The International Air Transport Association (IATA) has announced a downgrade of its 2019 outlook for the global air transport industry to a USD28 billion profit, slashing USD7.5 billion from the USD35.5 billion it forecast back in Dec-2018. That is also a decline on the re-stated 2018 net profits which IATA estimates at $30 billion.
The association, which represents some 290 airlines comprising 82% of global air traffic, says the business environment for airlines has deteriorated with rising fuel prices and a substantial weakening of world trade. In 2019, it predicts overall costs to grow by 7.4%, outpacing a forecast 6.5% rise in revenues. As a result, net margins are expected to be squeezed to 3.2% (from 3.7% in 2018). Profit per passenger will similarly decline to USD6.12 (from USD6.85 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,” said Alexandre de Juniac, IATA’s director general and CEO and its AGM in Seoul, South Korea this weekend.
Stiff competition among airlines is keeping yields from rising, and the view is that weakening of global trade is likely to continue as the US-China trade war intensifies. This primarily impacts the cargo business, but, IATA notes that 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,” added Mr de Juniac.
In 2019, IATA predicts the return on invested capital earned from airlines is expected to be 7.4% (down from 7.9% in 2018). While this still exceeds the average cost of capital (estimated at 7.3%), “the buffer is extremely thin,” says the association. Moreover, it says, 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,” says Mr de Juniac.
But what are the key drivers of this revised outlook. According to IATA these comprise:
- Costs: “The high price of fuel from 2018 (USD71.6/barrel Brent) will continue in 2019 with an average cost of USD70.00/barrel Brent expected. This is 27.5% higher than the $54.9/barrel Brent in 2017. Fuel costs will account for 25% of operating costs (up from 23.5% 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 labour, infrastructure and other costs. Overall expenses are expected to rise 7.4% to USD822 billion.
- Revenues: “Overall revenues are not keeping pace with the rise in costs. For 2019, total revenues of USD865 billion are expected (+6.5% on 2018).”
- Cargo: “After an exceptional performance in 2017 (+9.7% growth), cargo demand growth slowed to 3.4% 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 12.3% 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 2.7%, albeit slower than in 2018 (3.1%). 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 5.0% (down from 7.4% in 2018). Airlines have responded to the slower growth environment by trimming capacity expansion to 4.7% (ASKs). 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 2.1% 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.”
- 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.”