Contributor - Europe

Cathy Buyck

The International Air Transport Association predicts that 2019 will mark the tenth year of profit and the fifth consecutive year where airlines deliver a return on capital that exceeds the industry’s cost of capital. However, IATA cut its profit target for the global aviation market this year for a second time. The industry’s main trade body said on Wednesday that net income for 2018 will likely total $32.3 billion, which compares to a forecast of $33.8 billion in June and a December forecast for $38.4 billion.

 


“This year has been tougher than expected,” IATA chief economist Brian Pearce told AIN at the body’s global media day in Geneva. “We saw a squeeze on airline profits because of an acceleration of costs, mainly a rise in fuel prices, higher labor costs and increased infrastructure costs.”&nbsp;All regions will post a lower than anticipated financial performance, though hedging will shield Europe from the higher fuel prices, in contrast to airlines in the U.S., India or China, he noted.

 


IATA director general and CEO Alexandre de Juniac downplayed the second profit downgrade, pointing out to AIN it represented only a minor adjustment and the industry would earn an average net profit margin of 3.9 percent for 2018. IATA expects passenger traffic measured in RPKs to grow 6.5 percent, down from 8 percent last year, and revenue will increase 8.7 percent year-on-year to $821 billion.

 


For 2019, de Juniac remains “cautiously optimistic.” &nbsp;The IATA forecast released today calls for the world’s airlines collectively—including non-IATA members like Ryanair, AirAsia,&nbsp;and Southwest—to make a $35.5 billion net profit on revenues of $885 billion, up 7.7 percent 2018. It expects margin on net profit to reach 4 percent and return on invested capital 8.6 percent, unchanged from 2018. Finally, it expects passenger numbers to reach 4.59 billion, up from 4.34 billion this year.

 


“We had expected that rising costs would weaken profitability in 2019. But the sharp fall in oil prices and solid GDP growth projections have provided a buffer. So we are cautiously optimistic that the run of solid value creation for investors will continue for at least another year,” said de Juniac. But, he warned, “economic and political environments remain volatile” and the buffer between profit and loss remains thin. “A dollar for a new tax, an increase in charges or shift in the oil price can eat away at the $7.75 per passenger profit very quickly,” he said.

 


Protectionism and the imposition of tariffs stand as major worries, Pearce explained. Travel growth will inevitably slow, and IATA anticipates a 6 percent RPK growth in 2019, which, he noted “is still above the 20-year average.” The effect on air cargo will prove worse and IATA expects FTKs to increase only 3.7 percent, compared with 4.1 percent in 2018 and 9.1 percent in 2017.

 


One major short-term positive for the industry relates to fuel, the cost of which has fallen sharply in price over the past month, Pearce said. However, airlines will not feel the full benefit of lower oil prices in 2019 because of the delay caused by hedging in some regions, Europe in particular.

 


North American airlines will, once again, account for the largest chunk of the industry’s net profits. Forecasts call for them to collectively earn $16.6 billion in 2019, or $16.77 per passenger—up from $14.7 billion, or $15.08 per passenger on average this year.

 


IATA expects all regions except Africa to report profits next year and for financial performance to improve compared with 2018 in all regions except Europe.

 


IATA’s forecasts call for European operators to earn $7.4 billion jointly and $6.40 per passenger next year, slightly down from $7.5 billion and $6.65, respectively. Airlines in the U.S. continue to benefit from consolidation, a process that has “stopped in Europe,” de Juniac. “There are some bankruptcies of smaller airlines but consolation between majors stopped when IAG was formed and British Airways merged with Iberia.”

 


De Juniac told AIN he could not comment whether Europe, with its multitude of airlines, is a better environment for consumers than the U.S. market, as often suggested by officials of the European Commission. “Fares have also declined in the US.,” he said. “What is remarkable though is that the low-cost carrier phenomenon has completely stopped there, in contrast to Europe and Asia. There are 10 LCCs in Europe. That is a lot for a market that size.”

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