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Lower carrier profits seen as costs rise, cargo growth slows
ASIA-PACIFIC carriers are expected to rake in lower profits of US$8.2 billion this year, down from US$10.1 billion in 2017, as escalating costs and slowing cargo growth put pressure on the bottom line.
On Monday, the International Air Transport Association (Iata) downgraded its global forecast to US$33.8 billion, cutting its projection from US$38.4 billion previously, pointing to rising fuel and labour costs as well as the upturn in the interest rate cycle.
Speaking at Iata's 74th annual general meeting in Sydney, director-general Alexandre de Juniac said: "Solid profitability is holding up in 2018, despite rising costs. The industry's financial foundations are strong with a nine-year run in the black that began in 2010. And the return on invested capital will exceed the cost of capital for a fourth consecutive year."
However, he also flagged that trade protectionism spells bad news for the aviation industry, as the United States slapped metal tariffs on trading parters such as Canada, the European Union and Mexico. At the same time, US President Donald Trump appears poised to impose tariffs on Chinese goods, sparking fears of a trade war.
"For the moment, we haven't faced any significant decline in numbers in passenger or cargo related to trade wars or protectionism. But if it continues, it will happen," Mr de Juniac warned. Other risks to the industry's outlook including uncertainties surrounding the impact of Brexit and ongoing geopolitical conflicts.
Against an annual revenue of US$834 billion, the global industry will earn an average profit per passenger of US$7.76 this year, or a slim profit margin of 4.1 per cent.
In 2017, airlines earned a record US$38 billion, although this was partly boosted by one-off items such as tax credits.
North American airlines are leading the pack this year with an expected net profit of US$15 billion thanks to consolidation within the industry, while European carriers are in second place at US$8.6 billion. Middle Eastern carriers will see profit of US$1.3 billion, and Latin American airlines will nearly double profits to US$0.9 billion this year from US$0.5 billion in 2017.
African airlines are poised to rack up a loss again this year of US$0.1 billion, making it the only region bleeding red ink.
In tandem with climbing oil prices, the average price of jet fuel is expected to hit US$84 per barrel for 2018, surging nearly 26 per cent year-on-year. Fuel, one of the biggest components of operating costs for airlines, will account for some 24 per cent of total costs. Similarly, the world's airlines are expected to see a higher wage bill as they ramp up hiring over the next twelve months. Overall unit costs are projected to rise 5.2 per cent this year, accelerating from just 1.2 per cent last year.
Cushioning some of the impact of rising costs is buoyant demand. Passenger demand is expected to grow by 7 per cent this year on the back of stronger economic growth, while yields will trend into positive territory for the first time since 2011 with growth of 3.2 per cent.
Cargo demand will grow by 4 per cent, moderating from the 9.7 per cent growth clocked up last year as the restocking cycle for businesses comes to an end. As companies rushed to respond to the spike in demand, they had turned to air transport to swiftly replenish inventory, propelling solid cargo growth last year.
In particular, the cyclical rise in the cargo markets has been a boon for Asia-Pacific carriers, which account for nearly 40 per cent of global cargo capacity.
Global cargo yields will grow by 5.1 per cent this year, versus 8.1 per cent previously, Iata said.
Meanwhile, the return on invested capital is expected to ease to 8.5 per cent this year, down from 9 per cent last year, while the average cost of capital will rise to 7.7 per cent on the back of higher bond yields. Last year, the average cost of capital was 7.1 per cent.
In his speech, Mr de Juniac also touched on other challenges facing the industry today, such as infrastructure constraints, high taxes and ill-conceived regulation. In certain countries in South-east Asia, air traffic congestion remains a pressing concern, he noted. "We are urging governments to make a decision. For a new system to be implemented, it takes five to 10 years."
Iata represents some 290 airlines, accounting for 82 per cent of air traffic worldwide.
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