… but chal­lenges re­main

IATA: “Strong prof­its con­tinue in 2017...

Vayu Aerospace and Defence - - Contents -

Even though IATA has re­vised its 2017 in­dus­try prof­itabil­ity out­look up­wards, it cau­tions that labour, fuel and sup­plier costs re­main a chal­lenge. Re­gional fore­casts are given in­clud­ing for air­lines in the Asia-Pa­cific area.

The In­ter­na­tional Air Trans­port As­so­ci­a­tion (IATA) has re­vised its 2017 in­dus­try prof­itabil­ity out­look up­wards, with air­lines ex­pected to re­port a $31.4 bil­lion profit (up from the pre­vi­ous fore­cast of $ 29.8 bil­lion) on rev­enues of $743 bil­lion (up from the pre­vi­ously fore­cast $736 bil­lion). “This will be an­other solid year of per­for­mance for the air­line in­dus­try. De­mand for both the cargo and pas­sen­ger busi­ness is stronger than ex­pected. While rev­enues are in­creas­ing, earn­ings are be­ing squeezed by ris­ing fuel, labour and main­te­nance ex­penses. Air­lines are still well in the black and de­liv­er­ing earn­ings above their cost of cap­i­tal. But, com­pared to last year, there is a dip in prof­itabil­ity,” stated Alexan­dre de Ju­niac, IATA’s Di­rec­tor Gen­eral and CEO.

IATA has also re­vised (down­wards) its es­ti­ma­tion for 2016 prof­its to $34.8 bil­lion (from $35.6 bil­lion pre­vi­ously fore­cast). In­dus­try level prof­itabil­ity peaked at a his­tor­i­cally high level in the first half of 2016 but has since been slowly de­clin­ing, the re­sult of mar­gins be­ing squeezed by unit costs, which are ris­ing faster than unit rev­enues. Ad­di­tion­ally, net post-tax prof­its took a hit from fuel hedg­ing losses.

Still, in 2017 air­lines are ex­pected to re­tain a net profit of $7.69 per pas­sen­ger, down from $9.13 in 2016 and $10.08 in 2015. The av­er­age net profit mar­gin stands at 4.2% ( down from 4.9% in 2016). “Air­lines are defin­ing a new epoch in in­dus­try prof­itabil­ity. For a third year in a row we ex­pect re­turns that are above the cost of cap­i­tal. But, with earn­ings of $7.69 per pas­sen­ger, there is not much buf­fer. That’s why air­lines must re­main vig­i­lant against any cost in­creases, in­clud­ing from taxes, labour and in­fra­struc­ture,” ob­served de Ju­niac.

While over­all in­dus­try per­for­mance is strong, ma­jor re­gional vari­a­tions re­main. About half the in­dus­try prof­its are be­ing gen­er­ated in North Amer­ica ($15.4 bil­lion). Car­ri­ers in Europe and Asia-Pa­cific will each add a $7.4 bil­lion profit to the in­dus­try to­tal. Latin Amer­ica and Mid­dle East car­ri­ers are ex­pected to earn $800 mil­lion and $400 mil­lion re­spec­tively. Air­lines in Africa are how­ever ex­pected to post a $100 mil­lion loss.

The IATA fore­cast is driven by a num­ber of fac­tors, par­tic­u­larly a de­mand en­vi­ron­ment that has been much stronger

than an­tic­i­pated. Ex­pec­ta­tions for a 2.9 per cent GDP growth in 2017, if re­alised, will be the strong­est global eco­nomic per­for­mance since 2011. Pas­sen­ger de­mand is ex­pected to grow by 7.4% over the course of 2017, the same growth rate as 2016 and 2.3 per­cent­age points higher than pre­vi­ously fore­cast. Stronger de­mand trans­lates into an ad­di­tional 275 mil­lion pas­sen­gers (over 2016), which will bring the to­tal num­ber of pas­sen­gers ex­pected to fly in 2017 to 4.1 bil­lion. If achieved, this would be the largest year-on-year growth in ab­so­lute pas­sen­ger num­bers ever recorded.

