Tanzanian carriers optimistic despite gloomy IATA forecast

Friday June 7 2019

 

By Mnaku Mbani @mnaku28 mmbani@tz.nationmedia.com

Dar es Salaam. Tanzanian airlines have said that the recent report by the International Air Transport Association (IATA) showing the fall of profit this year was normal in the aviation sector.

IATA said in a statement after a meeting held in South Korea that the global air transport will this year face turbulences, which will slow profits.

The African airlines are projected to deliver a loss of $100 million, the same performance reported last year.

During its recent meeting held in Seoul, South Korea, IATA announced a downgrade of its 2019 outlook for the global air transport industry to a $28 billion profit (from $35.5 billion forecast in December 2018).

That is also a decline on 2018 net post-tax profits which IATA estimates at $30 billion (re‑stated).

IATA said the business environment for airlines has deteriorated with rising fuel prices, increased competition and a substantial weakening of world trade. In 2019 overall costs are expected to grow by 7.4 per cent, outpacing a 6.5 per cent rise in revenues.

As a result, net margins are expected to be squeezed to 3.2 per cent (from 3.7 per cent in 2018). Profit per passenger will similarly decline to $6.12 (from $6.85 in 2018).

African airlines will deliver a $0.1 billion loss (unchanged from 2018), continuing a weak trend into its fourth year, according to IATA.

Commenting on IATA forecasts, Air Tanzania Company Limited (ATCL) managing director Ladislaus Matindi said this is a normal trend for the aviation industry as ups and downs have been the behaviour of the airline business.

“I agree that this is true and ATCL is not competing in isolation; it is part and parcel of the global aviation market,” he said in an interview with The Citizen on Tuesday.

On rising price of aviation fuel, Mr Matindi said it has remained the major challenge to the airlines business as it accounts for 30 per cent of direct operational costs and this may rise as the fuel price escalates further.

According to IATA, the high price of fuel from 2018 ($71.6/barrel Brent) will continue in 2019 with an average cost of $70.00/barrel Brent expected.

This is 27.5 per cent higher than the $54.9/barrel Brent in 2017. Fuel costs will account for 25 per cent of operating costs (up from 23.5 per cent in 2018).

Non-fuel unit costs are expected to rise to 39.5 cents per available tonne kilometer from 39.2 cents, because of higher labour, infrastructure and other costs.

Overall expenses are expected to rise 7.4 per cent to $822 billion, says IATA.

He said the Iran/US conflict will directly affect the production of fuel and will automatically affects the prices and this will lead to increased prices of tickets.

“The conflict between the US and Iran as well as internal conflicts facing some of the Middle East countries, who are major oil producers, has affected the production of the commodity, which resulted in increased prices.

Mr Matindi said the issue of US-China trade war has also been the main challenge facing the aviation industry as two countries account for a large share of global travellers and cargo movement.

‘Whatever these conflicts happen, each people are usually attached to their countries and sometimes limit the movement of people from each country,” he said.

As the US-China trade war intensifies, IATA says the immediate risks to an already beleaguered air cargo industry increase. And, while passenger traffic demand is holding up, the impact of worsening trade relations could spillover and dampens demand.

However, Mr Matindi is optimistic that as far as ATCL has its own focus and does not mostly depending on global passengers or cargo, the IATA forecast does not relate to its outlook.

He said the airline’s main focus is on domestic and regional routes rather than the global routes, which are currently more complicated due to competition and trade war between the two global economic giants. He said competition in aviation industry is due to the emergence of new airlines as well as improvement of existing airlines as they are both battling to do well.

“Competition is not for granted because we have seen the emergence of smaller airlines which have shaken the market, while large airlines are also improving,” he said in a telephone interview.

He said ATCL is not competing with other airlines because some competitors are not from the same level, but the strong economic growth and increased appetite for air transport among Tanzanians, give a positive hope of doing better.

“ATCL has seen the strong growth of domestic market because many people have increased their ability to purchase air tickets and they are typically ordinary people,” he said.

According to IATA, in 2019, the return on invested capital earned from airlines is expected to be 7.4 per cent (down from 7.9 per cent in 2018). While this still exceeds the average cost of capital (estimated at 7.3 per cent), the buffer is extremely thin.

Precision Air head of marketing and corporate affairs Hillary Mremi said the airlines is one of the most challenging businesses because profit has become more difficult, especially on the African continent.

Commenting on IATA forecast, Mr Mremi said operating costs have become higher, especially fuel and spare parts for planes.

“The cost of fuel and spare parts are so expensive in Africa due to a distance from suppliers,” he said. He said economies of most of the people Africa do not support them to use air transport, which limits number of passengers.

“Each passenger carried is expected to cost the carriers $1.54, leading to a -1.0 per cent net margin,” the IATA statement says.

However, few airlines in the region are able to achieve adequate load factors, which averaged the lowest globally at 60.7 per cent in 2018.

However, IATA has noted that the overall industry performance is improving, but slowly.

“This year will be the tenth consecutive year in the black for the airline industry. But margins are being squeezed by rising costs right across the board—including labour, fuel, and infrastructure. Stiff competition among airlines keeps yields from rising,” said Mr Alexandre de Juniac, IATA’s Director General and CEO in a statement posted on the association’s website.

“Weakening of global trade is likely to continue as the US-China trade war intensifies. This primarily impacts the cargo business, but passenger traffic could also be impacted as tensions rise. Airlines will still turn a profit this year, but there is no easy money to be made.”

Moreover, IATA says the job of spreading financial resilience throughout the industry is only half complete with a major gap in profitability between the performance of airlines in North America, Europe and Asia-Pacific and the performance of those in Africa, Latin America and the Middle East.

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