costs, primarily fuel and labor, but also the upturn in the interest rate cycle. These rising costs are the main driver behind the downward revision from the previous forecast of US$38.4 billion in December 2017.

In 2017 airlines earned a record US$38 billion (revised from the previously estimate of US$34.5 billion). Comparisons to this, however, are severely distorted by special accounting items such as one-off tax credits which boosted 2017 profits.

Profits at the operating level, though still high by past standards, have been trending slowly downwards since early 2016, as a result of accelerating costs.

“Solid profitability is holding up in 2018, despite rising costs. The industry’s financial foundations are strong with a nine-year run in the black that began in 2010. And the return on invested capital will exceed the cost of capital for a fourth consecutive year.

“At long last, normal profits are becoming normal for airlines. This enables airlines to fund growth, expand employment, strengthen balance sheets and reward our investors,” said Alexandre de Juniac, IATA’s Director general and CEO.

In 2018, the return on invested capital is expected to be 8.5 per cen. This still exceeds the average cost of capital, which has risen to 7.7 per cent on higher bond yields.

This is critical for attracting the substantial capital needed by the industry to expand its fleet and services.

Inflation pressures are starting to emerge at this late stage of the economic cycle and airlines are facing significant pressures from rising fuel and labor costs in particular.

We expect the full-year average cost of Brent Crude to be US$70 per barrel. This is up from US$54.9 per barrel in 2017 and our previous 2018 expectation of US$60 per barrel. Jet fuel prices are expected to rise to US$84/barrel. Fuel costs will account for 24.2 per cent of total operating costs.

Overall unit costs are forecast to rise 5.2 per cent this year, after a 1.2 per cent increase in 2017; a significant acceleration.

Providing some offset to accelerating costs is a strong revenue environment, as demand from passengers and shippers continues to expand well above trend, and pricing has turned positive.

Overall revenues are expected to rise to US$834 billion (up 10.7 per cent from US$754 billion in 2017).

Unit revenues are expected to rise by 4.2 per cent in 2018, lagging the 5.2 per cent rise in unit costs. This will squeeze profit margins.

Passenger air travel is forecast to expand by 7.0 per cent in 2018. This is slower than the 8.1 per cent growth recorded for 2017 but still faster than the 20-year average (of 5.5 per cent) for the sixth consecutive year.

Demand is getting a boost from stronger economic growth and the stimulus from new city-pair direct services. Capacity is expected to grow by 6.7 per cent (the same pace as in 2017).The passenger load factor is expected to be 81.7 per cent, up a little on 2017 (81.5 per cent).

Total passenger numbers are expected to rise to 4.36 billion (up 6.5 per cent from 4.1 billion in 2017). Passenger yields are expected to grow by 3.2 per cent in 2018 after a 0.8 per cent decline in 2017. This will be the first year for strengthening yields since 2011, driven upwards by the 5.2 per cent rise in unit costs.

“Aviation spreads prosperity and enriches the human spirit. That truth lays the foundation for a very important message. The world is better off when borders are open to people and to trade. And our hard work as an industry has primed aviation to be an even stronger catalyst for an ever more inclusive globalization,” said de Juniac.

Asia-Pacific airlines benefitted from the strong growth in cargo revenues last year, since the region is the manufacturing center of the world. In 2017 the region generated the second largest profit at US$10.1 billion.

This year the region slips just behind Europe with net post-tax profits of US$8.2 billion, as the end of the business inventory restocking cycle slows cargo, particularly relative to travel. On a per passenger basis, airlines generated a profit of US$5.10 (US$6.82 in 2017).

The region is now the largest in both cargo and passenger markets, with 37 per cent and 33 per cent shares of these global markets.