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Aviation industry still profitable despite rising costs – IATA

By Emmie Abadilla | Manila Bulletin

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 Brexi;t, 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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