“Best Per­for­mance in the In­dus­try’s His­tory”

Vayu Aerospace and Defence - - Case Study - Ex­tracts from IATA re­ports

The In­ter­na­tional Air Trans­port As­so­ci­a­tion ( IATA) ex­pects the global air­line in­dus­try to make a net profit in 2017 of $29.8 bil­lion. To­tal rev­enues of $736 bil­lion, which rep­re­sents a 4.1% net profit mar­gin have been fore­cast. This will be the third con­sec­u­tive year (and the third year in the in­dus­try’s his­tory) in which air­lines will make a re­turn on in­vested cap­i­tal (7.9%) which is above the weighted av­er­age cost of cap­i­tal (6.9%).

IATA re­vised slightly down­ward its out­look for 2016 air­line in­dus­try prof­itabil­ity to $ 35.6 bil­lion ( from the June pro­jec­tion of $39.4 bil­lion) ow­ing to slower global GDP growth and ris­ing costs. This will still be the high­est ab­so­lute profit gen­er­ated by the air­line in­dus­try and the high­est net profit mar­gin (5.1%).

“Air­lines con­tinue to de­liver strong re­sults. This year we ex­pect a record net profit of $ 35.6 bil­lion. Even though con­di­tions in 2017 will be more dif­fi­cult with ris­ing oil prices, we see the in­dus­try earn­ing $29.8 bil­lion. That’s a very soft land­ing and safely in prof­itable ter­ri­tory. These three years are the best per­for­mance in the in­dus­try’s his­tory—ir­re­spec­tive of the many un­cer­tain­ties we face. In­deed, risks are abun­dant— po­lit­i­cal, eco­nomic and se­cu­rity among them. And con­trol­ling costs is still a con­stant bat­tle in our hy­per-com­pet­i­tive in­dus­try,” said Alexandre de Ju­niac, IATA’s Di­rec­tor Gen­eral and CEO.

“We need to put this into per­spec­tive. Record prof­its for air­lines means earn­ing more than our cost of cap­i­tal. For most other busi­nesses that would be con­sid­ered a nor­mal level of re­turn to in­vestors. But three years of sus­tain­able prof­its is a first for the air­line in­dus­try. And af­ter many years of hard work in re­struc­tur­ing and re-

en­gi­neer­ing the busi­ness the in­dus­try is also more re­silient. We should also recog­nise that prof­its are not evenly spread with the strong­est per­for­mance con­cen­trated in North Amer­ica,” said de Ju­niac.

“Soft land­ing in 2017”

While air­line in­dus­try prof­its are ex­pected to have reached a cycli­cal peak in 2016 of $35.6 bil­lion, a soft land­ing in prof­itable ter­ri­tory is ex­pected in 2017 with a net profit of $29.8 bil­lion. 2017 is ex­pected to be the eighth year in a row of ag­gre­gate air­line prof­itabil­ity, il­lus­trat­ing the re­silience to shocks that have been built into the in­dus­try struc­ture. On av­er­age, air­lines will re­tain $7.54 for ev­ery pas­sen­ger car­ried.

Ex­pected higher oil prices will have the big­gest im­pact on the out­look for 2017. In 2016 oil prices av­er­aged $44.6/bar­rel (Brent) and this is fore­cast to in­crease to $55.0 in 2017. This will push jet fuel prices from $52.1/bar­rel (2016) to $64.9/bar­rel (2017). Fuel is ex­pected to ac­count for 18.7% of the in­dus­try’s cost struc­ture in 2017, which is sig­nif­i­cantly be­low the re­cent peak of 33.2% in 2012-2013.

The de­mand stim­u­lus from lower oil prices will ta­per off in 2017, slow­ing traf­fic growth to 5.1% ( from 5.9% in 2016). In­dus­try ca­pac­ity ex­pan­sion is also ex­pected to slow to 5.6% ( down from 6.2% in 2016). Ca­pac­ity growth will still out­strip the in­crease in de­mand, thus low­er­ing the global pas­sen­ger load fac­tor to 79.8% (from 80.2% in 2016).

The neg­a­tive im­pact of a lower load fac­tor is ex­pected to be off­set some­what by a strength­en­ing of global eco­nomic growth. World GDP is pro­jected to ex­pand by 2.5% in 2017 (up from 2.2% in 2016). Along with struc­tural changes in the in­dus­try, this is ex­pected to help sta­bilise yields for both the cargo and pas­sen­ger busi­nesses. This is a wel­come de­vel­op­ment as yields (cal­cu­lated in dol­lar terms) have fallen each year since 2012.

There is some op­ti­mism over the prospects for the cargo busi­ness in 2017. The break in fall­ing yields and a mod­er­ate uptick in de­mand (3.5%) will see cargo in­dus­try vol­umes reach a record high of 55.7 mil­lion tonnes ( up from 53.9 mil­lion tonnes in 2016). In­dus­try rev­enues

are ex­pected to rise slightly to $ 49.4 bil­lion ( still well be­low the $ 60 bil­lion level of an­nual rev­enues ex­pe­ri­enced in 2010-2014). Trad­ing con­di­tions re­main chal­leng­ing.

4 Bil­lion Trav­ellers

“Con­nec­tiv­ity con­tin­ues to set new records. We ex­pect nearly 4 bil­lion trav­el­ers and 55.7 mil­lion tonnes of cargo in the com­ing year. And al­most 1% of global GDP is spent on air trans­port— some $769 bil­lion. Air trans­port has made the world more ac­ces­si­ble than ever and it is a crit­i­cal en­abler of the global econ­omy,” said de Ju­niac.

