Wed, 24 Jul 2019

Slowing demand and rising costs are squeezing airline profits, according to a report by the International Air Transport Association.

The industry body announced at its 75th annual general meeting in Seoul, South Korea in May that it had downgraded its 2019 outlook for the global air transport industry to $28bn profit from its previous forecast of a $35bn profit.

African airlines are expected to deliver a $0.1bn loss in 2019 - unchanged from 2018 - continuing a weak trend into its fourth year. Each passenger carried on an African airline is expected to cost the carriers $1.54, leading to a -1% net margin.

Breakeven load factors for African airlines are relatively low, as yields are a little higher than average and costs are lower, according to the Iata report.

Africa improving - slowly

However, few airlines in the region are able to achieve adequate load factors, which averaged the lowest globally at 60.7% in 2018. Overall, industry performance is improving in Africa, but only slowly, according to Iata.

"Globally, the business environment for airlines has deteriorated with rising fuel prices and a substantial weakening of world trade. In 2019 overall costs are expected to grow by 7.4%, outpacing a 6.5% rise in revenues," according to Iata.

"As a result, globally, 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."

Iata found that stiff competition among airlines keeps yields from rising. Furthermore, weakening 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.

No easy money

"Airlines will still turn a profit this year, but there is no easy money to be made. The good news is that airlines have broken the boom and bust cycle. A downturn in the trading environment no longer plunges the industry into a deep crisis," noted De Juniac.

"But 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 but only just."

In his view, downside risks are significant.

"Political instability and the potential for conflict never bodes well for air travel. Even more critical is the proliferation of protectionist measures and the escalation of trade wars," he cautioned.

"Aviation needs borders that are open to people and to trade. Nobody wins from trade wars, protectionist policies or isolationist agendas. But everybody benefits from growing connectivity. A more inclusive globalisation must be the way forward."

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