Strong demand, efficiency and reduced interest payments will help airlines improve net profitability in 2018 despite rising costs, says the International Air Transport Association (IATA) in its latest forecast. It forecasts global industry net profit to rise to USD38.4 billion in 2018, an improvement from the USD34.5 billion expected net profit in 2017 (which is a further revision from USD$31.4 billion forecast in Jun-2017). Next year is expected to be the fourth consecutive year of sustainable profits with a return on invested capital (9.4%) exceeding the industry’s average cost of capital (7.4%).
- IATA predicts global industry net profit to rise to USD38.4 billion in 2018, up from USD34.5 billion expected in 2017.
- Global passenger numbers are expected to increase to 4.3 billion in 2018, according to the IATA forecast.
- Biggest challenge to profitability in 2018 is rising costs, mainly dominated by escalating fuel and labour costs.
- All regions of the world are expected to report improved profitability in 2018 and see demand growth outpace capacity expansion.
IATA predicts global passenger numbers to increase to 4.3 billion in 2018. Passenger traffic (revenue passenger kilometers or RPKs) is expected to rise +6.0% (slightly down on the +7.5% growth of 2017 but still ahead of the average of the past 10-20 years of 5.5%), which will exceed a capacity expansion (available seat kilometers or ASKs) of +5.7%.This will push up the average load factor to a record 81.4%, helping to drive a 3.0% improvement in yields, predicts IATA. Revenues from the passenger business are expected to grow to USD581 billion (+9.2% on USD532 billion in 2017). The strong performance of the passenger business is supported by expected robust GDP growth of 3.1% (the strongest since 2010), says IATA.
Meanwhile, the cargo business continues to benefit from a strong cyclical upturn in volumes, with some recovery in yields, says IATA. It predicts volumes to grow by +4.5% in 2018 (down from the +9.3% growth of 2017). Although down significantly on 2017, this year’s boost was a result of companies needing to restock inventories quickly to meet unexpectedly strong demand and which led cargo volumes to grow at twice the pace of the expansion in world trade (4.3%). IATA predicts cargo yields to improve by +4.0% in 2018 (again slower than the +5.0% in 2017) with growth of e-commerce expected to support continued momentum in the sector and boosting revenues to USD59.2 billion (up +8.6% from 2017 revenues of USD54.5 billion).
Alexandre de Juniac, IATA’s director general and CEO is spot on when he says “these are good times for the global air transport industry”. More people than ever are traveling. The demand for air cargo is at its strongest level in over a decade. Employment is growing. More routes are being opened. Airlines are achieving sustainable levels of profitability. However, this is a cyclical industry and the next big crisis could be just around the corner, and as Mr de Juniac notes it is already “being challenged on the cost front by rising fuel, labuor and infrastructure expenses”.
The biggest challenge to profitability in 2018 is rising costs. Oil prices are expected to average USD60/barrel for Brent Crude in 2018 (up +10.7% from USD54.2/barrel in 2017), predicts IATA, while jet fuel prices are expected to rise even more quickly to USD73.8 per barrel (up +12.5% on USD65.6 in 2017). This will see fuel bills rise to 20.5% of total costs in 2018 (up from 18.8% in 2017). IATA notes that labour costs have been accelerating strongly and are now “a larger expense item” than fuel (30.9% in 2018), while it sees overall unit costs to grow by +4.3% in 2018 (a significant acceleration on the +1.7% increase in 2017) and which will outpace an expected +3.5% increase in unit revenues.
A strong performance over recent years has enabled the industry to pay dividends and to reduce debt. The debt to EBITDAR (earnings before interest, tax, depreciation, amortisation and rentals) ratio has fallen from 3.7x in 2016 to 3.5x in 2017, notes IATA and it’s expected to fall further to 3.4x in 2018. Despite the squeeze in operating margins (from 8.3% in 2017 to 8.1% in 2018), the net margin is expected to grow to 4.7% (from 4.6% in 2017) because of lower interest payments driven by the lower debts. This, says IATA, will see net profits rise to the record USD38.4 billion in 2018 (up from USD34.5 billion in 2017) figure it is forecasting.
All regions of the world are expected to report improved profitability in 2018 and see demand growth outpace capacity expansion with carriers in North America continuing to lead on financial performance, accounting for nearly half of the industry’s total profits. Airlines in this region are forecast to generate net profits of USD16.4 billion in 2018 (up from $15.6 billion in 2017). Market conditions are expected to continue to be strong, says IATA, with announced capacity growth (+3.4%) likely to be slightly less than our traffic forecast of 3.5%.
Elsewhere, airlines in Asia Pacific are forecast to see profits of USD9 billion in 2018 (up from $8.3 billion in 2017); Europe’s airlines USD11.5 billion in 2018 (up from USD9.8 billion in 2017); Latin American airlines USD900 million (up from USD700 million in 2017); Middle East carriers USD600 million (double the USD300 million in 2017); while African carriers are expected to continue to make small losses of USD100 million in 2018 in line with 2017.
As The Blue Swan Daily reported earlier this week unique city pairs served by airlines grew to over 20,000 in 2017 (+1,351 on 2016 and double the 10,000 city pairs served in 1996). IATA says international tourists travelling by air are expected to spend more than USD750 billion in 2018, a rise of 15% in just over two years with the value of goods carried by airlines expected to exceed USD6.2 trillion in 2018, representing 7.4% of world GDP. IATA also notes direct employment by airlines will exceed 2.7 million worldwide in 2018. This means that on average across the world each airline employee will generate over USD109,000 of gross value added (the firm-level equivalent to GDP), which is considerably higher than the economy-wide average.
Highlights from IATA’s 2018 performance forecast include:
- A slight decline in the operating margin to 8.1% (down from 8.3% in 2017)
- An improvement in net margin to 4.7% (up from 4.6% in 2017)
- A rise in overall revenues to USD824 billion (+9.4% on 2017)
- A rise in passenger numbers to 4.3 billion (+6.0% on 2017)
- A rise in cargo carried to 62.5 million tonnes (+4.5% on 2017)
- Slower growth for passenger (+6.0% in 2018) and cargo (+4.5% in 2018) demand
- Average net profit per departing passenger of USD8.90 (up from USD8.45 in 2017)