Global Airline Profit Forecast Cut by IATA on Higher Costs

(Bloomberg) -- The International Air Transport Association cut its profit target for the global aviation market this year, predicting lower returns than six months ago as rising fuel prices and labor costs eat into the industry.

Net income for 2018 is likely to total $33.8 billion, 12 percent lower than a December forecast for $38.4 billion, the industry’s main trade group said in a statement in Sydney. The new forecast compares with an all-time high of $38 billion airlines made last year, which was boosted by special accounting like one-off tax credits, IATA said.

“At long last, normal profits are becoming normal for airlines,” Alexandre de Juniac, IATA’s director general and chief executive officer, said in the statement referring to continued profits for the ninth straight year. “This enables airlines to fund growth, expand employment, strengthen balance sheets and reward our investors.”

North American airlines, with a net profit of $15 billion, will contribute the most to the industry’s earnings, apart from posting the highest margins and return on capital, IATA said. Apart from Africa, all other regions will remain profitable. Carriers in Asia Pacific, the fastest growing region in terms of passengers, will earn $8.2 billion, just behind European airlines’ $8.6 billion.

Upturn in interest rates is also another reason affecting profit, the airline group said. Growing uncertainty in global affairs, including a protectionist agenda by some political forces, U.S. withdrawal from the Iran nuclear deal and lack of clarity on the impact of Brexit are risks to the industry’s outlook, IATA said.

While fuel costs top the list of expenses for most airlines, it is wages for U.S. carriers. Brent crude prices have risen 55 percent in the past year and touched a 3 1/2-year high last month. It’s inevitable that airlines will have to pass some of the fuel burden onto passengers, de Juniac said Thursday in Sydney. IATA represents about 280 carriers worldwide, or 83 percent of total air traffic.

American Airlines Group Inc. said the carrier is managing to soak up rising fuel costs for the moment, but it may have to raise prices if those levels become “the new normal.” Qantas Airways Ltd. said its domestic business "can continue to digest" higher fuel prices. IndiGo, India’s biggest airline, said last week it is reintroducing a fuel surcharge citing the rise in oil prices.

IATA also said:

• Inflation pressures are starting to emerge at this late stage of the economic cycle and airlines are facing significant pressures from rising fuel and labor costs in particular
• Full-year average cost of Brent seen at $70 a barrel, while jet fuel prices may rise to $84 a barrel
• Passenger air travel is forecast to expand by 7 percent in 2018, compared with 8.1 percent in 2017
• Cargo growth to slow to 4 percent from 9.7 percent in 2017, as a restocking cycle by business on the back of a strong economy comes to an end
• The 2018 average return airfare, before surcharges and tax, is expected to be $380, which is 59% below 1998 levels after adjusting for inflation. Average air freight rates in 2018 are expected to be $1.80/kg, which is a 63% fall from 1998 levels

To contact the reporters on this story: Kyunghee Park in Singapore at kpark3@bloomberg.net;Anurag Kotoky in New Delhi at akotoky@bloomberg.net

To contact the editors responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net, Sam Nagarajan

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