The International Air Transport Association has announced a significant downgrade of its 2019 outlook for the global air transport industry to a US$28 billion profit (from $35.5 billion forecast in December 2018). That is also a decline on 2018 net post-tax profits which IATA estimates at $30 billion.
IATA says 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%, outpacing a 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 $6.12 (from $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 labor, fuel, and infrastructure,” said Alexandre de Juniac, IATA’s Director General and CEO.
“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,” de Juniac added.
In 2019, 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, IATA says.
There’s also 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.
On top of the trimmed profit forecast, IATA says “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,” the group says in a statement.
“As the U.S.-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 globalization must be the way forward,” said de Juniac.
Bruce Parkinson Editor-in-Chief
An observer and analyst of the Canadian and international travel industries for over 25 years, Bruce uses the pre-dawn hours to prepare a daily news and information package to keep industry members up to date.