IATA tunes its crystal ball into 2018

2018 forecast

The International Air Transport Association (IATA) forecasts global cargo revenues will continue to do well in 2018, reaching USD 59.2 billion – up 8.6 per cent from 2017 revenues of $54.5 billion.

Next year will also see a rise in cargo carried to 62.5 million tonnes, up 4.5 per cent on the 59.9 million tonnes in 2017. The value of goods carried by airlines is expected to exceed $6.2 trillion in 2018, representing 7.4 per cent of world GDP.

IATA notes that the cargo business continues to benefit from a strong cyclical upturn in volumes, with some recovery in yields. Volumes are expected to grow by 4.5 per cent in 2018 to 62.5 million tonnes, down from the 9.3 per cent growth of 2017.

The boost to cargo volumes in 2017 was a result of companies needing to restock inventories quickly to meet unexpectedly strong demand which led cargo volumes to grow at twice the pace of the expansion in world trade of 4.3 per cent.

Cargo yields are expected to improve by 4.0 per cent in 2018, down from the 5.0 per cent in 2017. While restocking cycles are usually short-lived, the growth of e-commerce is expected to support continued momentum in the cargo business beyond the rate of expansion of world trade in 2018.

Overall, carriers will see net profit in 2018 rise to $38.4 billion, an improvement from the $34.5 billion expected net profit in 2017 which was revised upwards from June’s forecast of $31.4 billion.

Next year is also expected to be the fourth consecutive year of sustainable profits for carriers, with a return on invested capital of 9.4 per cent, exceeding the industry’s average cost of capital of 7.4 per cent.

Strong demand, efficiency and reduced interest payments will help airlines improve net profitability in 2018 despite rising costs, IATA said.

“These are good times for the global air transport industry. Safety performance is solid,” said Alexandre de Juniac, IATA’s director general and CEO. “We have a clear strategy that is delivering results on environmental performance. More people than ever are traveling. The demand for air cargo is at its strongest level in over a decade. Employment is growing. More routes are being opened. Airlines are achieving sustainable levels of profitability. It’s still, however, a tough business, and we are being challenged on the cost front by rising fuel, labour and infrastructure expenses.

“The industry also faces longer-term challenges. Many of them are in the hands of governments. Aviation is the business of freedom and a catalyst for growth and development. To continue to deliver on our full potential, governments need to raise their game – implementing global standards on security, finding a reasonable level of taxation, delivering smarter regulation and building the cost-efficient infrastructure to accommodate growing demand.

“The benefits of aviation are compelling – 2.7 million direct jobs and critical support for 3.5 per cent of global economic activity. And the industry is ready to partner with governments to reinforce the foundations for global connectivity that are vital to modern life,” said de Juniac.

Helping boost profits, the industry has used the period of positive cash flows to pay dividends and to reduce debt. The debt to EBITDAR (earnings before interest, tax, depreciation, amortisation and rentals) ratio has fallen from 3.7x in 2016 to 3.5x in 2017. It is expected to fall further to 3.4x in 2018, according to IATA.

Lower debt means reduced interest payments and despite the squeeze in operating margins from 8.3 per cent in 2017 to 8.1 per cent in 2018, the net margin is expected to grow to 4.7 per cent from 4.6 per cent in 2017, because of lower interest payments. This will see net profits rise to a record $38.4 billion in 2018, up from $34.5 billion in 2017.

The bad news
The bad news is oil prices are expected to average $60/barrel for Brent Crude in 2018 – up 10.7 per cent from USD54.2/barrel in 2017. Jet fuel prices are expected to rise even more quickly to USD73.8 per barrel, up 12.5 per cent on USD65.6 in 2017.

IATA said airlines with low levels of hedging – in the US and China for example – are likely to feel the impact of this increase more immediately than those with higher average hedging ratios, like Europe. The fuel bill is expected to be 20.5 per cent of total costs in 2018 – up from 18.8 per cent in 2017.

Labour costs have been accelerating strongly and are now a larger expense item than fuel – 30.9 per cent in 2018. Overall unit costs are expected to grow by 4.3 per cent in 2018, a significant acceleration on the 1.7 per cent increase in 2017, IATA noted. This will outpace an expected 3.5 per cent increase in unit revenues, it said.

