VISITING THE LAND OF THE MORNING CALM
Aviation Business travelled to Seoul to attend last month’s IATA Annual General Meeting, discovering the latest developments with the global air transport market, as well as the challenges the industry is facing in 2019
AVB TRAVELLED TO SEOUL TO ATTEND LAST MONTH’S IATA ANNUAL GENERAL MEETING, DISCOVERING THE LATEST DEVELOPMENTS WITH THE GLOBAL AIR TRANSPORT MARKET, AS WELL AS THE CHALLENGES THE INDUSTRY IS FACING IN 2019
Last month, the International Air Transport Association (IATA) hosted its 75th IATA Annual General Meeting (AGM) and World Air Transport Summit (WATS) in Seoul. Running from the 1 – 3 June, this marked the first time that Korean Air
played host to the AGM and the first time the event has been held in the Republic of Korea. Over 300 hundred of the world’s press attended, along with representatives from among IATA’s 290 member airlines.
Under the theme of The Vision for the Future, the 75th IATA AGM touched on a number of topics, which included increasing demand for connectivity, airline digital transformation, infrastructure capacity, sustainability, as well as the future workforce.
The event concluded with both the announcement of Lufthansa Group CEO Carsten Spohr’s appointment
as Chairman of the IATA Board of Governors (BoG) and that the 76th IATA AGM will be hosted by KLM Royal Dutch Airlines in Amsterdam, The Netherlands.
Downgrade in the works
During the opening of the annual general meeting, Alexandre de Juniac, IATA’s director general and CEO, painted a cautious state of the global air transport market, sharing that the organisation had downgraded its 2019 outlook.
The association has projected $28bn profit for the global air transport industry for 2019, down from $35.5bn forecasted back in December 2018. Additionally, IATA noted that is a decline on 2018 net post-tax profits, which the association estimates at $30bn.
Factors that are negatively affecting the business environment includes the increase in fuel prices, as well as a decrease in global trade. In the case of the former, the high price of fuel from 2018, which was recorded as $71.6/barrel Brent, is expected to continue well into 2019 with an average cost of $70.00/barrel Brent expected. This is 27.5% higher than the $54.9/barrel Brent recorded back in 2017.
The airline association expected that fuel costs will account for 25% of total operating costs, a one and half percentage point increase over the 2018 figure.
Over the course of 2019, overall costs are projected to increase by
7.4%, surpassing a 6.5% increase in revenues. This, in turn, will likely squeeze net margins down from the 3.7% recorded to 2018, to 3.2% for the current year. Additionally, IATA expects a profit per passenger will decline from $6.85 recorded in 2018 to $6.12 for 2019.
“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 labour, fuel, and infrastructure. Stiff competition among airlines keeps yields from rising,” said de Juniac.
“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.”
Other projections from IATA point to a decline in return on invested capital earned. According to the association, the return on invested capital earned will drop by 0.5 percentage points from last year’s figure of 7.9%. While exceeding the average cost of capital that is estimated at 7.3%, IATA notes that the buffer is quite narrow.
Despite efforts to instil “financial resilience” throughout the global industry, there remains a substantial gap between the performance of carriers in North America, Europe and Asia-Pacific and those that are based 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. 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 costof-capital returns, but only just,” said de Juniac.
Challenges for the Middle East
Over in the Middle East, IATA noted that Middle East-based carriers are
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.” Alexandre de Juniac
expected to deliver a combined net loss of $1.1bn, which is further down from the $1.0bn loss recorded in 2018. Equating to a $.01 loss per passengers and a negative net margin of -1.9%, the Middle East has faced challenges in both the business environment and to business models. The former is expected to prolong losses for airlines in the region over 2019.
In a media briefing that included journalists from both Africa and the Middle East, Muhammad Ali Albakri, regional VP, Africa and the Middle East, shared an update on the progress of the region that supports 8.2 million jobs and generates $185.8bn in GDP. Of those figures, the Middle East supports 2.4 million jobs in the region and generates $130bn in GDP.
Recent findings from IATA also point out that the Middle East’s compound annual growth rate for 2018 – 2037 will be 4.4% and will record an extra 278 million passengers to reach a total of 501 million by 2037.
“We have three different scenarios; we have an optimistic scenario, an asis scenario, and a pessimistic scenario. If you looked at all three scenarios, you see that the demand for travel by people in the region is increasing in terms of travel,” said Albakri.