“Gov­ern­ments, how­ever, do not make avi­a­tion’s work easy. The global tax bill has bal­looned to $123 bil­lion. Over 60% of coun­tries put visa bar­ri­ers in the way of travel. And the to­tal num­ber of ticket taxes ex­ceeds 230. Bil­lions of dol­lars are wasted in direct costs and lost pro­duc­tiv­ity as a re­sult of in­ef­fi­cient in­fra­struc­ture. These are only some of the hur­dles which con­front air­lines. Our aim is to work in part­ner­ship to help gov­ern­ments bet­ter un­der­stand and fully max­imise the so­cial and eco­nomic ben­e­fits of ef­fi­cient global air links,” stressed de Ju­niac.

Regional Anal­y­sis for 2017

North Amer­i­can car­ri­ers: The strong­est fi­nan­cial per­for­mance is be­ing de­liv­ered by air­lines in North Amer­ica. Net post-tax prof­its will be the high­est at $18.1 bil­lion next year, al­though down slightly from the $20.3 bil­lion ex­pected in 2016. The net mar­gin for the re­gion’s car­ri­ers is also ex­pected to be the strong­est at 8.5% with an av­er­age profit of $ 19.58/ pas­sen­ger. In 2017 ca­pac­ity of­fered by the re­gion’s car­ri­ers is ex­pected to grow by 2.6%, slightly out­pac­ing ex­pected de­mand growth of 2.5%. Re­cent con­sol­i­da­tion con­tin­ues to un­der­pin the re­gion’s strong prof­itabil­ity, even as the re­gion faces up­wards cost pres­sures which in­clude the price of fuel.

Euro­pean car­ri­ers: Air­lines based in Europe are ex­pected to post an ag­gre­gate net profit of $5.6 bil­lion in 2017, which is be­low the $7.5 bil­lion for 2016. None­the­less, car­ri­ers there are fore­cast to gen­er­ate a 2.9% net profit mar­gin and a per pas­sen­ger profit of $5.65. There re­mains a sig­nif­i­cant gap be­tween the per­for­mance of the re­gion’s car­ri­ers and the per­for­mance of North Amer­i­can ones. Ca­pac­ity in 2017 is ex­pected to grow by 4.3%, ahead of de­mand growth which is fore­cast at 4.0%. The re­gion is sub­ject to in­tense com­pe­ti­tion and ham­pered by high costs, oner­ous reg­u­la­tion and high taxes. And ter­ror­ist threats re­main a real risk, even if con­fi­dence is start­ing to re­turn af­ter the tragic in­ci­dents in re­cent times.

Asia-Pa­cific car­ri­ers: Air­lines in the Asia-Pa­cific re­gion are ex­pected to gen­er­ate a net profit of $6.3 bil­lion in 2017 (down from $7.3 bil­lion in 2016) for a net mar­gin of 2.9%. On a per pas­sen­ger ba­sis av­er­age prof­its are an­tic­i­pated to be $4.44. Ca­pac­ity of­fered by the re­gion’s car­ri­ers is fore­cast to grow by 7.6%, ahead of a fore­cast growth in de­mand of 7.0%. Im­proved cargo per­for­mance is ex­pected to off­set ris­ing fuel prices for many of the re­gion’s air­lines. The ex­pan­sion of new model air­lines and pro­gres­sive lib­er­al­i­sa­tion in the re­gion is in­ten­si­fy­ing al­ready strong com­pe­ti­tion. In ad­di­tion prof­itabil­ity varies widely across the re­gion.

Mid­dle East­ern car­ri­ers: Mid­dle East­ern air­lines are fore­cast to gen­er­ate a net profit of $0.3 bil­lion for a net mar­gin of 0.5% and an av­er­age profit per pas­sen­ger of $1.56. This is be­low the $900 mil­lion profit ex­pected in 2016. Av­er­age yields for the re­gion’s car­ri­ers are low but unit costs are even lower, partly driven by the strong ca­pac­ity ex­pan­sion, fore­cast at 10.1% this year, ahead of ex­pected de­mand growth of 9.0%. Threats are emerg­ing to the suc­cess story of the Gulf car­ri­ers, in­clud­ing in­creases in air­port charges across the Gulf States and grow­ing air traf­fic man­age­ment de­lays.

Latin Amer­i­can car­ri­ers: Latin Amer­i­can air­lines are ex­pected to post a net profit of $200 mil­lion, which is slightly lower than the $300 mil­lion fore­cast for 2016. Profit per pas­sen­ger is ex­pected to be $0.76 with a net profit mar­gin of 0.7%. Ca­pac­ity of­fered by the re­gion’s car­ri­ers is fore­cast to grow by 4.8% which is ahead of ex­pected de­mand growth of 4.0%. De­spite some signs of im­prove­ment in the re­gion’s cur­ren­cies and eco­nomic prospects, op­er­at­ing con­di­tions re­main chal­leng­ing, with in­fra­struc­ture de­fi­cien­cies, high taxes, and a grow­ing reg­u­la­tory bur­den across the con­ti­nent. Mean­while, Venezuela con­tin­ues to block the repa­tri­a­tion of some $ 3.8 bil­lion of in­dus­try funds in con­tra­ven­tion of in­ter­na­tional obli­ga­tions.

African car­ri­ers: Car­ri­ers in Africa are ex­pected to de­liver the weak­est fi­nan­cial per­for­mance with a net loss of $800 mil­lion (broadly un­changed from 2016). For each pas­sen­ger flown this amounts to an av­er­age loss of $9.97. Ca­pac­ity in 2017 is ex­pected to grow by 4.7%, ahead of 4.5% de­mand growth. The re­gion’s weak per­for­mance is be­ing driven by regional con­flict and the im­pact of low com­mod­ity prices.

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