Trade tensions and rising costs dent airlines' 2019 profit outlook by 21%, Iata says

Airlines are grappling with a slump in air cargo demand while Boeing's 737 Max grounding adds to concerns

Alexandre de Juniac, director general and chief executive officer of International Air Transport Association (IATA), speaks during the IATA annual general meeting in Seoul, South Korea, on Sunday, June 2, 2019. The worsening U.S.-China trade war and rising costs are putting pressure on airline earnings as the IATA cut its forecast for 2019 industry profits by more than a fifth. Photographer: Jean Chung/Bloomberg
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Escalating US-China trade tensions and higher fuel costs have squeezed airlines' margins, prompting the International Air Transport Association to slash its industry profit forecast for 2019 by 21 per cent.

Global airlines are expected to earn a combined $28 billion net profit this year, revised down from a December forecast of $35.5bn, Iata said during a conference in Seoul on Sunday. The latest forecast compares with a collective net profit of $30bn in 2018.

"Trade wars and protectionist measures are taking their toll on the cargo business and rising costs for fuel, labour and infrastructure are squeezing margins," Alexandre de Juniac, director general of Iata, said at the airline association's 75th annual meeting.

The forecast marks the tenth year that airlines are in the black but the association warned a "sweeping protectionist agenda" is on the rise and is threatening the industry's growth. The US and China, the world's two biggest economies, have imposed a series of retaliatory tariffs on various goods, denting air cargo demand and hurting the aviation industry.

Iata projects that air cargo volumes growth will stall this year at 63.1 million tonnes because of the impact of higher tariffs on trade, according to its industry outlook update released on Sunday.

Costs are also increasing. The fuel bill of airlines is forecast to jump 14.3 per cent to $206bn year on year - representing a quarter of average operating costs, Iata said.

Total costs are growing 7.4 per cent to $822bn this year, outpacing the 6.5 per cent growth in sales of $865bn in 2018.

Passenger growth, while slower, is still more robust than cargo volumes. Passenger demand is projected to grow five per cent in 2019 from a year ago, according to Iata. Yields will remain flat after a 2.1 per cent fall last year.

Middle East carriers are expected to record the weakest performance compared to other regions, according to Iata. Regional airlines are forecast to post a combined net loss of $1.1bn, slightly worse than the $1bn loss in 2018. That represents a $5.01 loss per passenger compared to a $6.12 profit per traveller globally.

Iata's lower profit forecast is based on an oil price assumption of about $70 per barrel compared to an assumption of $65 in the December, the organisation's chief economist, Brian Pearce, said at a press briefing in Seoul.

Global airlines are also suffering a financial hit from the global grounding of the Boeing 737 Max since March, after the model was involved in two deadly plane crashes within the space of five months. Investigators have pointed to a flaw in the Max flight-control system in both incidents.

"The recent Boeing 737 Max accidents have put our reputation in the spotlight," Mr de Juniac said at Iata's first annual meeting since the dual disasters. "Trust in the certification system has been damaged - among regulators, between regulators and the industry and with the flying public."

Mr de Juniac said last week that the Max is expected to remain grounded for another 10 to 12 weeks and called on regulators to act in unison to return the plane to service.

Emirates president Tim Clark anticipated the Max, of which sister budget carrier Flydubai is a customer, may not be flying globally until December.

Iata is planning to hold a meeting of Max operators, regulators and Boeing to discuss steps to return the plane to the skies and restore confidence in the jet amongst passengers and pilots.

The financial impact from the Max grounding is still unclear and depends partly on when the aircraft is approved for commercial flight.

Globally, the Max is not expected to have a major impact on airlines' profits, Mr Pearce said.

While the Max issue is weighing on the gathering of global airlines in Seoul, Iata has also voiced concerns for the continued lack of women in the industry’s top ranks.

"Women are not equally advancing into senior management. And that’s a big problem," Mr de Juniac said. Diversity is strength... Our industry must engage the female half of the world’s population much more effectively."

The association named Lufthansa Group chief executive, Carsten Spohr, as chairman of the Iata Board of Governors for a one-year term. He succeeds Qatar Airways chief executive Akbar Al Baker, who will continue to serve on the board.

KLM Royal Dutch Airlines will host Iata's next annual meeting in Amsterdam on 22-23, June 2020.