Airlines cutting profit forecasts

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Airline profits are on course to fall faster than expected in 2019 as trade wars hit global commerce and broader confidence, the industry’s main global body said, while predicting a modest recovery next year.

Cutting its full-year net profit forecast to $25.9 billion, a 5.1% decline from 2018, the International Air Transport Association(IATA) said an improvement in 2020 was contingent on a “truce” in global trade disputes. In June it forecast $28 billion profit this year.

“Trade wars produce no winners,” IATA Director General Alexandre de Juniac told an annual media briefing.

De Juniac cited slower growth, Brexit and social unrest as factors that “all came together to create a tougher than anticipated business environment for airlines” in 2019.

IATA cut its full-year global revenue forecast to $838 billion from the $899 billion predicted in June and expected an improvement to $872 billion for 2020.

“We’ve downgraded our forecasts for 2019 pretty much across the board,” chief economist Brian Pearce said. “This is driven mostly by the impact of trade wars.”

Reflecting downward pressure on fares, net profit per passenger fell to $5.70 this year from $6.22, with the industry’s nett profit margin expected to decline to 3.1% this year from 3.4% in 2018.

The sharpest deterioration is in airlines’ cargo businesses, where a 3.3% drop in freight demand marked the steepest decline since the 2009 financial crisis, with revenue down 8% year-on-year.

Growth in world trade all but evaporated to an expected 0.9% this year, sharply down from the 2.5% forecast in June and the 4.1% expansion predicted a year ago, IATA said.

Underpinning the partial recovery predicted next year, IATA forecast more robust trade growth of 3.3% as “election-year pressures in the US contribute to reduced trade tensions”.

CAPACITY PRESSURE

A return to service of Boeing’s grounded 737 MAX would relieve airline customers, it could lead to a glut in short-term capacity, putting further pressure on fares, analysts warned.

Outstripping a 4.1% traffic increase next year, airline capacity is expected to rise 4.7% with the arrival of hundreds of MAX jets the market may find “hard to swallow” even when offset by retirement of older aircraft, Pearce said.

The MAX safety crisis is ending, IATA’s safety chief said, warning disagreements among regulators could complicate the jet’s return.

WMost global profit is currently generated by a handful of mainly US-based carriers, the past year has seen a slew of airline failures mainly in Europe.

“There is scope for more consolidation, given the long tail of airlines that haven’t improved,” Pearce predicted, despite regulatory barriers to cross-border mergers.

Airlines stepped up criticism of new European environmental taxes they see as an excessive burden in addition to the CORSIA emissions reduction and offsetting scheme developed by the industry to take effect in 2021.

A number of European states are imposing new taxes pending an EU-wide deal, with environmental and “flight-shaming” activists inspired by teen activist Greta Thunberg demanding an end to airlines’ fuel tax exemption.



“We need to make sure CORSIA is successful and not compromised by a patchwork of competing taxes and charges,” De Juniac said.