IATA predicts ninth consecutive year of solid financial returns for airlines

The International Air Transport Association (IATA) cut its forecast for airlines' profits on the back of rising labour and interest rate costs, but predicted a ninth consecutive year of solid financial returns for the industry.

Alexandre de Juniac, IATA's Director General and CEO, said: "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. And 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."

Airlines' profits were set to fall from the record $38.0bn achieved in 2017 to $33.8bn in 2018 on net margins of 4.1%, IATA projected. While still a "solid" performance, rising costs were a cause for concern, the business lobby added.

In December, IATA had forecast profits of $38.4bn for 2018, alongside a preliminary estimate of $34.5bn in profits for 2017.

Even so, carriers' return on invested capital was expected to reach 8.5% (down from 9% in 2017), still exceeding their average cost of capital, which had risen from 7.1% during the previous year to 7.7% on the back of higher bond yields.

"This is critical for attracting the substantial capital needed by the industry to expand its fleet and services," IATA said.

With the oil price expected to average $70 a barrel, up from $54.90 a barrel in 2017 (and a prior forecast for $60 a barrel), fuel costs were expected to jump 30%, driving a "significant" acceleration in the rate of increase in carriers' overall unit costs from 1.2% in 2017 to 5.2% for 2018.

And with unit revenues seen rising just 4.2%, profit margins were set to get squeezed, IATA said.

Passenger air travel meanwhile was seen increasing by 7% in the current year, down from a 8.1% increase for 2017, the trade lobby also predicted, but would still outpace capacity growth of 6.7%.

That was expected to translate into top-line growth of 10.7% to $834bn, a passenger load factor of 81.7% (2017: 81.5%) and a 3.2% rise in passenger yields (2017: -0.8%).

In 2017, the number of travellers carried grew by 8.1%.

Cargo demand growth on the other hand was set to slow from 2017's jump of 9.7% to 4.0% as companies' inventory restocking cycle came to an end.

Free cash flows were seen falling to roughly $4bn as capital expenditures grew.

In terms of risks to the outlook said: "growing uncertainty in the direction by which global affairs will evolve could present risks to the industry's outlook.

"These include the advancement of political forces pushing a protectionist agenda, uncertainty following the US withdrawal from the Iran nuclear deal, lack of clarity on the impact of Brexit, numerous ongoing trade discussions and continuing geopolitical conflicts."

To take note, IATA said profits in 2017 and 2018 might not be fully comparable as a result of "special accounting items such as tax credits", which had boosted the former.