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The International Air Transport Association (IATA) has downgraded its 2019 outlook for the global air transport industry, noting how the business environment for airlines has deteriorated with rising fuel prices and a substantial weakening of world trade.

The new forecast is a US$28 billion profit for the year, down from the $35.5 billion forecast in December 2018, and a decline on 2018 net post-tax profits which IATA estimates at $30 billion (re‑stated).

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%, down 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.”

“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.

IATA predicts total revenues for 2019 of $865 billion, higher by 6.5% from 2018, but they are not keeping pace with the rise in costs, expected to expand 7.4% to $822 billion.

For cargo, after an exceptional 9.7% demand growth in 2017,  growth slowed to 3.4% in 2018. It is anticipated to be flat in 2019 with cargo volumes of 63.1 million tonnes (63.3 million tonnes in 2018) because of the impact of higher tariffs on trade.

Cargo yields are expected to be flat in 2019 after a 12.3% improvement in 2018 as cargo load factors fall further and supply-demand conditions weaken.

Passenger demand growth is expected to be more robust than for cargo, as global GDP growth is expected to remain relatively strong at 2.7%, albeit slower than in 2018 (3.1%).  Total passenger demand is expected to grow by 5.0% (down from 7.4% in 2018).

Total passenger numbers are expected to rise to 4.6 billion (up from 4.4 billion in 2018). Passenger yields are expected to remain flat in 2019 after a 2.1% fall in 2018.

Downside risks are significant, said IATA, adding that 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.

“As the US-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,” IATA warned.

Regional forecasts

All regions are expecting a reduction in profitability except for North America and Latin America. Regional differences are significant.

Asia-Pacific airlines will deliver a net profit of $6.0 billion (down from $7.7 billion in 2018). That represents a net profit per passenger of $3.51 and a net margin of 2.3%. The region is showing very diverse performance. Accounting for about 40% of global air cargo traffic makes the region the most exposed to weakness in world trade, and that, combined with higher fuel costs, is squeezing the region’s profits.

North American carriers will deliver the strongest financial performance with a $15 billion post-tax profit (up from $14.5 billion in 2018). That represents a net profit of $14.77 per passenger. Net margins, forecast at 5.5%, are down from 2018 levels owing to higher than expected fuel costs and slowing growth.

European airlines will deliver a net profit of $8.1 billion (down from $9.4 billion in 2018). That represents a net profit per passenger of $6.75 and a net margin of 3.7%—both are the second strongest industry results, but below what North American carriers earn.

Middle Eastern airlines will deliver a combined net loss of $1.1 billion (slightly worse than the $1.0 billion loss in 2018). That equates to a $5.01 loss per passenger and a negative net margin (-1.9%).

Latin American airlines will deliver a net profit of $0.2 billion. This reflects a moderate improvement from the $0.5 billion loss in 2018, as the recovery of the Brazilian economy is offsetting higher oil prices. With a $0.50 profit per passenger, the region’s net margin is expected to be a thin 0.4%.

African airlines will deliver a $0.1 billion loss (unchanged from 2018), continuing a weak trend into its fourth year. Each passenger carried is expected to cost the carriers $1.54, leading to a -1.0% net margin.

Photo by Bilal EL-Daou

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