IATA forecasts a strong year for airlines in 2018
December 5, 2017: The latest release from the International Air Transport Association (IATA) forecasts the airlines to continue stronger performance through 2018. The global industry net profit is expected 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).
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 (4.3 percent).
Cargo yields are expected to improve by 4.0 percent in 2018 (slower than the 5.0 percent 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 percent from 2017 revenues of $54.5 billion).
Average net profit per departing passenger of $8.90 (up from $8.45 in 2017)
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. 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, director general and CEO, IATA.
Costs: The biggest challenge to profitability in 2018 is rising costs. Jet fuel prices are expected to rise to $73.8 per barrel (up 12.5 percent on $65.6 in 2017).
Labor costs have been accelerating strongly and are now a larger expense item than fuel (30.9 percent in 2018).
Overall unit costs are expected to grow by 4.3 percent in 2018 (a significant acceleration of the 1.7 percent increase in 2017). This will outpace an expected 3.5 percent 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, amortisation 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. Despite the squeeze in operating margins (from 8.3 percent in 2017 to 8.1 percent in 2018), the net margin is expected to grow to 4.7 percent (from 4.6 percent in 2017) because of lower interest payments. This will see net profits rise to a record $38.4 billion in 2018 (up from $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.
African carriers are expected to continue to make small losses of $100 million in 2018 following a collective net loss of $100 million in 2017. Stronger forecast economic growth in the region is expected to support demand growth of 8 percent in 2018, slightly outpacing the announced capacity expansion of 7.5 percent.
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 70 percent which is over 10 percentage points lower than the industry average. With high fixed costs this low utilisation 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 liberalise further to promote the growth of intra-Africa connectivity.
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 percent) likely to be slightly less than our traffic forecast of 3.5 percent.
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 percent of global cargo capacity. Anticipated growth in demand of 7.0 percent will outpace announced capacity increases of 6.8 percent.
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 percent trail the expected 6.0 percent growth in demand in 2018 supporting a strengthening of the region’s performance.
Airlines in Latin America are forecast to generate a $900 million net profit in 2018 (up from $700 million in 2017). Passenger demand is expected to grow by 8 percent in 2018, outpacing announced passenger capacity growth of 7.5 percent.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 $600 million in 2018 (up from $300 million in 2017). Demand in 2018 is expected to grow by 7 percent outpacing announced capacity expansion of 4.9 percent (the slowest growth since 2002).The region’s carriers face challenges to their business models, and from low oil revenues, regional conflict, crowded airspace, 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.
Economic Impact of Aviation
Unique city pairs served by airlines grew to over 20,000 in 2017 (+1,351 in 2016 and double the 10,000 city pairs served in 1996). This saves time for users and opens new links for tourism, trade and investment.
Since 1996 the inflation-adjusted cost of air transport to consumers has halved.
International tourists travelling by air are expected to spend more than $750 billion in 2018, a rise of 15 percent in just over 2 years.
The value of goods carried by airlines is expected to exceed $6.2 trillion in 2018, representing 7.4 percent of world GDP.
Direct employment by airlines will exceed 2.7 million worldwide in 2018. On average across the world, we forecast that in 2018 each airline employee will generate over $109,000 of gross value added (the firm-level equivalent to GDP), which is considerably higher than the economy-wide average.