What is most im­por­tant for in­dus­try fi­nan­cial per­for­mance is that this surge in ex­pected de­mand takes traf­fic growth ahead of planned ca­pac­ity growth. As a re­sult, the av­er­age pas­sen­ger load fac­tor is ex­pected to reach 80.6% (slightly ahead of the 80.3% achieved in 2016), help­ing to boost unit rev­enues.

Cargo de­mand is ex­pected to grow by 7.5% in 2017, more than dou­ble the 3.6% growth re­alised in 2016 and 4.0 per­cent­age points above the pre­vi­ous fore­cast for this year. To­tal cargo car­ried is ex­pected to reach 58.2 mil­lion tonnes, higher than pre­vi­ously fore­cast (by 2.5 mil­lion tonnes) and 3.9 mil­lion tonnes over 2016 lev­els. Air cargo typ­i­cally grows strongly at the start of an eco­nomic up­turn, as firms turn to rapid air trans­port to re­stock in­ven­to­ries – which is what is hap­pen­ing to­day. There are also re­tail trends, such as the switch to e-com­merce and in phar­ma­ceu­ti­cals which is sup­port­ing air cargo growth.

On the other hand, cost in­creases for fuel, labour and main­te­nance ac­cel­er­ated in the first quar­ter. Over­all in­dus­try ex­penses are ex­pected to rise to $687 bil­lion, a $44 bil­lion in­crease on 2016. In­dus­try rev­enues are ex­pected to in­crease to $743 bil­lion, $38 bil­lion more than 2016.

Cheaper fuel was re­spon­si­ble for most of the 8% fall in air­lines’ unit costs in 2016, but that im­pact is com­ing to an end due to the in­flu­ence of fuel hedges and ris­ing spot prices. Some re­gions will still see some mod­est ben­e­fits from hedges but this will be in­suf­fi­cient to off­set the rise of other op­er­at­ing costs. The to­tal in­dus­try fuel bill is pre­dicted to be $129 bil­lion, slightly be­low the 2016 level of $133 bil­lion, and ac­count­ing for 18.8% of the in­dus­try’s to­tal costs. The fore­cast an­tic­i­pates an av­er­age oil price of $54.0 per bar­rel for Brent Crude (up from $44.6/bar­rel in 2016 but close to cur­rent lev­els) re­flect­ing a broad bal­ance be­tween OPEC sup­ply cuts and new sup­ply from US shale oil pro­duc­ers, which will lead to jet kerosene prices av­er­ag­ing $64.0 per bar­rel this year.

Aside from the ef­fect of fuel prices and hedg­ing, the main driver of in­creased costs in 2017 is com­ing from labour and in­dus­try sup­pli­ers which are ex­ert­ing pres­sure for an in­creased share of the air­line in­dus­try’s im­proved fi­nan­cial per­for­mance. In 2016 pro­duc­tiv­ity gains off­set wage in­creases, but this year unit labour costs will rise by al­most 3%, con­tin­u­ing what has al­ready been ev­i­dent in the first quar­ter.

Yields are still ex­pected to be down on 2016 lev­els, but there are signs of sta­bil­i­sa­tion in the first half of the year with a slight im­prove­ment an­tic­i­pated to­wards year-end, driven by bet­ter ca­pac­ity util­i­sa­tion and the im­per­a­tive to re­spond to the rise of unit costs.

Pas­sen­ger yields are ex­pected to fall by 2.0% over the course of the year. This is the small­est de­crease in re­cent years (-8.8% in 2016, -11.9% in 2015, -5.5% in 2014, -3.9% in 2013). Cargo yields are ex­pected to fall by 1.0% over the course of the year. This is also the small­est de­crease in re­cent years (-12.5% in 2016, -17.4% in 2015, -2.0% in 2014, -4.9% in 2013).

