IATA downgrades 2019 outlook in face of slow demand and increasing costs

The association has projected $28bn profit for the global air transport industry for 2019, down from $35.5bn forecasted back in December 2018
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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.
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.

The International Air Transportation Association (IATA) has revealed as part of the 7th IATA Annual General Meeting that it has downgraded its 2019 outlook. The association has projected $28bn profit for the global air transport industry for 2019, down from $35.5bn forecasted back in December 2018. Additionally, IATA noted that is a decline on 2018 net post-tax profits, which the association estimates at $30bn.

Factors that are negatively affecting the business environment includes the increase in fuel prices, as well as a decrease in global trade. In the case of the former, the high price of fuel from 2018, which was recorded as $71.6/barrel Brent, is expected to continue well into 2019 with an average cost of $70.00/barrel Brent expected. This is 27.5% higher than the $54.9/barrel Brent recorded back in 2017.

The airline association expected that fuel costs will account for 25% of total operating costs, a one and half percentage point increase over the 2018 figure.

Over the course of 2019, overall costs are projected to increase by 7.4%, surpassing a 6.5% increase in revenues. This in turn will likely squeeze net margins down from the 3.7% recorded to 2018, to 3.2% for the current year. Additionally, IATA expects profit per passenger will decline from $6.85 recorded in 2018 to $6.12 for 2019.

Alexandre de Juniac, IATA’s director general and CEO, said: “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. 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.”

Other projections from IATA point to a decline in return on invested capital earned. According to the association, the return on invested capital earned will drop by 0.5 percentage points from last year’s figure of 7.9%. While exceeding the average cost of capital that is estimated at 7.3%, IATA notes that the buffer is quite narrow.

Despite efforts to instil “financial resilience” throughout the global industry, there remains a substantial gap between the performance of carriers in North America, Europe and Asia-Pacific and those that are based 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.

Over in the Middle East, IATA noted that Middle East-based carriers are expected to deliver a combined net loss of $1.1bn, which is further down from the $1.0bn loss recorded in 2018. Equating to a $.01 loss per passengers and a negative net margin of -1.9%, the Middle East has faced challenges in both the business environment and to business models. The former is expected to prolong losses for airlines in the region over 2019.

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