The International Air Transport Association (IATA) forecasts global industry net profit to rise to $38.4 billion in 2018, an improvement from the US $34.5 billion expected net profit in 2017 (revised from a US $31.4 billion forecast in June). Highlights of expected 2018 performance include:
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 percent) exceeding the industry’s average cost of capital (7.4 percent).
“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. 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,” said Alexandre de Juniac, IATA’s Director General and CEO.
“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. The benefits of aviation are compelling—2.7 million direct jobs and critical support for 3.5 percent 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.
Performance drivers in 2018
Passenger: Passenger numbers are expected to increase to 4.3 billion in 2018. Passenger traffic (revenue passenger kilometers or RPKs) is expected to rise 6.0 percent (slightly down on the 7.5 percent growth of 2017 but still ahead of the average of the past 10-20 years of 5.5 percent), which will exceed a capacity expansion (available seat kilometers or ASKs) of 5.7 percent.This will push up the average load factor to a record 81.4 percent, helping to drive a 3.0 percent improvement in yields. Revenues from the passenger business are expected to grow to US $581 billion (+9.2 percent on US $532 billion in 2017). Strong performance of the passenger business is supported by expected robust GDP growth of 3.1 percent (the strongest since 2010).
Cargo: 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 percent in 2018 (down from the 9.3 percent 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 (4.3percent). Cargo yields are expected to improve by 4.0percent in 2018 (down from the 5.0percent 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 US $59.2 billion (up 8.6percent from 2017 revenues of US $54.5 billion).
Costs: The biggest challenge to profitability in 2018 is rising costs.
Oil prices are expected to average US $60/barrel for Brent Crude in 2018 (up 10.7percent from US $54.2/barrel in 2017). Jet fuel prices are expected to rise even more quickly to US $73.8 per barrel (up 12.5percent on US $65.6 in 2017). Airlines with low levels of hedging (in the US and China for example) are likely to feel the impact of this increase more immediately than those with higher average hedging ratios (Europe). The fuel bill is expected to be 20.5percent of total costs in 2018 (up from 18.8percent in 2017).
Labour costs have been accelerating strongly and are now a larger expense item than fuel (30.9percent in 2018).
Overall unit costs are expected to grow by 4.3percent in 2018 (a significant acceleration on the 1.7percent increase in 2017). This will outpace an expected 3.5percent increase in unit revenues.
Debt: The industry has used the period of positive cash flows to pay dividends and to reduce debt. The debt to EBITDAR (earnings before interest, tax, depreciation, amortization and rentals) ratio has fallen from 3.7x in 2016 to 3.5x in 2017. It is expected to fall further to 3.4x in 2018. Lower debt means reduced interest payments. Despite the squeeze in operating margins (from 8.3percent in 2017 to 8.1percent in 2018), the net margin is expected to grow to 4.7percent (from 4.6percent in 2017) because of lower interest payments. This will see net profits rise to a record US $38.4 billion in 2018 (up from US $34.5 billion in 2017).
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 US US $16.4 billion in 2018 (up from US $15.6 billion in 2017). Market conditions are expected to continue to be strong, with announced capacity growth (3.4percent) likely to be slightly less than our traffic forecast of 3.5percent.
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 US $9 billion in 2018 (up from US $8.3 billion in 2017). The strong cyclical rise in cargo markets has been a particular support for this region, whose carriers account for 37percent of global cargo capacity. Anticipated growth in demand of 7.0percent, will outpace announced capacity increases of 6.8percent.
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 US $11.5 billion in 2018 (up from US $9.8 billion in 2017). Announced capacity increases of 5.5percent trail the expected 6.0percent 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—84.3percent. 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 programs.
Airlines in Latin America are forecast to generate a US $900 million net profit in 2018 (up from US $700 million in 2017). Passenger demand is expected to grow by 8.0percent in 2018, outpacing announced passenger capacity growth of 7.5percent.
The region will approach 2018 with momentum provided by the moderate recovery in the Brazilian economy, reasonable growth in Mexico and the weaker US dollar over the last year.
Middle East carriers are forecast to see net profits improve to US 600 million in 2018 (up from US $300 million in 2017). Demand in 2018 is expected to grow by 7.0percent, outpacing announced capacity expansion of 4.9percent (the slowest growth since 2002).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.
African carriers are expected to continue to make small losses of US 100 million in 2018 following a collective net loss of US $100 million in 2017. Stronger forecast economic growth in the region is expected to support demand growth of 8.0percent in 2018, slightly outpacing the announced capacity expansion of 7.5percent.
The wider economic situation is only improving slowly in Africa, which is hampering the financial performance of its airlines. The key Nigerian economy is only just out of recession and growth in South Africa remains extremely weak. While traffic is growing, passenger load factors for African airlines are just over 70percent which is over 10 percentage points lower than the industry average. With high fixed costs this low utilization makes it very difficult to make a profit. Stronger economic growth will help in 2018, but the continent’s governments need a concerted effort to further liberalize to promote growth of intra-Africa connectivity.