The performance of the Middle Eastern airlines is improving but they are expected to “prolong losses” in 2019 due to the “worsening” in the business environment, IATA said in an outlook released here on Sunday.
Middle Eastern airlines will deliver a combined net loss of $1.1bn, slightly worse than the $1bn loss in 2018, the International Air Transport Association (IATA) said in a report released at its 75th Annual General Meeting at the COEX Convention Centre in Seoul on Sunday.
That equates to a $5.01 loss per passenger and a negative net margin (-1.9%).
IATA’s chief economist Brian Pearce noted the region has faced “substantial challenges” in recent years, both to the business environment and to business models. Airlines there are going through a process of adjustment and announced schedules point to a substantial slowdown in capacity growth in 2019.
Globally, IATA announced a downgrade of its 2019 outlook for the air transport industry to a $28bn profit (from $35.5bn forecast in December 2018). That is also a decline on 2018 net post-tax profits, which IATA estimates at $30bn (re-stated).
The business environment for airlines has “deteriorated” with rising fuel prices and a substantial weakening of world trade, Pearce said.
In 2019 overall costs are expected to grow by 7.4%, outpacing a 6.5% rise in revenues. As a result, 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’s director general and CEO Alexandre De Juniac said, “This year will be the tenth 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 US-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.”
In 2019, the return on invested capital earned from airlines is expected to be 7.4% (down from 7.9% in 2018). While this still exceeds the average cost of capital (estimated at 7.3%), 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.
Stressing that aviation is the business of freedom, de Juniac said, “For 4.6bn travellers, it is their freedom to explore, build business, or reunite with friends and family. The economic benefit of this is 65mn jobs and a $2.7tn 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.”
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