Good times ahead for airlines in 2018

Barring unexpected crises - and they happen all the time - 2018 is forecast to be one of the best 12 months in years for the world’s airlines. Asia-Pacific carriers will lead the march to larger profits, the International Air Transport Association (IATA) said in December. Chief correspondent, Tom Ballantyne, reports from Geneva.

December 1st 2017

Print Friendly

Airlines in the Asia-Pacific are expected to earn up to $9 billion in profits in 2018 compared with $8.3 billion in 2017, the International Air Transport Association (IATA) forecast early this month. Read More » The more positive earnings environment was boosted by a healthy 15% improvement in cargo revenue; a welcome trend after years of profit doldrums.

Despite the increased profitability, IATA pointed to mixed results across the region. “Passenger markets have been mixed in profitability, but mostly are improving to varying degrees,” IATA director general and CEO, Alexandre de Juniac, said.

The trends range from increased airline start-ups that are keeping profitability low in ASEAN to strengthening domestic markets in China, India and Japan. The statistics report a pause in competitive pressures on long-haul connecting markets from the super-connectors,the generic label for the big three Gulf airlines and Turkish Airlines, said IATA.

The association said the global industry would report profits of $34.5 billion for the year, an upward adjustment of the June forecast of $31.4 billion. In 2018, carriers are predicted to post a record profit of $38.4 billion; the ninth consecutive year of profit for the global airline industry.

De Juniac said: “Per passenger, airlines on average will make less than $9. And the net margin of 4.7% is hard won.”

Speaking to aviation industry writers at the organization’s annual global media day in Geneva, de Juniac repeated the IATA view that the industry faced an infrastructure crisis – particularly at some Asian airports – unless governments moved to invest quickly in new airport and air traffic management facilities.

More positively, strong demand, efficiency and reduced interest payments will help airlines improve net profitability in 2018 despite rising staff costs, which are now averaging around 30% of total outlays. Return on invested capital should be 9.4%, which will exceed the industry’s average of 7.4%.

Passenger numbers are expected to increase to 4.3 billion in 2018 from four billion in 2017 and revenue passenger kilometers (RPKs) will improve by 6.0%, a decline from the 7.5% growth of 2017, but the numbers will be ahead of the average of 5.5% of the last two decades. Available Seat Kilometres (ASKs) will be up 5.7% and load factor will increase to 81.4%. Revenue from the passenger business will improve 9.2% over 2017, to $581 billion, supported by expected GDP growth of 3.1% - the strongest global expansion for seven years.

IATA chief economist, Brian Pearce, said in Geneva the industry had added 1,315 city-pair connections this year, which took their total to 20,000 for the first time and double the 10,000 city pairs of 1996. China alone added 380 of them.

Airlines took delivery of 1,683 new jets and turboprop aircraft, which resulted in a worldwide ASK jump of 6.3%. According to the published schedules for 2018, airlines are planning a significant boost to capacity of around 5.7%, a pace likely to come in below the growth in traffic, he said.

Pearce said Boeing and Airbus forecast the industry would need to attract $5 trillion to $6 trillion of new capital to buy 35,000-40,000 new aircraft in the next 20 years, so a return on capital acceptable to investors – at least equal to the cost of capital – was critical.

“Until 2015, the industry as a whole had failed to achieve this. Since 2015 returns on capital have exceeded the industry’s average cost of capital. We have upgraded our estimate of industry return on capital this year to 9.6%, down from a revised 10.3% in 2016.

IATA said cargo volumes were expected to grow by 4.5% in 2018, a fall off from the 9.3% growth of 2017 when companies had to restock inventories quickly to meet unexpectedly strong demand.

“This led cargo volumes to grow at twice the pace of expansion in world trade (4.3%). Cargo yields are expected to improve by 4.0% in 2018, which will be slower than the 5.0% of 2017. While restocking cycles are usually short-lived, the growth of e-commerce is expected to support continued momentum in the cargo business above the rate of expansion of world trade in 2018. Cargo revenues will continue to do well in 2018, reaching $59.2 billion, up 8.6% from 2017 revenues of $54.5 billion,” IATA said.

 De Juniac concluded: “For most of the airline industry’s history, its financial performance has not matched the value it created. “But in recent years, airlines have dramatically improved profitability and have collectively been in the black for seven years.

“For any other business, that’s normal. For the airline industry, it’s an extraordinary achievement. Hopefully, we are on our way to normalizing it”