Airline profits to fall 11% amidst rising fuel and labor costs

Crude and jet fuel prices are expected to climb 27.5% and 25.8%, respectively.

Airline profits in 2018 may crash to $45.1b (US$33.8b),11% lower from $50.8b (US$38.0b) in 2017 due to rising production cost in the industry, the International Air Transport Association (IATA) said. IATA initially pegged the airline net profits at $51.3b.

Asia-Pacific airline profits dropped to $11b (US$8.2b) from $13.5b (US$10.1b) in 2017 as the end of the business inventory restocking cycle slows cargo, International Air Transport Association said. Despite this, the region is still the largest global markets for cargo and passenger.

“This is a solid performance despite rising costs, primarily fuel and labor, but also the upturn in the interest rate cycle,” IATA said.

In 2017 airline profits totaled $50.8 (US$38.0b). But due to accelerating costs, profits at the operating level have been recorded to be slipping since early 2016, according to IATA.   

IATA expect the average cost of crude at $93.50 (US$70) per barrel which is up 27.5% from the $73.9 (US$54.9) per barrel in 2017. Jet fuel prices are expected to rally 25.9% at $112.2 (US$84)

"Solid profitability is holding up in 2018, despite rising costs. The industry’s financial foundations are strong with a nine-year run in the black that began in 2010,” IATA director general and CEO Alexandre de Juniac said.

Juniac thinks that the return on invested capital will exceed the cost of capital for a fourth consecutive year.

“At long last, normal profits are becoming normal for airlines. This enables airlines to fund growth, expand employment, strengthen balance sheets and reward our investors," he added.

For 2018, the return on invested capital is expected to be 8.5%. This still exceeds the average cost of capital, which has risen to 7.7% on higher bond yields (7.1% in 2017).

“Providing some offset to accelerating costs is a strong revenue environment, as demand from passengers and shippers continues to expand well above trend, and pricing has turned positive,” IATA said.

Amidst the rising production costs, IATA believes that passenger air travel and cargo demands continue to rise.

The aviation authority forecast a 7.0% expansion for passenger air travel, which is actually slower than recorded 8.1% growth in 2017 but still faster than the 20-year average (of 5.5%) for the sixth consecutive year.

“Demand is getting a boost from stronger economic growth and the stimulus from new city-pair direct services,” IATA said.

Total passenger numbers is pegged at 4.36b, which is up 6.5% from 4.1b passengers in 2017. Capacity is expected to grow at 6.7% which is the same pace in 2017, whilst passenger load factor is will rise at 81.7%, IATA forecasted.

Meanwhile, cargo demand growth is seen at 4.0%, IATA reported. The sector has benefitted from businesses turning to air transport to replenish inventory to respond faster amidst the unexpected growth acceleration of the global economy in 2017.

IATA thinks that total cargo will reach 63.6 million tonnes from 61.5 million tonnes in 2017, with pharmaceuticals, e-commerce, and other premium cargo services leading the growth in 2018.