Global airlines’ profits will drop 12 per cent this year from record levels in 2017, weighed down by rising fuel and labour costs, the International Air Transportation Association said, as geopolitical uncertainty may exacerbate the challenges.
Net income for the year is likely to reach $33.8 billion, revised down from a December forecast of $38.4bn, IATA said during a press conference in Sydney on Monday. The latest forecast compares with a record high of $38bn earned by global carriers in 2017, which was boosted by special accounting items such as one-off tax credits.
“Growing uncertainty in the direction by which global affairs will evolve could present risks to the industry’s outlook,” Alexandre de Juniac, director general of IATA, said.
The association warned that airlines will face growing operating risks from “political forces pushing a protectionist agenda,” the US withdrawal from the Iran nuclear deal, trade war discussions and lack of clarity about the impact of Brexit. The industry’s trade group, which represents some 280 carriers, revised its forecast for full-year crude prices upwards. It expects average oil prices of $70 a barrel, up from $54.9 a barrel in 2017, and higher than its previous prediction of $60.
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The industry’s ability to resist future shocks this year will be limited as airlines are expected to operate within a “thin” profit margin of 4.1 per cent, IATA said. The average profit per passenger at airlines is $7.76, with rising costs putting margins under pressure.
The airlines’ fuel bill will account for 24 per cent of total operation costs this year, up from 21.4 per cent in 2017.
The Middle East carriers are “lagging” behind their global peers’ growth but will recover this year as the rebound in oil prices helps revenue and boosts the oil-reliant economies of the region, Brian Pearce, chief economist of IATA, told reporters.
Regional carriers are also recovering after the easing of a US travel ban on some Middle East and African countries and improving relations with the US following a deal with UAE to resolve a long-standing dispute on alleged state subsidies to their carriers.
Regional carriers are expected to post a $1.3bn net profit this year, up from $1bn last year, IATA said.
“Recovering oil prices is going to do wonders for origin destination travel from the Middle East and we expect that to strengthen,” he said.
Middle Eastern airlines will see demand grow faster than capacity this year, leading to improved load factors of 76.5 per cent. Demand for air travel is predicted to grow six per cent ahead of capacity increase of four per cent.
“There’s big restructuring taking place, particularly in the Gulf. The airlines are much more cautious about adding capacity, so we expect in the Middle East to see demand running almost two percentage points ahead of capacity added so that will raise load factors,” he said. “That’s one of the key drivers of better profitability.”
The carriers will recover this year but from a lower base than their global peers.
“They’re lagging behind because they’ve been through quite a difficult time with weak commodity prices, with the travel bans, regional conflict, so it’s not surprising they’ve been lagging behind other regions in the world,” Mr Pearce said.
Global airlines’s revenues are expected to rise to $834bn, up 10.7 per cent on the year before.
Passenger yields, a measure of air fares, is expected to rise 3.2 per cent this year, for the first time since 2011, as stronger economic growth drives demand for air travel, IATA said.
“Solid profitability is holding up in 2018, despite rising costs,” Mr de Juniac said.
