Rising fuel prices and a substantial weakening of world trade are leading the International Air Transport Association (IATA) to downgrade its 2019 profit outlook for the global air transport industry.
IATA is forecasting a USD 28 billion profit (from USD 35.5 billion forecast in December 2018), along with a decline on 2018 net post-tax profits which IATA estimates at USD 30 billion.
The business environment for airlines has deteriorated with rising fuel prices and a substantial weakening of world trade, which as IATA notes hits the cargo business directly, but may spill over to the passenger side as tensions rise.
In 2019 overall costs are expected to grow by 7.4 per cent, outpacing a 6.5 per cent rise in revenues. As a result, net margins are expected to be squeezed to 3.2 per cent (from 3.7 per cent in 2018). Profit per passenger will similarly decline to USD 6.12 (from USD 6.85 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,” says Alexandre de Juniac, IATA’s director general and CEO.
“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,” de Juniac adds.
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 per cent), the buffer is extremely thin, IATA notes.
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,” says de Juniac.
“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,” he adds.
2019 outlook drivers
IATA forecasts the high price of fuel from 2018 (USD 71.6/barrel Brent) will continue in 2019 with an average cost of USD 70.00/barrel Brent expected. This is 27.5 per cent higher than the per cent 54.9/barrel Brent in 2017. Fuel costs will account for 25 per cent of operating costs (up from 23.5 per cent in 2018).
Non-fuel unit costs are expected to rise to 39.5 cents per available tonne kilometre from 39.2 cents, because of higher labour, infrastructure and other costs. Overall expenses are expected to rise 7.4 oer cent to USD 822 billion.
Overall revenues are not keeping pace with the rise in costs. For 2019, total revenues of USD 865 billion are expected (+6.5 per cent on 2018).
After an exceptional performance in 2017 (+9.7 per cent growth), cargo demand growth slowed to 3.4 per cent 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 per cent improvement in 2018, as cargo load factors fall further, and supply-demand conditions weaken.
Average air freight rates in 2019 are expected to be $1.86/kg (2018 dollars) which is a 62 per cent fall on 1998 levels.
Passenger demand growth is expected to be more robust than for cargo. This is because global GDP growth is expected to remain relatively strong at 2.7 per cent, albeit slower than in 2018 (3.1 per cent).
Passenger demand, measured in revenue passenger kilometers, is expected to grow by 5.0 per cent (down from 7.4 per cent in 2018). Airlines have responded to the slower growth environment by trimming capacity expansion to 4.7 per cent (ASKs).
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 per cent fall in 2018.
Debt-to-earnings ratios, which had fallen significantly are starting to rise once more, IATA notes. Average debt-to-earnings ratios for airlines in Europe and North America are not far above the levels rated as investment grade by the credit rating agencies, which provides a degree of security in the event of a deterioration in the business environment.
Africa, Middle East and Latin America still have high levels of debt (6-7 times annual earnings) which leaves them more vulnerable to increasingly likely cash flow shocks, or rising interest rates.
Downside risks are significant IATA warns, led by political instability and the potential for conflict – both of which never bode 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,” says de Juniac. “Nobody wins from trade wars, protectionist policies or isolationist agendas. But everybody benefits from growing connectivity. A more inclusive globalisation must be the way forward,” he adds.
All regions are expecting a reduction in profitability with the exception of North America and Latin America. Regional differences are significant.
North American carriers will deliver the strongest financial performance with a USD 15 billion post tax profit (up from USD 14.5 billion in 2018). That represents a net profit of USD 14.77 per passenger, which is a marked improvement from just seven years earlier (USD 2.3 in 2012).
Net margins, forecast at 5.5 per cent, are down from 2018 levels owing to higher than expected fuel costs and slowing growth. The limited downside in this region has been underpinned by consolidation, helping to sustain load factors (passenger + cargo) above 65 per cent, and ancillaries, which limit the impact of higher fuel costs, keeping breakeven load factors to 59.5 per cent.
European airlines will deliver a net profit of USD 8.1 billion (down from USD 9.4 billion in 2018). That represents a net profit per passenger of USD 6.75 and a net margin of 3.7 per cent – both are the second strongest industry results, but below what North American carriers earn.
Breakeven load factors are the highest at 70.2 per cent, caused by low yields due to the highly competitive open aviation area, high regulatory costs, and inefficient infrastructure. In 2019, for example, en-route air traffic management delays doubled to 19.1 million minutes. Europe also is one of the more exposed regions to weak international trade and this has damaged prospects this year.
Asia-Pacific airlines will deliver a net profit of USD 6.0 billion (down from USD 7.7 billion in 2018). That represents a net profit per passenger of USD 3.51 and a net margin of 2.3 per cent. The region is showing very diverse performance, IATA notes. Accounting for about 40 per cent 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 USD 1.1 billion (slightly worse than the USD 1.0 billion loss in 2018). That equates to a USD 5.01 loss per passenger and a negative net margin (-1.9 per cent).
The region has faced substantial challenges in recent years, both to the business environment and to business models. Airlines there are going through a process of adjustment and announced schedules point to a substantial slowdown in capacity growth in 2019. Performance is now improving but the worsening in the business environment is expected to prolong losses in 2019.
Latin American airlines will deliver a net profit of USD 0.2 billion. This reflects a moderate improvement from the USD 0.5 billion loss in 2018, as the recovery of the Brazilian economy is offsetting higher oil prices. With a USD 0.50 profit per passenger, the region’s net margin is expected to be a thin 0.4 per cent.
African airlines will deliver a USD 0.1 billion loss (unchanged from 2018), continuing a weak trend into its fourth year. Each passenger carried is expected to cost the carriers USD 1.54, leading to a -1.0 per cent net margin.
Breakeven load factors are relatively low, as yields are a little higher than average and costs are lower. However, few airlines in the region are able to achieve adequate load factors, which averaged the lowest globally at 60.7 per cent in 2018. Overall, industry performance is improving, but only slowly.