SYDNEY, 5 June 2018: Airlines should achieve a collective net profit of USD 33.8 billion this year according to the International Air Transport Association, but it represents a downward revision on a forecast made last December.
The latest forecast was presented during the annual general meeting held in Sydney Monday.
However, rising costs caused IATA to revise its forecast from a high of USD 38.4 billion made in December 2017.
The latest forecast if realised would give the worldwide airline business a net margin 4.1%.
But there are massive challenges such as rising costs, primarily fuel and labour as well as an upturn in the interest rate cycle.
In 2017, airlines earned a record USD 38.0 billion (revised from the previously estimate of USD 34.5 billion).
Comparisons, however, are severely distorted by special accounting items such as one-off tax credits, which boosted 2017 profits.
Profits at the operating level, remain high by past standards, but they 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, IATA’s director general and CEO, Alexandre de Juniac.
Outlook Drivers
Costs:
Inflation pressures are starting to emerge at this late stage of the economic cycle and airlines are facing significant pressures from rising fuel and labour costs in particular.
IATA expects the full-year average cost of Brent Crude to be USD 70/barrel. This is up from USD 54.9/barrel in 2017 (+27.5%) and our previous 2018 expectation of USD 60/barrel.
Jet fuel prices are expected to rise to USD 84/barrel (+25.9%). Fuel costs will account for 24.2% of total operating costs (up from a revised 21.4% in 2017).
Overall unit costs are forecast to rise 5.2% this year, after a 1.2% increase in 2017; a significant acceleration.
Revenues:
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 USD 834 billion (up 10.7% from USD 754 billion in 2017).
Demand:
Passenger air travel is forecast to expand by 7.0% in 2018. This is slower than the 8.1% growth recorded for 2017 but still faster than the 20-year average (of 5.5%) 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% (the same pace as in 2017). The passenger load factor is expected to be 81.7%, up a little on 2017 (81.5%). Total passenger numbers are expected to rise to 4.36 billion (up 6.5% from 4.1 billion in 2017). Passenger yields are expected to grow by 3.2% in 2018 after a 0.8% decline in 2017.
This will be the first year for strengthening yields since 2011, driven upwards by the 5.2% rise in unit costs.
With over 1,900 aircraft due for delivery to airlines in 2018 (up from 1,722 in 2017), there will be a boost in capital expenditure.
Risk factors:
Growing uncertainty in the direction by which global affairs will evolve could present risks to the industry’s outlook. These include the advancement of political forces pushing a protectionist agenda, uncertainty following the US withdrawal from the Iran nuclear deal, lack of clarity on the impact of Brexit, numerous ongoing trade discussions and continuing geopolitical conflicts.
“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
Asia-Pacific airlines benefitted from the strong growth in cargo revenues last year, since the region is the manufacturing centre of the world.
In 2017 the region generated the second largest profit at USD 10.1 billion. This year the region slips just behind Europe with net post-tax profits of USD 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 USD 5.10 (USD 6.82 in 2017). The region is now the largest in both cargo and passenger markets, with 37% and 33% shares of these global markets.
