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Sunday, December 17, 2017
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Africa's airlines to incur $100 million loss in 2018 – IATA

Cape Town International airport.Africa’s airlines are expected to continue making a combined loss of $100 million in 2018, the same as 2017, in spite of an anticipated 8% growth in demand and capacity expansion of 7.5%.

This is according to the International Air Transport Association’s (IATA’s) 2018 global airline industry forecast which was presented by IATA’s Director-General and CEO, Alexandre de Juniac, in Geneva, Switzerland on 5 December.

The forecast says the slow pace of wider economic improvement in Africa is hampering the financial performance of the continent’s airlines. Nigeria is only just out of recession and growth in South Africa remains extremely weak. As a result, although traffic is growing, the passenger load factors (i.e. the measure of utilised capacity) are just over 70%. This is more than 10% lower than the global industry average.

The combination of low utilisation and high fixed costs make it difficult for airlines to make a profit, IATA says. Stronger economic growth will help in 2018, but Africa’s governments need to make a concerted effort to free up intra-African access to their markets as the increased connectivity will stimulate wider economic growth.

Globally, IATA expects 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).

2018 is expected to be the fourth consecutive year of sustainable global airline profits with a return on invested capital (9.4%) exceeding the industry’s average cost of capital (7.4%).

"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 travelling. 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 de Juniac.

"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% 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.

In 2018, passenger numbers are expected to increase to 4.3 billion. Passenger traffic (revenue passenger kilometers or RPKs) is expected to rise 6.0% (slightly down on the 7.5% growth of 2017 but still ahead of the average of the past 10-20 years of 5.5%), which will exceed a capacity expansion (available seat kilometers or ASKs) of 5.7%.

This will push up the average load factor to a record 81.4%, helping to drive a 3.0% improvement in yields. Revenues from the passenger business are expected to grow to $581 billion (+9.2% on $532 billion in 2017). Strong performance of the passenger business is supported by expected robust GDP growth of 3.1% (the strongest since 2010).

The biggest challenge to profitability in 2018 is rising costs, IATA cautions. Oil prices are expected to average $60/barrel for Brent Crude in 2018 (up 10.7% from $54.2/barrel in 2017). Labour costs have been accelerating strongly and are now a larger expense item than fuel (30.9% in 2018).

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.

Economic Impact of Aviation

IATA notes that since 1996 the inflation-adjusted cost of air transport to consumers has halved and that international tourists travelling by air are expected to spend more than $750 billion in 2018, a rise of 15% in just over 2 years.

The value of goods carried by airlines is expected to exceed $6.2 trillion in 2018, representing 7.4% of world GDP.

Direct employment by airlines will exceed 2.7 million worldwide in 2018. On average across the world IATA 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.