Muscat: Middle East carriers are forecast to see net profits improve to $600 million in 2018 (up from $300 million in 2017), according to IATA’s latest forecasts of global industry. Demand in 2018 is expected to grow by 7 per cent, outpacing announced capacity expansion of 4.9 per cent (the slowest growth since 2002), the report added.
The region’s carriers face challenges to their business models, and from low oil revenues, regional conflict, crowded air space, the impact of travel restrictions to the US, and competition the new "super connector" (Turkish Airlines).
Despite the challenges, there is positive momentum heading into 2018, International Air Transport Association said in its latest report.
IATA forecasts global industry net profit to rise to $38.4 billion in 2018, an improvement from the $34.5 billion expected net profit in 2017 (revised from a $31.4 billion forecast in June).
Strong demand, efficiency and reduced interest payments will help airlines improve net profitability in 2018 despite rising costs. 2018 is expected to be the fourth consecutive year of sustainable profits with a return on invested capital (9.4 per cent) exceeding the industry’s average cost of capital (7.4 per cent).
"These are good times for the global air transport industry. Safety performance is solid. We have a clear strategy that is delivering results on environmental performance. More people than ever are traveling. The demand for air cargo is at its strongest level in over a decade,” said Alexandre de Juniac, IATA’s Director General and CEO.
“Employment is growing. More routes are being opened. Airlines are achieving sustainable levels of profitability. It’s still, however, a tough business, and we are being challenged on the cost front by rising fuel, labour and infrastructure expenses," he further added.
The industry also faces longer-term challenges. Many of them are in the hands of governments. Aviation is the business of freedom and a catalyst for growth and development. To continue to deliver on our full potential, governments need to raise their game—implementing global standards on security, finding a reasonable level of taxation, delivering smarter regulation and building the cost-efficient infrastructure to accommodate growing demand, he said.
“The benefits of aviation are compelling—2.7 million direct jobs and critical support for 3.5% of global economic activity. And the industry is ready to partner with governments to reinforce the foundations for global connectivity that are vital to modern life," said de Juniac.
Passenger numbers are expected to increase to 4.3 billion in 2018. Passenger traffic (revenue passenger kilometres or RPKs) is expected to rise 6.0 per cent (slightly down on the 7.5 per cent growth of 2017 but still ahead of the average of the past 10-20 years of 5.5 per cent), which will exceed a capacity expansion (available seat kilometres or ASKs) of 5.7 per cent.
This will push up the average load factor to a record 81.4 per cent, helping to drive a 3.0 per cent improvement in yields. Revenues from the passenger business are expected to grow to $581 billion (+9.2 per cent on $532 billion in 2017). Strong performance of the passenger business is supported by expected robust GDP growth of 3.1 per cent (the strongest since 2010).
The cargo business continues to benefit from a strong cyclical upturn in volumes, with some recovery in yields. Volumes are expected to grow by 4.5 per cent in 2018 (down from the 9.3 per cent growth of 2017). The boost to cargo volumes in 2017 was a result of companies needing to restock inventories quickly to meet unexpectedly strong demand. This led cargo volumes to grow at twice the pace of the expansion in world trade (4.3 per cent). Cargo yields are expected to improve by 4.0 per cent in 2018 (slower than the 5.0 per cent in 2017). While restocking cycles are usually short-lived, the growth of e-commerce is expected to support continued momentum in the cargo business beyond 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 per cent from 2017 revenues of $54.5 billion).
All regions are expected to report improved profitability in 2018 and all regions are expected to see demand growth outpace capacity expansion. Carriers in North America continue to lead on financial performance, accounting for nearly half of the industry’s total profits.
Airlines in this region are forecast to generate the strongest financial performance with net profits of $16.4 billion in 2018 (up from $15.6 billion in 2017). Market conditions are expected to continue to be strong, with announced capacity growth (3.4 per cent) likely to be slightly less than our traffic forecast of 3.5 per cent.
North American airlines have generated more than half of the industry’s profits produced in the past three years, but rising cost pressures have slowed further improvements. Low hedging ratios mean rising fuel prices have hit this region first and labor cost pressures have been an issue, though the expectation is that this pressure will diminish in 2018.
Airlines in Asia Pacific are forecast to see profits of $9 billion in 2018 (up from $8.3 billion in 2017). The strong cyclical rise in cargo markets has been a particular support for this region, whose carriers account for 37 per cent of global cargo capacity. Anticipated growth in demand of 7.0 per cent, will outpace announced capacity increases of 6.8 per cent.
Passenger market conditions vary across the region. Domestic markets have strengthened in China, India and Japan. New low cost market entrants in the ASEAN (Association of Southeast Asian Nations) region are intensifying competition and contributing to keeping profitability low. But there has been a pause in competitive pressures from the "super connectors" on long-haul routes as they face various challenges in their home markets.
Airlines in Europe are expected to deliver a net profit of $11.5 billion in 2018 (up from $9.8 billion in 2017). Announced capacity increases of 5.5 per cent trail the expected 6.0 per cent growth in demand in 2018 supporting a strengthening of the region’s performance.
European airlines are benefiting from a strong economic recovery in home markets, including Russia, a rebound from the terrorism events of 2016, and some consolidation following the failure of several regional airlines. The results of these developments are evident in the continent achieving the highest average passenger load factor in 2017 to date—84.3 per cent. Strong transatlantic demand is also supporting this performance, although new market entry is intensifying already stiff competition. And an early resolution to Brexit uncertainties is needed for airlines to plan and market their flying programmes.