Tuesday, June 6, 2017

ME carrier profits to drop 63.6pc in 2017

Middle East airlines are expected to post a $400 million profit this year (down 63.6 per cent from $1.1 billion in 2016) which is equal to $1.78/passenger.

According to an industry profitability outlook released by Iata, Passenger demand is expected to grow by 7.0 per cent, slightly ahead expected capacity growth of 6.9 per cent.'

Trading conditions for the Middle Eastern carriers have sharply declined over the last six months. Profitability and load factors are down significantly, as traffic and some business models have come under pressure. There is growing evidence that the ban on large electronic devices in the cabin and the uncertainty created around possible US travel bans is taking a toll on some key routes. Meanwhile the region is struggling with increased infrastructure taxes/charges and air traffic congestion.

North American carriers are forecast to take the lead in 2017 in terms of profit, as they are expected to post a $15.4 billion net profit (down slightly from the $16.5 billion in 2016). Passenger demand is expected to grow by 4.0 per cent, slightly behind expected capacity growth of 4.4 per cent.

North American airlines are the powerhouse of industry profitability, generating about half of the collective global profit. This is owing to the restructuring of the industry, a relatively strong economy and a resilient US dollar. The region’s carriers also face challenges. Very limited fuel hedging delivered quick benefits when fuel prices fell. Conversely, there is less of a buffer as fuel prices rise. A tight labor market is adding more pressure to profits by pushing up wages. Nonetheless, profitability remains at historically high levels, even if slightly down on 2016.

According to the outlook, global airlines are expected to report a $31.4 billion profit (up from the previously forecast $29.8 billion) on revenues of $743 billion (up from the previously forecast $736 billion).

“This will be another solid year of performance for the airline industry. Demand for both the cargo and passenger business is stronger than expected. While revenues are increasing, earnings are being squeezed by rising fuel, labor and maintenance expenses. Airlines are still well in the black and delivering earnings above their cost of capital. But, compared to last year, there is a dip in profitability,” said Alexandre de Juniac, Iata’s Director General and CEO.

In 2017 airlines are expected to retain a net profit of $7.69 per passenger. That is down from $9.13 in 2016 and $10.08 in 2015. The average net profit margin stands at 4.2 per cent (down from 4.9 per cent in 2016).

“Airlines are defining a new epoch in industry profitability. For a third year in a row we expect returns that are above the cost of capital. But, with earnings of $7.69 per passenger, there is not much buffer. That’s why airlines must remain vigilant against any cost increases, including from taxes, labor and infrastructure,” said de Juniac.   

While overall industry performance is strong, major regional variations remain. About half the industry profits are being generated in North America ($15.4 billion). Carriers in Europe and Asia-Pacific will each add a $7.4 billion profit to the industry total. Latin America and Middle East carriers are expected to earn $800 million and $400 million respectively. Airlines in Africa are expected to post a $100 million loss.

Forecast Drivers
Strong Demand Environment: The demand environment has been much stronger than anticipated. Expectations for GDP growth in 2017 stand at 2.9 per cent. If realized this will be the strongest global economic performance since 2011.

• Passenger demand is expected to grow by 7.4 per cent over the course of 2017. That is the same growth rate as 2016 and 2.3 percentage points higher than previously forecast. Stronger demand translates into an additional 275 million passengers (over 2016), which will bring the total number of passengers expected to fly this year to 4.1 billion. If achieved, this would be the largest year-on-year growth in absolute passenger numbers ever recorded.

What is most important for the industry financial performance is that this surge in expected demand takes traffic growth ahead of planned capacity growth. As a result, the average passenger load factor is expected to reach 80.6 per cent (slightly ahead of the 80.3 per cent achieved in 2016), helping to boost unit revenues.

• Cargo demand is expected to grow by 7.5 per cent in 2017. That is more than double the 3.6 per cent growth realized in 2016 and 4.0 percentage points above the previous forecast for this year. Total cargo carried is expected to reach 58.2 million tonnes. This is higher than previously forecast (by 2.5 million tonnes) and 3.9 million tonnes over 2016 levels.

Air cargo typically grows strongly at the start of an economic upturn, as firms turn to rapid air transport to restock inventories – which is what we are seeing today. There are also retail trends, such as the switch to e-commerce and in pharmaceuticals – that are supporting air cargo growth.

Cost increases for fuel, labor and maintenance accelerated in the first quarter. Overall industry expenses are expected to rise to $687 billion, a $44 billion increase on 2016. Industry revenues are expected to increase to $743 billion, $38 billion more than 2016.

• Cheaper fuel was responsible for most of the 8 per cent fall in airlines’ unit costs in 2016, but that impact is coming to an end due to the influence of fuel hedges and rising spot prices. Some regions will still see some modest benefits from hedges but this will be insufficient to offset the rise of other operating costs. The total industry fuel bill is predicted to be $129 billion, slightly below the 2016 level of $133 billion, and accounting for 18.8 per cent of the industry’s total costs. The forecast anticipates an average oil price of $54.0/barrel for Brent Crude (up from $44.6/barrel in 2016 but close to current levels) reflecting a broad balance between OPEC supply cuts and new supply from US shale oil producers. That will lead to jet kerosene prices averaging $64.0/barrel this year.

• Aside from the effect of fuel prices and hedging, the main driver of increased costs this year is coming from labor and industry suppliers which are exerting pressure for an increased share of the airline industry’s improved financial performance. Last year productivity gains offset wage increases, but this year we expect unit labor costs to rise by almost 3 per cent, continuing what has already been evident in the first quarter.

Yields are still expected to be down on 2016 levels, but there are signs of stabilization in the first half of the year with a slight improvement anticipated towards year-end, driven by better capacity utilization and the imperative to respond to the rise of unit costs.

• Passenger yields are expected to fall by 2.0 per cent over the course of the year. This is the smallest decrease in recent years (down 8.8 per cent in 2016, down 11.9 per cent in 2015, down 5.5 per cent in 2014, down 3.9 per cent in 2013).

• Cargo yields are expected to fall by 1.0 per cent over the course of the year. This is also the smallest decrease in recent years (down 12.5 per cent in 2016, down 17.4 per cent in 2015, down 2.0 per cent in 2014, down 4.9 per cent in 2013).

“Air transport is the business of freedom. The safe and efficient global movement of goods and people is a positive force in our world. Aviation’s success betters peoples’ lives by creating economic opportunity and supporting global understanding. We must stand firm in the face of any rhetoric that would put limits on aviation’s future success,” said de Juniac.

Some key indicators of the strength of global connectivity include:
• The 2017 average return airfare is expected to be $353 (2016 dollars), which is 64 per cent below 1996 levels after adjusting for inflation.
• Average air freight rates in 2017 are expected to be $1.51/kg (2016 dollars) which is a 69 per cent fall on 1996 levels.
• Air cargo accounts for around 35 per cent of the total value of goods traded globally.
• The number of unique city pairs served by aviation is forecast to grow to 19,699 in 2017, a 99 per cent increase on 1996.
• The global spend on tourism enabled by air transport is expected to grow by 5.2 per cent in 2017 to $685 billion.

Airlines are expected to take delivery of some 1,850 new aircraft in 2017, around half of which will replace older and less fuel-efficient aircraft. This will expand the global commercial fleet by 3.8 per cent to 28,645. - TradeArabia News Service

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