GENEVA – The International Air Transport Association (IATA) forecasts that African airlines are to make a loss of more than N$4.2 billion (US$300 million) in 2019, which is in stark contrast to the rest of the global airline industry that is anticipated to report a net profit of close to half a trillion Namibia dollars (US$35.5 billion) next year.
The expected loss for African carriers is actually a slight improvement from a net loss of N$5.6 billion (US$400 million) in 2018 while the rest of the world is slightly ahead of the N$448 billion (US$32.3 billion) expected net profit this year. The main factors for the continued losses of African airlines are low load factors and high regulatory costs.
The expected loss for next year makes Africa the weakest aviation region in the world, a position it has held for the past four years. IATA’s chief economist, Brian Pearce, in his global economic outlook presented here yesterday, said Africa’s performance is improving, but only slowly.
Some good news for African airlines is that losses are expected to be cut in 2019 as fuel prices decrease and as the region benefits from higher-than-average yields and lower operating costs in some categories. However, Pearce cautioned that few African airlines are able to achieve adequate load factors to generate profits.
“Lower spot fuel prices will bring some relief from intensifying downward pressure on airline operating margins, which squeezed margins in the second and third quarters of 2018. Fourth quarter results should show some improvement but note that the margins are still significantly higher than just four years ago,” said Pearce.
He added that a strong US dollar has caused problems for airlines in a number of economies, particularly the big emerging aviation markets. Key airline costs, such as fuel and aircraft, are priced in US dollars which leads to a large rise in operating costs. Additional factors that make flying in Africa significantly more expensive than the rest of the world include high taxes and the cost of jet fuel which is more than 30 percent more expensive win Africa compared to the rest of the world. “Exchange rate weakness against the US dollar is also a problem for those that have US dollar debt and local currency revenues,” Pearce added.
Pearce added that lower oil prices and solid, albeit slower, economic growth (+3.1 percent) are extending the run of profits for the global airline industry, after profitability was squeezed by rising costs in 2018.
It is expected that 2019 will be the tenth year of profit and the fifth consecutive year where global airlines deliver a return on capital that exceeds the industry’s cost of capital, creating value for its investors.
“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. But there are downside risks as the economic and political environments remain volatile,” said Alexandre de Juniac, IATA’s Director General and CEO.
The 2019 industry outlook is based on an anticipated average oil price of US$65/barrel (Brent) which is lower than the US$73/barrel (Brent) experienced in 2018, following the increase in US oil output and rising oil inventories. This, Pearce noted, is welcome relief for airlines which have seen jet fuel prices fall, albeit at a slower pace owing to the impact of low-sulfur environmental measures undertaken by the marine sector that have increased demand for diesel (which competes with jet fuel for refinery capacity).
Nonetheless, Pearce points out that jet fuel prices are expected to average US$81.3/barrel in 2019, lower than the US$87.6/barrel average for 2018.
The full impact of this decline will be delayed due to heavy levels of hedging in some regions. Fuel is expected to account for 24.2 percent of the average airline’s operating costs (an increase from 23.5 percent forecast for 2018). Fuel hedging is a contractual tool some large fuel consuming companies, such as airlines, use to reduce their exposure to volatile and potentially rising fuel costs.
All regions, except Africa, are expected to report profits in 2018 and 2019. Carriers in North America continue to lead on financial performance, accounting for nearly half of the industry’s total profits. Financial performance is expected to improve compared to 2018 in all regions except for Europe, where improvement has been delayed by the high degree of fuel hedging.
North American carriers are expected to deliver the strongest global financial performance in 2019, with a N$232 billion (US$16.6 billion) net profit, up from about N$206 billion (US$14.7 billion) in 2018.
“That is a six percent net margin and represents a net profit of US$16.77 per passenger, which is a marked improvement from just six years earlier. Net margin is up from 2018 (5.7 percent) as low levels of fuel hedging allows lower prices to impact immediately. Profits are further buffered by high load factors and ancillary revenues,” Pearce noted.