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A squeeze on airline profits

International Air Transport Association on June 2 released a report highlighting a downgrade of its 2019 profit outlook for the global air transport industry. The association, which represents some 290 airlines comprising 82 per cent of global air traffic, projects the sector’s 2019 profit will reach US$28 billion, a decrease of 11.8 per cent from the $35.5 billion mark forecasted in December 2018.

IATA points to rising fuel prices and what it describes as a “substantial weakening” of world trade, including the effects of a U.S.-China trade war. Its projections do not become rosier, including an expectation, that in 2019, overall costs will grow by 7.4 per cent, outpacing a 6.5 per cent rise in revenues for the year. From these numbers, IATA expects net margins “to be squeezed” to 3.2 per cent (from 3.7 per cent in 2018 ) with profit per passenger also facing a decline to $6.12 (from $6.85 in 2018).

Alexandre de Juniac, IATA’s CEO, notes 2019 will represent the tenth consecutive year in the black for the airline industry. But he continues to point to rising competition among airlines and the impact of weaker trade on cargo, which can trickle into passenger traffic. “Airlines will still turn a profit this year, but there is no easy money to be made,” said de Juniac. He also states airlines have broken the boom-and-bust cycle, that a downturn no longer plunges the industry into a deep crisis – even if investors may not see their normal levels of profitability over the past decade.

Fuel costs will account for 25 per cent of operating costs (up from 23.5 per cent in 2018), according to IATA, which also projects non-fuel unit will rise to 39.5 cents per available tonne kilometer from 39.2 cents, because of higher labour, infrastructure and other costs. IATA does not specifically mention the 737 MAX grounding in its profit-projection report, but its effects represent both immediate and near-future costs for many significant players.

After what IATA describes as an exceptional performance in 2017 (+9.7 per cent growth), cargo demand growth slowed to 3.4 per cent in 2018. IATA anticipates this sector will be flat in 2019 with cargo volumes of 63.1 million tonnes (63.3 million tonnes in 2018) because of the impact of higher tariffs on trade. Cargo yields are expected to be flat in 2019 after a 12.3 per cent improvement in 2018, explains IATA, as cargo load factors fall further, and supply-demand conditions weaken.

Passenger demand growth is expected to be more robust than for cargo, according to IATA, which points to global GDP growth that is expected to remain relatively strong at 2.7 per cent, albeit slower than in 2018 (3.1 per cent). Governments and central banks have responded to slower economic growth with more supportive policies, explains IATA, which is providing an offset to trade weakness. But IATA continues to explain that economic growth and household incomes will still grow more slowly, so total passenger demand, measured in revenue passenger kilometers, is expected to grow by 5.0 per cent (down from 7.4 per cent in 2018). Airlines have responded to the slower growth environment by trimming capacity expansion to 4.7% (ASKs), states IATA, which also notes total passenger numbers are expected to rise to 4.6 billion (up from 4.4 billion in 2018).

All regions are expecting a reduction in profitability with the exception of North America and Latin America, according to IATA. The association states North American carriers will deliver the strongest financial performance with a $15 billion post tax profit (up from $14.5 billion in 2018). That represents a net profit of $14.77 per passenger, according to IATA, which is described as marked improvement from just seven years earlier ($2.3 in 2012). IATA concludes that net margins, forecast at 5.5 per cent, are down from 2018 levels owing to what the association describes as higher than expected fuel costs and slowing growth.