IATA upbeat about airlines’ profitability
Setback from higher fuel and labour costs
CANCUN: Airlines around the world can look forward to higher than expected profitability this year amid a robust operating environment, but their profit margin will be squeezed by higher fuel, labour and maintenance costs, according to the International Air Transport Association (IATA).
Airlines globally are expected to post US$31.4 billion in net profit for 2017, a slight improvement from the forecast of $29.8 billion IATA issued in December last year, or a 5.36% increase. But that is down from $34.8 billion estimated for 2016 and $35.9 billion in 2015, a record since 2004.
However, airlines are making less from each passenger they carry this year, at $7.69 a head, down from $9.13 in 2016 and $10.08 in 2015.
In percentage terms, the average net profit margin would fall to 4.2%, down from 4.9% in 2016.
Despite the lower earnings outlook, IATA secretary-general Alexandre de Juniac on Monday described 2017 as another solid year for the airline industry as their balance sheets are still well in the black and delivering earnings above their cost of capital.
“Airlines are defining a new epoch in industry profitability. For the 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,” he said.
“That’s why airlines must remain vigilant against any cost increases, including from taxes, labour and infrastructure.”
In its new projection, the global airline industry body sees revenue this year edging up to $743 billion from $736 billion predicted earlier, only $38 billion more than 2016.
The upward revision of the net profit outlook for 2017 reflects a stronger demand environment with global GDP growth this year expected to be 2.9%, the highest rate since 2011.
Passenger traffic demand this year is expected to sustain last year’s level of 7.4%. That translates to an additional 275 million passengers this year for a total of 4.1 billion.
Cargo demand is projected to rise by 7.5% in 2017, more than double the 3.6% growth realised in 2016.
But IATA recorded fuel, labour and maintenance costs accelerating in the first quarter this year, pushing full-year expenses to $687 billion, $44 billion more than in 2016.
Cheaper fuel was responsible for most of the 8% fall in airlines’ unit costs in 2016, but that effect is coming to an end because of the influence of fuel hedging and rising spot prices.
Some regions will still see some modest benefits from hedging, but it will be insufficient to offset the rise of other operating costs, according to IATA.
The total industry fuel bill is predicted to be $129 billion, against $133 billion in 2016, and accounting for 18.8% of the industry’s total costs.
The new IATA forecast sees an average oil price of $54 a barrel for Brent crude, up from $44.6 a barrel in 2016 but close to current levels, reflecting a broad balance between Opec supply cuts and new supply from US shale oil producers. Its outlook for jet kerosene prices is an average of $64 a barrel this year.
Aside from the effect of fuel prices and hedging, the main driver of higher costs this year will come from labour and industry suppliers that are exerting pressure for an increased share of the airline industry’s improved financial performance.
Last year productivity gains offset wage increases, but this year IATA expects unit labour costs to rise by almost 3%, continuing a trend started in the first quarter.
REGIONAL OUTLOOKS
NORTH AMERICA: $15.4 billion net profit, against $16.5 billion in 2016, which is equal to $16.32 per passenger.
ASIA-PACIFIC: $7.4 billion net profit, down from $8.1 billion in 2016, which is equal to $4.96 per passenger.
EUROPE: $7.4 billion net profit, down from $8.6 billion in 2016, equal to $6.94 per passenger. LATIN AMERICA: $800 million net profit, up from $600 million in 2016, equal to $2.87 per passenger.
MIDDLE EAST: $400 million net profit, down from $1.1 billion in 2016, which is equal to $1.78 per passenger.
AFRICA: $100 million loss, similar to the $100 million loss in 2016, which is equal to a loss of $1.50 per passenger.