“Africa and the Middle East is one of the most promising regions of all the regions worldwide.”
Despite the forward progress, however, the regional VP is quick to point that there are still challenges that need to be overcome. One such issue shared between Africa and the Middle East is the constriction of profit margins.
Where the global average profit per passengers was recorded reaching $6.12 in 2019, airlines in the Middle East saw a decline to -$4.46 per passenger, while carriers in Africa lost $1.09 per passengers.
Delving more specifically into the issues faced in the Middle East, Albakri noted that despite a reduction in oil prices that should have benefitted airlines, oil producing nations moved to recoup lost revenue through additional taxes and charges. This, in turn, impacted the Middle East’s aviation market.
The ongoing political instability of the region has also affected the Middle East’s performance, particularly when it comes to the management of the airspace. The fact that most of the airspace is managed by the military has led to severely constricted zones of operation within a small geographic area. This has resulted in an increase in the number of ATC issues across, as well as a significant increase in the average delay of flights.
Pointing a previous study done on the region, Albarki explained that the average delay per flight attributed
We are working very hard with the regulatory and governments to really address the issue of taxes and charges, to bring them down. Improving air traffic management that’s a huge priority for us in the Middle East. Skies are over congested” Ali Albakri
to ATC issues reached as high as 29 minutes. Unless addressed soon, this figure could double by 2025, resulting in over $7bn in lost productivity time to passengers, while also adding $9bn to airline operating costs.
The final challenge is around capacity-building, securing the necessary talent within the region to cope with future air demand.
“We are working very hard with the regulatory and governments to really address the issue of taxes and charges, to bring them down. Improving air traffic management that’s a huge priority for us in the Middle East. Skies are over congested,” shared Albakri.
“And capacity building in terms of knowledge and skilled resources that will be able to provide the support needed for the expected growth in the region,” he concluded.
Five key areas of focus
As part of its annual general meeting, IATA discussed and passed five resolutions that the association will now focus its efforts towards.
The first resolution to be passed with a unanimous vote called on governments to implement the
Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), as established through the UN’s International Civil Aviation Organization (ICAO).
As the first global carbon pricing scheme for any industry sector, CORSIA is set to cap net CO2 emissions of the global aviation sector at 2020 levels. Building upon the foundation formed by the initiative, this year’s IATA AGM looked to the future and established the goal to reduce net emissions to half 2005 levels by 2050. To achieve this, airlines are encouraged to introduce all aviation industry standard fuel efficiency practices, as well as participate in a long-term switchover to sustainable fuels.
The second area explored was the concept of a global airport slot system, towards which AGM called upon governments to address capacity shortages. As part of the resolution, the organisation reaffirmed that the Worldwide Slot Guidelines (WSG) is the global standard for the policies and procedures of airport slot allocation and management.
IATA members voted for the resolution aimed at developing the global deployed of Radio Frequency Identification (RFID) for baggage tracking. Part of this includes the introduction of modern baggage messaging standards that will, in turn, better track passenger baggage in real-time. To comply with the resolution, airlines are encouraged to switch to bar-coded bag tags with RFID inlays and to utilise RFID data alerts that engage processes with airports and their respective ground handlers. This, in turn, will minimise instances of the mishandling of luggage.
A concept that IATA has pushed for the past couple of years and implemented to a limited degree at select locations, the organisation has now resolved to push the global implementation of the One ID initiative. Utilising a single biometric identifier, the idea is that a passenger can be processed through an airport and throughout the entire journey, without the need for paper travel documentation. The newly enacted resolution calls for cross-collaboration between airlines, airports, and government authorities to implement a paperless passenger process utilising biometric technology.
The final resolution passed is focused on improving the air travel experience for the estimated one billion people living with disabilities worldwide. IATA’s members are committed to ensuring that passengers with disabilities have access to safe, reliable and dignified travel. As part of the resolution, airlines will work with their respective governments and other elements of the travel sector to harmonise regulations and deliver a global standard that will improve travel for people of determination.
Pieter Elbers’ KLM Royal Airlines will play host to the 76th IATA AGM in 2020.
The association has projected $28bn profit for the global air transport industry for 2019, down from $35.5bn forecasted back in December 2018.
Albakri: Africa and the Middle East is one of the most promising regions of all the regions worldwide.