Re­gional Fore­casts

North Amer­ica: Car­ri­ers in this re­gion are ex­pected to post a $15.4 bil­lion net profit (slightly down from the $16.5 bil­lion in 2016), which is equal to $16.32/pas­sen­ger. Pas­sen­ger de­mand is ex­pected to grow by 4.0%, slightly be­hind ex­pected ca­pac­ity growth of 4.4%.

North Amer­i­can air­lines are the pow­er­house of in­dus­try prof­itabil­ity, gen­er­at­ing about half of the col­lec­tive global profit. This is ow­ing to the re­struc­tur­ing of the in­dus­try, a rel­a­tively strong econ­omy and a re­silient US dol­lar. The re­gion’s car­ri­ers also face chal­lenges as lim­ited fuel hedg­ing de­liv­ered quick ben­e­fits when fuel prices fell. Con­versely, there is less of

a buf­fer as fuel prices rise. A tight labour mar­ket is adding more pres­sure to prof­its by push­ing up wages. None­the­less, prof­itabil­ity re­mains at his­tor­i­cally high lev­els, even if slightly down on 2016.

Asia-Pa­cific: Air­lines in this re­gion are ex­pected to post a $7.4 bil­lion net profit (down from $8.1 bil­lion in 2016) which is equal to $4.96/pas­sen­ger. Pas­sen­ger de­mand is ex­pected to grow by 10.4%, slightly ahead of ex­pected ca­pac­ity growth of 8.8%.

Cargo is play­ing a large role in strength­en­ing the re­gion’s car­ri­ers, which col­lec­tively ac­count for about 40% of air cargo ship­ments. Cargo rev­enues are ris­ing for the first time in sev­eral years and this trend should be boosted by the re­stock­ing of re­tail­ers and in­dus­try in the ini­tial stages of the eco­nomic up­turn. China con­tin­ues to re­ori­ent its econ­omy away from ex­ports and to­ward do­mes­tic de­mand. The wider Asia re­gion is still the key source of man­u­fac­tured com­po­nents and fin­ished goods, which is show­ing strong de­mand at start of the cycli­cal eco­nomic up­turn, seen in re­cent quar­ters.

Europe: Euro­pean air­lines are ex­pected to post a $7.4 bil­lion profit (down from $8.6 bil­lion in 2016) which is equal to $6.94/ pas­sen­ger. Pas­sen­ger de­mand is ex­pected to grow by 7.0%, slightly ahead of ex­pected ca­pac­ity growth of 6.9%.

Ter­ror in­ci­dents in 2016 have dented Euro­pean de­mand but per­for­mance over the first months of the year pointed to­wards the re­cov­ery of lost ground. How­ever, re­cent ter­ror­ist at­tacks demon­strate that the threat con­tin­ues to hang over the con­ti­nent with po­ten­tial neg­a­tive im­pacts on de­mand.

The cargo busi­ness for the con­ti­nent’s car­ri­ers is get­ting a de­mand boost from the weak Euro, im­prove­ment in world trade (with a di­rect pos­i­tive im­pact on air cargo) and in­di­ca­tions of po­lit­i­cal sta­bil­ity.

Latin Amer­ica: Latin Amer­i­can air­lines are ex­pected to post a $0.8 bil­lion profit (up from $0.6 bil­lion in 2016) which is equal to $2.87/pas­sen­ger. Pas­sen­ger de­mand is ex­pected to grow by 7.5%, well ahead of ex­pected ca­pac­ity growth of 6.7%.

The con­ti­nent is see­ing slightly im­proved trad­ing con­di­tions with its largest econ­omy (Brazil) emerg­ing from re­ces­sion, po­lit­i­cal in­sta­bil­ity per­sists in many mar­kets and ris­ing costs in dol­lars (for fuel) presents chal­lenges. Ad­di­tion­ally the re­gion suf­fers from an oner­ous reg­u­la­tory bur­den on pas­sen­ger rights. Brazil has been joined by Mex­ico with puni­tive pas­sen­ger rights regimes that dif­fer sig­nif­i­cantly from in­ter­na­tional norms, while the po­lit­i­cal chaos in Venezuela makes it un­likely that there will be a re­cov­ery of $3.8 bil­lion of air­line rev­enues blocked from repa­tri­a­tion. None­the­less, the re­gion’s air­lines are re­spond­ing to these chal­lenges and Latin Amer­ica is ex­pected to be the only re­gion to see an im­prove­ment in its busi­ness for­tunes com­pared to 2016.

