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Airlines face margin squeeze due to rising costs: IATA chief

Association cuts 2019 industry profit to US$28b from earlier estimates of US$35.5b as worsening US-China trade war and higher overall costs put pressure on airline earnings

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Noting that 2019 will be the 10th consecutive year in the black for the airline industry, Mr de Juniac said while airlines will still turn a profit this year, there is no easy money to be made.

Seoul

WEIGHED down by a potential weakening of global trade and rising fuel prices, the global aviation industry will generate a lower profit of US$28 billion, down from earlier estimates of US$35.5 billion.

The 2019 forecast is also below the US$30 billion profit the industry earned in 2018.

These latest numbers were unveiled by the International Air Transport Association (IATA) on Sunday at its 75th annual general meeting in Seoul.

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"The business environment for airlines has deteriorated with rising fuel prices and a substantial weakening of world trade," the association said in a statement.

The organisation, which represents 290 airlines comprising 82 per cent of global air traffic, said that overall costs are expected to grow by 7.4 per cent this year, outpacing a 6.5 per cent rise in revenues.

As a result, net margins could be squeezed to 3.2 per cent, compared to 3.7 per cent in 2018.

Still, 2019 will be the 10th consecutive year in the black for the airline industry, noted Alexandre de Juniac, IATA's director-general and CEO.

"But margins are being squeezed by rising costs across the board, including labour, fuel and infrastructure," he warned.

"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."

Return on invested capital for airlines as a whole will be 7.4 per cent this year, down from 7.9 per cent in 2018. While this still exceeds the average cost of capital (estimated at 7.3 per cent), the buffer is extremely thin.

Also, there are major gaps in profitability between performance of airlines by regions, with Asia-Pacific and North American carriers doing much better than their African and Latin American counterparts.

But the industry has, by and large, broken out of its notorious boom-and-bust cycle, Mr de Juniac noted: "A downturn in the trading environment no longer plunges the industry into a deep crisis.

Still, 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."

During his keynote address to some 1,000 delegates gathered at the IATA AGM and World Air Transport Summit, Mr de Juniac also touched on various other topics which he said were key to the organisation's vision for the future.

These include the need for more efficient infrastructure in order to beat air and landside congestion; the need to use more technology to improve the passenger experience; and the need for more gender diversity in the aviation business.

Mr de Juniac also addressed the issue of air safety following the crashes of the two Boeing 737 Max jets over the past year which killed 346 people.

He noted that the accidents, and the uncoordinated responses by aviation authorities in the aftermath, had put the reputation of the industry in the spotlight.

"Serious questions arise with two accidents of a new aircraft model in quick succession," he said.

"Trust in the certification system has been damaged - among regulators, between regulators and the industry and with the flying public. Everyone must be confident that processes are sufficiently thorough not to warrant duplicative and redundant examinations jurisdiction by jurisdiction.

"While Boeing and the US Federal Aviation Administration are at centre stage, the close collaboration of counterpart manufacturers and civil aviation authorities around the world is essential. Any rift between regulators is not in anybody's interest."

He also addressed concerns about aviation's impact on the environment. The industry is estimated to account for 2 per cent of global CO2 emissions. Mr de Juniac said his industry had taken concerted steps, via its 2016 Carbon Offsetting and Reduction Scheme for International Aviation, to achieve carbon neutrality by 2020 and halve its net emissions relative to 2005 levels by 2050. But government and airline partners must also help, he added.

"Governments also need to act. They should build supportive policies to invigorate the sustainable fuels industry. But too many are focused on punitive environment taxes instead."

He said that the combination of new technology, more fuel efficient planes, better airspace management and the development of sustainable fuels could deliver real emissions reductions and generate US$40 billion in climate financing by 2035.

READ MORE: Airlines urge regulators to work together on lifting 737 MAX ban