Fuel price spike, operational cost squeeze airlines’ profit

Apparently in reaction to the trend, the International Air Transport Association (IATA) yesterday 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.

The business environment for airlines, according to IATA, “has deteriorated with rising fuel prices and a substantial weakening of world trade.”

In 2019 overall costs are expected to grow by 7.4 per cent, outpacing a 6.5 per cent rise in revenues. As a result, net margins are expected to be squeezed to 3.2 per cent from 3.7 per cent in 2018. Profit per passenger will similarly decline to $6.12 from $6.85 in 2018.

IATA’s Director General and Chief Executive Officer (CEO), Alexandre de Juniac, said this year would be the 10th consecutive year in the black for the airline industry.

“But margins are being squeezed by rising costs right across the board—including labour, fuel, and infrastructure. Stiff competition among airlines keeps yields from rising. Weakening of global trade is likely to continue as the U.S.-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,” said.

In 2019, the return on invested capital earned from airlines is expected to be 7.4 per cent, 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.

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. 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. Airlines will still create value for investors in 2019 with above cost-of-capital returns, but only just,” said de Juniac.

According to the global outlook, the high price of fuel from 2018, $71.6/barrel Brent will continue in 2019 with an average cost of $70.00/barrel Brent expected. This is 27.5 per cent higher than the $54.9/barrel Brent in 2017. Fuel costs will account for 25 per cent of operating costs, up from 23.5 per cent in 2018.

Non-fuel unit costs are expected to rise to 39.5 cents per available tonne kilometer from 39.2 cents, because of higher labor, infrastructure and other costs. Overall expenses are expected to rise 7.4 per cent to $822 billion.

However, a fuel marketer in the Nigerian aviation industry told The Guardian that the local circumstance is a little different, given the era of subsidy that is perpetually disrupting the market.

“Unlike in the global space, ours is a peculiar market where government brings in the cargo to disrupt the market. The force of demand and supply no longer work here, making it impossible for suppliers to make any profit.

“For instance, if the market price is x, government can bring in the supply at 5-x price. That is why our local airlines will hardly feel the global pinch,” he said.

Notwithstanding, all regions including Africa are expecting a reduction in profitability with the exception of North America and Latin America. Regional differences are significant.

African airlines will deliver a $0.1 billion loss, unchanged from 2018, continuing a weak trend into its fourth year. Each passenger carried is expected to cost the carriers $1.54, leading to a -1.0 per cent net margin. Breakeven load factors are relatively low, as yields are a little higher than average and costs are lower.

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

North American carriers will deliver the strongest financial performance with a $15 billion post tax profit, up from $14.5 billion in 2018. That represents a net profit of $14.77 per passenger, which is a marked improvement from just seven years earlier, $2.3 in 2012. Net margins, forecast at 5.5 per cent, are down from 2018 levels owing to higher than expected.

The limited downside in this region has been underpinned by consolidation, helping to sustain load factors (passenger + cargo) above 65 per cent, and ancillaries, which limit the impact of higher fuel costs, keeping breakeven load factors to 59.5 per cent.

“Aviation is the business of freedom. For 4.6 billion travelers it is their freedom to explore, build business, or reunite with friends and family. The economic benefit of this is 65 million jobs and a $2.7 trillion boost to the global economy. Aviation is growing responsibly to meet this demand. From 2020, for example, the industry will achieve carbon-neutral growth. And that is on the way to the much more ambitious goal of cutting emissions to half 2005 levels by 2050. We are determined to deliver sustainable global connectivity through aviation,” de Juniac said.