Edgar Brandt
GENEVA - The International Air Transport Association (IATA) forecasts that the global airline industry will realise a return on invested capital of 8.6 percent in 2019, which is quite similar to returns realised in 2018. At last week’s Global Media Day in Geneva, IATA revealed that industry net profit is expected to be US$35.5 billion in 2019, slightly ahead of the US$32.3 billion expected net profit in 2018 which was revised down from US$33.8 billion forecast in June at IATA’s annual general meeting in Australia. For 2019, the margin on the industry’s net post-tax profits is expected to remain at four percent, which is quite similar to last year.
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 10th year of profit and the fifth consecutive year where 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.
A key performance drivers in 2019 is economic growth as global GDP is forecast to expand by 3.1 percent in 2019 (marginally below the 3.2 percent expansion in 2018). This slower but still robust growth, said IATA, is a main driver of continued solid profitability. There are significant downside risks to growth from trade wars and political uncertainties such as with BREXIT, but the consensus view is that these factors will not offset the positive impetus from expansionary fiscal policy and growing business investment in major economies.
Another major driver will be fuel costs as 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, said IATA, 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, 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).
Furthermore, total employment by airlines is expected to reach 2.9 million in 2019, up 2.2 percent in 2018. Wages are also rising, reflecting the tightness of labour markets, and it is expected that unit labour costs will increase by 2.1 percent in 2019 after a long period of stability. Aviation jobs are getting more productive and in 2019, IATA expects productivity to increase by 2.9 percent to 535 000 available tonne kilometers/employee.
Global passenger traffic (RPKs) is expected to grow six percent in 2019, which will outpace the forecast capacity (ASKs) increase of 5.8 percent, and remains above the 20-year trend growth rate. This in turn will increase load factors and support a 1.4 percent increase in yields (partially clawing back the 0.9 percent fall experienced in 2018). Passenger revenues, excluding ancillaries, are expected to reach US$606 billion (up from US$564 billion in 2018).
On the cargo front, the 3.7 percent annual increase in cargo tonnage to 65.9 million tonnes is the slowest pace since 2016, reflecting the weak world trade environment impacted by increasing protectionism. Cargo yields are expected to grow by 2.0 percent. This is well below the exceptional 10 percent yield growth in 2018. It does, however, continue the recent strengthening of the cargo business, since cost increases are lower. Overall cargo revenues are expected to reach US$116.1 billion (up from US$109.8 billion in 2018).