Regional outlook

All regions are expected to report improved profitability in 2018 and all regions are expected to see demand growth outpace capacity expansion. Carriers in North America continue to lead on financial performance, accounting for nearly half of the industry’s total profits, IATA said.

North America
Airlines in this region are forecast to generate the strongest financial performance with net profits of USD16.4 billion in 2018, up from USD15.6 billion in 2017. Market conditions are expected to continue to be strong, with announced capacity growth or 3.4 per cent likely to be slightly less than our traffic forecast of 3.5 per cent.

North American airlines have generated more than half of the industry’s profits produced in the past three years, but rising cost pressures have slowed further improvements. Low hedging ratios mean rising fuel prices have hit this region first and labour cost pressures have been an issue, although the expectation is that this pressure will diminish in 2018, according to IATA.

Airlines in Asia Pacific are forecast to see profits of USD9.0 billion in 2018, up from USD8.3 billion in 2017. The strong cyclical rise in cargo markets has been a particular support for this region, whose carriers account for 37 per cent of global cargo capacity. Anticipated growth in demand of 7.0 per cent, will outpace announced capacity increases of 6.8 per cent.

Passenger market conditions vary across the region with domestic markets strengthening in China, India and Japan. New low cost market entrants in the Association of Southeast Asian Nations (ASEAN) region are intensifying competition and contributing to a dampening of profitability. But there has been a pause in competitive pressures from the ‘super connectors’ on long-haul routes as they face various challenges in their home markets, IATA said.

Airlines in Europe are expected to deliver a net profit of USD11.5 billion in 2018, up from USD9.8 billion in 2017. Announced capacity increases of 5.5 per cent trail the expected 6.0 per cent growth in demand in 2018 supporting a strengthening of the region’s performance.

European airlines are benefiting from a strong economic recovery in home markets, including Russia, a rebound from the terrorism events of 2016, and some consolidation following the failure of several regional airlines. The results of these developments are evident in the continent achieving the highest average passenger load factor in 2017 to date – 84.3 per cent.

Strong transatlantic demand is also supporting this performance, although new market entry is intensifying already stiff competition. And an early resolution to Brexit uncertainties is needed for airlines to plan and market their flying programmes.

Latin America
Airlines in Latin America are forecast to generate a USD900 million net profit in 2018, up from USD700 million in 2017. Passenger demand is expected to grow by 8.0 per cent in 2018, outpacing announced passenger capacity growth of 7.5 per cent.

IATA said the region will approach 2018 with momentum provided by the moderate recovery in the Brazilian economy, reasonable growth in Mexico and the weaker US dollar over the last year.

Middle East
Middle East carriers are forecast to see net profits improve to USD600 million in 2018, up from USD300 million in 2017. Demand in 2018 is expected to grow by 7.0 per cent, outpacing announced capacity expansion of 4.9 per cent – the slowest growth since 2002.

The region’s carriers face challenges to their business models, and from low oil revenues, regional conflict, crowded air space, the impact of travel restrictions to the US, and competition from new ‘super connector’ carriers like Turkish Airlines. Despite the challenges, there is positive momentum heading into 2018.

African carriers are expected to continue to make small losses of USD100 million in 2018 following a collective net loss of USD100 million in 2017. Stronger forecast economic growth in the region is expected to support demand growth of 8.0 per cent in 2018, slightly outpacing the announced capacity expansion of 7.5 per cent.

The wider economic situation is only improving slowly in Africa, which is hampering the financial performance of its airlines, IATA noted. The key Nigerian economy is only just out of recession and growth in South Africa remains extremely weak. While traffic is growing, passenger load factors for African airlines are just over 70 per cent which is over 10 percentage points lower than the industry average.

With high fixed costs this low utilisation makes it very difficult to make a profit. Stronger economic growth will help in 2018, but the continent’s governments need a concerted effort to further liberalise to promote growth of intra-Africa connectivity.


IATA tunes its crystal ball into 2018
Article Name
IATA tunes its crystal ball into 2018
The International Air Transport Association (IATA) forecasts global cargo revenues will continue to do well in 2018, reaching USD 59.2 billion – up 8.6 per cent from 2017 revenues of $54.5 billion.
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