Global air transport feels pains of high fuel costs

Thursday January 24 2019

An Ethiopian Airlines aircraft flies. The world

An Ethiopian Airlines aircraft flies. The world airline share price index fell by 20 per cent in 2018, compared with an 11.3 per cent decline in the global equity market for the year. PHOTO | FILE 

Osborne Park. Aviation investors felt the pain in 2018 as worries about fuel costs and the economy pushed down the global airline share prices by 20 per cent to underperform the wider equity market.

The 20 per cent fall in the world airline share price index compared to an 11.3 per cent decline in the global equity market for the year.

“The underperformance of airline shares across much of 2018 mainly reflected investor concerns about the impact of rising costs on airline financial performance,’’ the International Air Transport Association said in its latest financial monitor. “However, the sharp fall in oil prices in late-2018 contributed to airline shares outperforming during Q4.”

Volatility in the global equity market saw the world airline share price index fall by 9.4 per cent in December to levels last seen two years ago.

All three regional airline sub-indices declined during the month, with North America down by 16.5 per cent followed by Europe (-5.6 per cent) and the Asia Pacific ( -2.5 per cent).

Pre-tax earnings margins in the third quarter were down in all regions compared to the same period in 2017 and dropped from 14.2 per cent to 10.7 percent globally

Free cash flow was also down for the quarter while capital expenditure remained broadly unchanged at 10 per cent of revenues. There was better news from oil prices, which finished the year about 30 per cent down on their October peak after rising for much of the year. But some uncertainty remained.

“The trend in oil prices has been less clear in recent months,’’ IATA said. “Prices fell sharply in late-2018 as market concerns shifted to oversupply, but have recovered partially in recent weeks amid signs of further supply cuts. “The current price of Brent is around $60/bbl, which is approximately 30 per cent lowerA compared to values seen during the price peak in early October and approximately 12 per cent lower than a year ago. Jet fuel prices are close to $78/bbl.”

Global base passengers yields, which exclude surcharges and ancillary revenue, finished the year under pressure as global economic growth slowed. This meant continuing low average fares for economy passengers but the picture was brighter for airlines in premium cabins.

“As we have noted before, premium-class yields are holding up better than those in the economy cabin,’’ the Iata report said. “This reflects the fact that premium-class demand is typically less price-sensitive than economy, which allows airlines to offset higher input costs to a greater extent.”

Both passenger and freight load factors trended down as the year closed.

Recovery expected 2019

According to Iata’s latest forecast, the global airlines’ industry is projected to report a net profit of $35.5 billion in 2019.

It is expected that 2019 will be the tenth year of profit and the fifth consecutive year where airlines deliver a return on capital that exceeds the industry’s cost of capital.

“We had expected that rising costs would weaken profitability in 2019. But the sharp fall in oil prices and solid GDP growth projections have provided a buffer,” said Alexandre de Juniac, Iata’s Director General and CEO. He said Iata is cautiously optimistic that the healthy state of the airline industry for investors will continue for at least another year.

“Air travel has never been such a good deal for consumers. Some 1,300 new direct links between cities opened in 2018. And 250 million more journeys by air occurred in 2018 than in 2017,” said de Juniac.

He cautioned, however, that there are downside risks as the economic and political environments remain volatile.

Lower oil prices and solid, albeit slower, economic growth (up 3.1 per cent) are extending the run of profits for the global airline industry after rising costs squeezed profitability in 2018.

All regions, except Africa, are expected to report profits in 2018 and 2019.

Carriers in North America continue leading on financial performance, accounting for nearly half of the industry’s total profits. North American carriers are expected to deliver the most robust performance in 2019 with a $16.6 billion net profit, up from $14.7 billion in 2018.

Asia-Pacific carriers are expected to report a $10.4 billion net profit in 2019, up from $9.6 billion in 2018.

Cargo

Global freight capacity rose by 5.4 per cent year-on-year in October 2018 for the eighth consecutive month that capacity growth outstripped demand.

“Cargo is a tough business, but we can be cautiously optimistic as we approach the end of 2018. Slow but steady growth continues despite trade tensions,” said de Juniac.

He said the growth of e-commerce is more than making up for sluggishness in more traditional markets and that yields are strengthening in the traditionally busy fourth quarter.

“We must be conscious of the economic headwinds, but the industry looks set to bring the year to a close on a positive note,” said de Juniac.

Asia-Pacific airlines saw demand for air freight, which is measured in freight tonne kilometers, grow by 1.9 percent in October 2018, compared to the same period last year. (Iata)

This pace of growth was relatively unchanged from the previous month.

Weaker manufacturing conditions for exporters and longer supplier delivery times particularly in China and Korea impacted the demand.

As the largest freight-flying region, carrying more than one-third of the total, the risks from rising trade tensions are disproportionately high, said IATA.

North American airlines showed the fastest growth of any region in October 2018, with an increase in demand of 6.6 percent from a year earlier.

The strength of the US economy and consumer spending have helped support the demand for air cargo over the past year, benefiting American carriers.

European airlines experienced a 1.4 percent increase in freight demand in October last year, as weaker manufacturing conditions for exporters and longer supplier delivery times particularly in Germany, Europe’s largest freight flying country, impacted demand, said IATA.

African carriers saw freight demand decrease by 4.2 percent in October 2018, compared to the same month in 2017 last year in the seventh time in eight months that demand shrank.

Passengers

Global passenger traffic results for October showing that demand (measured in revenue passenger kilometers, or RPKs) rose 6.3 per cent compared to the same month last year.

This marked a rebound from 5.5 per cent growth recorded in September, which was an eight-month low. Capacity also grew 6.3 per cent and load factor was flat at 81.1 per cent, matching last year’s record for the month.

October’s healthy performance is reassuring after the slower demand growth in September—some of which was attributable to weather-related disruptions.

However, the bigger picture is that traffic growth has moderated compared to earlier in the year, reflecting a more mixed economic backdrop and reduced demand stimulation from lower fares.

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