The International Air Transport Association (IATA) announced a downgrade of its 2019 outlook for the global air transport industry to a $28 billion profit from $35.5 billion forecast in December 2018.
That is also a decline in 2018 net post-tax profits which IATA estimates at $30 billion.
The business environment for airlines has deteriorated with rising fuel prices and a substantial weakening of world trade.
For example, this year’s overall costs are expected to grow by 7.4%, outpacing a 6.5% rise in revenues.
And as a result, net margins are expected to be squeezed to 3.2% from 3.7% in 2018. Profit per passenger will similarly decline to $6.12 from $6.85 in 2018.
According to Alexandre de Juniac, IATA Director General and CEO, “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. 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.
De Juniac, who was speaking during the IATA general assembly meeting in Seoul, South Korea last week, further said that airlines will still turn a profit this year, but there is no easy money to be made.
In 2019, the return on invested capital earned from airlines is expected to be 7.4% (down from 7.9% in 2018). While this still exceeds the average cost of capital estimated at 7.3%, the buffer is extremely thin. Moreover, the job of spreading financial resilience throughout the industry is only half complete with a major gap in profitability between the performance of airlines in North America, Europe and Asia-Pacific and the performance of those in Africa, Latin America and the Middle East.
“The good news is that airlines have broken the boom-and-bust cycle and 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,” said Nick Careen IATA’s Senior Vice president in charge of Air ports passenger and cargo security
According to the experts like, said Brian Pearce, IATA’s Chief Economist, Airlines will still create value for investors in 2019 with above cost-of-capital returns, but only just.
Passenger demand to increase
Meanwhile, Passenger demand growth is expected to be more robust than for cargo. This according to IATA is because global GDP growth is expected to remain relatively strong at 2.7%.
Overall 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.
By Peterson Tumwebaze