Avi­a­tion in­dus­try still prof­itable de­spite ris­ing costs – IATA

US$33.8-B col­lec­tive profit seen in 2018 vs $38 B in 2017

Manila Bulletin - - Shipping Bulletin - By EMMIE V. ABADILLA

SYD­NEY, Aus­tralia – De­spite ris­ing fuel and la­bor costs plus an up­turn in the in­ter­est rate cy­cle, air­lines ex­pect to net US$33.8 bil­lion col­lec­tive prof­its (4.1% net mar­gin) in 2018, ver­sus its record $38.0 bil­lion earn­ings last year, though com­par­isons will be “se­verely dis­torted” by spe­cial ac­count­ing items, such as one-off tax cred­its, which boosted 2017 prof­its.

The In­ter­na­tional Air Trans­port As­so­ci­a­tion (IATA) made the an­nounce­ment yes­ter­day at the start of its 74th An­nual Gen­eral Meet­ing (AGM) and World Air Trans­port Sum­mit in Syd­ney, Aus­tralia.

“At long last, nor­mal prof­its are be­com­ing nor­mal for air­lines,” ac­cord­ing to Alexan­dre de Ju­niac, IATA’s Di­rec­tor Gen­eral and CEO.

"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. This en­ables air­lines to fund growth, ex­pand em­ploy­ment, strengthen bal­ance sheets and re­ward our in­vestors."

In 2018, the re­turn on in­vested cap­i­tal is ex­pected to be 8.5%, down from 9% in 2017. This still ex­ceeds the av­er­age cost of cap­i­tal, which has risen to 7.7% on higher bond yields at 7.1% in 2017. This is crit­i­cal to at­tract the sub­stan­tial cap­i­tal which the in­dus­try needs to ex­pand its fleet and ser­vices.

With the full-year av­er­age cost of Brent Crude pro­jected to rise 27.5 per cent to $70/bar­rel from $54.9/bar­rel in 2017, jet fuel prices will also rise by 26 per cent to $84/bar­rel. Fuel costs will ac­count for 24.2% of to­tal op­er­at­ing costs. Over­all unit costs are fore­cast to rise 5.2% this year, af­ter a 1.2% in­crease in 2017, a sig­nif­i­cant ac­cel­er­a­tion.

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 11 per cent to $834 bil­lion; unit rev­enues, 4.2% be­hind the 5.2% rise in unit costs. This will squeeze profit mar­gins.

On the other hand, 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 against 2017’s 81.5%.

To­tal pas­sen­ger num­bers are ex­pected to rise 6.5% to 4.36 bil­lion; pas­sen­ger yields, 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.

Cargo de­mand ben­e­fit­ted from the un­ex­pected ac­cel­er­a­tion in the growth of the global econ­omy over the past year. As busi­nesses rushed to re­spond, they turned to air trans­port to re­plen­ish in­ven­tory, pro­duc­ing strong air cargo growth in 2017.

How­ever, that re­stock­ing cy­cle has come to an end. Cargo de­mand is ex­pected to grow by 4.0%, a ma­jor drop from the 9.7% growth ex­pe­ri­enced in 2017, but it re­mains in line with the 20-year trend growth rate.

To­tal cargo car­ried is ex­pected to in­crease to 63.6 mil­lion tonnes, from 61.5 mil­lion tonnes in 2017. Phar­ma­ceu­ti­cals, e-com­merce and other pre­mium cargo ser­vices are ex­pected to lead growth in 2018. Cargo yields are ex­pected to im­prove by 5.1% from a 8.1% growth in 2017.

Nev­er­the­less, air­lines are boost­ing their capex, with over 1,900 air­craft ex­pected to be de­liv­ered this year, from 1,722 in 2017. Many of these will re­place older and less fuel-ef­fi­cient air­craft, ex­pand­ing the global com­mer­cial fleet by 4.2% to 29,600 air­craft.

Grow­ing un­cer­tainty in global af­fairs could pose risks to the in­dus­try’s out­look, how­ever. 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, along with nu­mer­ous on­go­ing trade dis­cus­sions and con­tin­u­ing geopo­lit­i­cal con­flicts.

By re­gion, Asia-Pa­cific air­lines ben­e­fit­ted from the strong growth in cargo rev­enues last year, since it is the man­u­fac­tur­ing cen­ter of the world.

Af­ter gen­er­at­ing the sec­ond largest profit at $10.1 bil­lion, the re­gion slips just be­hind Europe this year, with net post-tax prof­its of $8.2 bil­lion, as the end of the busi­ness in­ven­tory re­stock­ing cy­cle slows cargo, par­tic­u­larly rel­a­tive to travel.

On a per pas­sen­ger ba­sis, Asia Pa­cific air­lines gen­er­ated a profit of $5.10 (ver­sus $6.82 in 2017) and is now the largest in both cargo and pas­sen­ger mar­kets, with 37% and 33% shares, re­spec­tively.

Mid­dle East air­lines are re­cov­er­ing, though slower than in Latin Amer­ica. The rise of oil prices is help­ing rev­enues and the oil-based economies in the re­gion, aero-po­lit­i­cal re­la­tions with the US have im­proved, while the Gulf air­lines have sub­stan­tially curbed growth. Net prof­its are fore­cast to rise to $1.3 bil­lion in 2018 (up from $1.0 bil­lion in 2017) or $5.89 per pas­sen­ger ($4.81 in 2017).

North Amer­i­can air­lines are ex­pected to post a net profit of $15.0 bil­lion (down from $18.4 bil­lion in 2017) ac­count­ing for 44% of global prof­its (down from a peak share of 60% in 2015). Av­er­age profit per pas­sen­ger is ex­pected to be $15.67. The re­gion con­tin­ues to gen­er­ate the high­est mar­gins, re­turns on cap­i­tal and US dol­lar amounts of profit. How­ever, mar­gins are be­ing grad­u­ally re­duced by ris­ing costs from peak lev­els in 2015.

Euro­pean air­lines are slowly mov­ing to­wards North Amer­i­can per­for­mance (some in­di­vid­ual air­lines al­ready match). The re­gion’s air­lines are fore­cast to gen­er­ate the sec­ond high­est net post-tax prof­its of $8.6 bil­lion in 2018 (up from $8.1 bil­lion in 2017) and a per pas­sen­ger profit of $7.58 ($7.53 in 2017).

Ex­ten­sive hedg­ing by Euro­pean car­ri­ers is help­ing to im­prove per­for­mance by de­lay­ing the im­pact of higher fuel prices (while North Amer­i­can air­lines with lower hedg­ing po­si­tions are more im­me­di­ately ex­posed). The gap in prof­itabil­ity with North Amer­i­can car­ri­ers is largely driven by breakeven load fac­tors which are higher than in North Amer­ica due to in­dus­try frag­men­ta­tion and higher reg­u­la­tory costs in Europe.

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