IATA: Airline profits to slow down in APAC

By LYDIA NATHAN & DASHVEENJIT KAUR

Airlines in the Asia-Pacific (APAC) region are expected to post a lower net profit this year compared to 2016 as a result of increasing fuel, labour and maintenance expenses.

The International Air Transport Association (IATA) stated in its revised 2017 industry profitability report that airlines in the APAC region are expected to post a US$7.4 billion (RM31.82 billion) net profit, down from US$8.1 billion in 2016 which is equivalent to US$4.96 per passenger.

IATA said that cost increases for fuel, labour and maintenance had accelerated in the first-quarter (1Q).

As such, the overall industry expenses are expected to rise to US$687 billion, a US$44 billion increase compared to 2016.

“Cheaper fuel was responsible for most of the 8% 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 report read.

IATA said that the total industry fuel bill is predicted to be US$129 billion, slightly below the 2016 level of US$133 billion which accounts for 18.8% of the industry’s total costs.

It is also anticipated that oil price would average at US$54 per barrel for Brent crude, up from US$44.6 per barrel the year before.

“This reflects a broad balance between OPEC supply cuts and new supply from US shale oil producers, which would lead to jet kerosene prices averaging at US$64 per barrel this year,” IATA said.

Aside from the effect of fuel prices and hedging, IATA said the main driver of increased costs this year is coming from labour 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 labour costs to rise by almost 3%, continuing what has already been evident in 1Q,” it said.

On a brighter note, IATA expects that both cargo and passenger demand in APAC and globally to perform stronger than expected.

“Passenger demand in APAC is expected to grow by 10.4%, slightly ahead of expected capacity growth of 8.8%, whereby globally it is expected to grow by 7.4% over the course of 2017.

“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,” it said.

IATA added that if the target is achieved, it would be the largest year-on-year growth in absolute passenger numbers ever recorded.

Besides that, cargo demand is expected to grow by 7.5% in 2017, more than double the 3.6% growth realised in 2016 and four percentage points above the previous forecast for this year.

Although IATA projected a lower net profit for the APAC region, the association reportedly said that on a worldwide scale, the airline industry is expected to up its profit to US$31.4 billion from US$29.8 billion in 2016.

IATA also projected that industry revenue to increase to US$743 billion, which is US$38 billion more than the year before.

IATA DG and CEO Alexandre de Juniac (picture) stated in the report that 2017 is expected to be another solid year for the airline industry.

“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,” he said.

He warned that airlines still face risks, ranging from cost increases to security issues to growing protectionism including the US and Britain.

“With expected earnings of US$7.69 per passenger, there is not much buffering and that is why airlines must remain vigilant against any cost increases, including from taxes, labour and infrastructure,” de Juniac said.

On a larger scale, commercial airlines are expected to take delivery of around 1,850 new aircraft, a substantial investment by the industry, though less than expected earlier in the year.

“The fleet is forecast to increase by over 1000 aircraft to end next year at almost 29,000 aircraft; expansion has slowed as fuel prices start to rise and the outlook has become less positive,” the report stated. IATA’s report also recorded that airlines in North America had the strongest performances, while the weakest are carriers in Africa.

Breakeven load factors were the highest in Europe, caused by low yields due to the competitive open aviation area, and high regulatory costs.

Growth in the Europe was damaged in 2016 by terrorist attacks, but a rebound can be expected this year.