Business environment worsens with weakening of world trade

IATA predicts slight decline in global aviation profits this year

_By Raquib Siddiqi01 Jul, 2019 | 504 Views|-+
Seoul : The International Air Transport Association (IATA) announced a downgrade of its 2019 outlook for the global air transport industry to a USD 28 billion profit (from USD 35.5 billion forecasts in December 2018).

That is also a decline on 2018 net post-tax profits, which IATA estimates at USD 30 billion (re-stated).

The business environment for airlines has deteriorated with rising fuel prices and a substantial weakening of world trade. In 2019 overall costs are expected to grow by 7.4 per cent, outpacing a 6.54 per cent, rise in revenues. As a result, net margins are expected to be squeezed to 3.24 per cent, (from 3.74 per cent, in 2018). Profit per passenger will similarly decline to USD 6.12 (from USD 6.85 in 2018).

"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. 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," said Alexandre de Juniac, Director General and CEO, IATA.

In 2019, the return on invested capital earned from airlines is expected to be 7.44 per cent, (down from 7.94 per cent, in 2018). While this still exceeds the average cost of capital (estimated at 7.34 per cent,), the buffer is extremely thin. Moreover, the job of spreading financial resilience throughout the industry is only half complete with a major gap in profitability between the performance of airlines in North America, Europe and Asia-Pacific and the performance of those 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 cost-of-capital returns, but only just," said de Juniac.

Costs

The high price of fuel from 2018 (USD 71.6/barrel Brent) will continue in 2019 with an average cost of USD 70.00/barrel Brent expected. This is 27.54 per cent, higher than the USD 54.9/barrel Brent in 2017. Fuel costs will account for 25 per cent of operating costs (up from 23.54 per cent, in 2018).

Non-fuel unit costs are expected to rise to 39.5 cents per available tonne kilometre from 39.2 cents, because of higher labor, infrastructure and other costs.

Overall expenses are expected to rise 7.4 per cent to USD 822 billion.

Revenues

Overall revenues are not keeping pace with the rise in costs. For 2019, total revenues of USD 865 billion are expected (+6.5 per cent on 2018).

Cargo

After an exceptional performance in 2017 (+9.74 per cent, growth), cargo demand growth slowed to 3.44 per cent, in 2018. It is anticipated to 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 12.34 per cent, improvement in 2018, as cargo load factors fall further, and supply-demand conditions weaken.

Passenger

Passenger demand growth is expected to be more robust than for cargo. This is because global GDP growth is expected to remain relatively strong at 2.74 per cent, albeit slower than in 2018 (3.14 per cent). Governments and central banks have responded to slower economic growth with more supportive policies, which is providing an offset to trade weakness.

But economic growth and household incomes will still grow more slowly, so total passenger demand, measured in revenue passenger kilometers, is expected to grow by 5.04 per cent, (down from 7.44 per cent, in 2018). Airlines have responded to the slower growth environment by trimming capacity expansion to 4.74 per cent.

Total passenger numbers are expected to rise to 4.6 billion, up from 4.4 billion in 2018.

Passenger yields are expected to remain flat in 2019 after a 2.14 per cent, fall in 2018.

Cash flow

Free cash flow, which enables investors to be paid and debt to be reduced, is expected to disappear at the industry level because cash from operations will be reduced by slower demand growth and higher costs. Debt-to-earnings ratios, which had fallen significantly are starting to rise once more.

Average debt-to-earnings ratios for airlines in Europe and North America are not far above the levels rated as investment grade by the credit rating agencies, which provides a degree of security in the event of a deterioration in the business environment. Africa, Middle East and Latin America still have high levels of debt (6 to 7 times annual earnings) which leaves them more vulnerable to cash flow shocks (increasingly likely) or rising interest rates.

Risk factors

Downside risks are significant. Political instability and the potential for conflict never bodes well for air travel. Even more critical is the proliferation of protectionist measures and the escalation of trade wars.

As the US-China trade war intensifies, the immediate risks to an already beleaguered air cargo industry increase. And while passenger traffic demand is holding up, the impact of worsening trade relations could spillover and dampen demand.

"Aviation needs borders that are open to people and to trade. Nobody wins from trade wars, protectionist policies or isolationist agendas. But everybody benefits from growing connectivity. A more inclusive globalisation must be the way forward," said de Juniac.

The business of freedom

"Aviation is the business of freedom. For 4.6 billion travellers it is their freedom to explore, build business or reunite with friends and family. The economic benefit of this is 65 million jobs and a USD 2.7 trillion boost to the global economy. Aviation is growing responsibly to meet this demand. From 2020, for example, the industry will achieve carbon-neutral growth. And that is on the way to the much more ambitious goal of cutting emissions to half 2005 levels by 2050. We are determined to deliver sustainable global connectivity through aviation," said de Juniac.

Some key indicators of the strength of global connectivity include:

The 2019 average return airfare (before surcharges and tax) is expected to be USD 317 (2018 dollars), which is 614 per cent, below 1998 levels after adjusting for inflation. It is also USD 10 lower than in 2018 in real terms.

Average airfreight rates in 2019 are expected to be USD 1.86/kg (2018 dollars) which is a 624 per cent, fall on 1998 levels.

The number of routes served by aviation is forecast to grow to over 58,000 in 2019, up from 52,000 in 2014.

The global spend on tourism enabled by air transport is expected to grow by 7.8 per cent in 2019 to USD 909 billion.

Airlines are expected to take delivery of more than 1,770 new aircraft in 2019, many of which will replace older and less fuel-efficient aircraft. This will expand the global commercial fleet by 3.674 per cent, to over 30,697 aircraft. This will help improve fuel efficiency by 1.74 per cent, to 22.4 liters/100 available tonne kilometres.

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