Mid­dle East: Mid­dle East air­lines are ex­pected to post a $0.4 bil­lion profit (down from $1.1 bil­lion in 2016) which is equal to $1.78/pas­sen­ger. Pas­sen­ger de­mand is ex­pected to grow by 7.0%, slightly ahead ex­pected ca­pac­ity growth of 6.9%.

Trad­ing con­di­tions for the Mid­dle East­ern car­ri­ers have sharply de­clined over the last six months. Prof­itabil­ity and load fac­tors are down sig­nif­i­cantly, as traf­fic and some busi­ness mod­els have come un­der pres­sure. There is grow­ing ev­i­dence that the ban on large elec­tronic de­vices in the cabin and the un­cer­tainty cre­ated around pos­si­ble

US travel bans is tak­ing a toll on some key routes. Mean­while the re­gion is strug­gling with in­creased in­fra­struc­ture taxes/charges and air traf­fic con­ges­tion.

Africa: African air­lines are ex­pected to post a $0.1 bil­lion loss (in line with the $0.1 bil­lion loss in 2016), which is equal to a loss of $1.50/pas­sen­ger. Pas­sen­ger de­mand is ex­pected to grow by 7.5%, slightly be­hind ex­pected ca­pac­ity growth of 7.9%.

African car­ri­ers re­main in the red, but with­out a de­te­ri­o­ra­tion on 2016 per­for­mance. On safety, the re­gion’s car­ri­ers achieved a ma­jor mile­stone with zero jet hul­l­losses in 2016. And a gen­eral im­prove­ment in com­mod­ity prices is help­ing in­vig­o­rate the con­ti­nent’s economies (and off­set fuel price in­creases). This trend, how­ever, is un­likely to ac­cel­er­ate sub­stan­tially. The bur­dens of high taxes, higher-than-global-av­er­age fuel prices, com­pe­ti­tion from the Gulf and lim­ited in­tra-con­ti­nen­tal lib­er­al­i­sa­tion re­main. The bal­ance of these fac­tors is ex­pected to re­sult in con­tin­ued small losses.

“The Busi­ness of Free­dom”

“Air trans­port is the busi­ness of free­dom. The safe and ef­fi­cient global move­ment of goods and peo­ple is a pos­i­tive force in our world. Avi­a­tion’s suc­cess bet­ters peo­ples’ lives by cre­at­ing eco­nomic op­por­tu­nity and sup­port­ing global un­der­stand­ing. We must stand firm in the face of any rhetoric that would put lim­its on avi­a­tion’s fu­ture suc­cess,” said de Ju­niac.

Some key in­di­ca­tors of the strength of global con­nec­tiv­ity in­clude the 2017 av­er­age re­turn air­fare, ex­pected to be $353 (2016 dol­lars), which is 64% be­low 1996 lev­els af­ter ad­just­ing for in­fla­tion; av­er­age air freight rates in 2017 are ex­pected at $1.51/ kg (2016 dol­lars) which is a 69% fall on 1996 lev­els; air cargo’s share (around 35%) of the to­tal value of goods traded glob­ally; the num­ber of unique city pairs served by avi­a­tion is fore­cast to grow to 19,699 in 2017, a 99% in­crease on 1996; and the global spend on tourism en­abled by air trans­port is ex­pected to grow by 5.2% in 2017 to $685 bil­lion.

Keep­ing the pro­duc­tion lines ac­tive, air­lines are ex­pected to take de­liv­ery of some 1,850 new air­craft in 2017, around half of which will re­place older and less fuel-ef­fi­cient air­craft. This will ex­pand the global com­mer­cial fleet by 3.8% to 28,645.

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.