Another strong year for airline profits expected in 2017

GENEVA: Airlines are expected to earn $35.6 billion (SR133.43 billion) this year, “a record profit, even if slightly less than our original expectation,” International Air Airport Association (IATA) Director General/CEO Alexandre de Juniac said on Thursday.


This “best performance in the industry’s history — irrespective of the many uncertainties we face,” is all the more impressive considering that the oil prices averaged at or above $100 per barrel of Brent for three of the last six years, (since 2010), said de Juniac, who forecast strong profitability to extend into next year.


“A net profit of $29.8 billion in 2017 will mean eight years in the black for the industry. And it will be the third year in a row where the return on invested capital (7.8 percent) will exceed the cost of capital (6.9 percent),” he said at the IATA Media Day 2016 in Geneva.


But while the strongest financial performance is being delivered by airlines in North America, whose net post-tax profits will stand at $18.1 billion next year, Middle Eastern airlines have one of the lower breakeven load factors.


Average yields are low, but unit costs are even lower, “partly driven by the strength of capacity growth, forecast at 10.1 percent this year,” according to IATA Chief Economist Brian Pearce.


Post-tax profits for Middle Eastern airlines are expected to slip to $0.3 billion in 2017, representing a profit of $1.56 per passenger and a net margin of 0.5 percent, said Pearce.


The success of global aviation rests on safety, security, sustainability and global standards, but “while respecting them airlines must run efficient businesses and generate enough surplus to reward their shareholders,” which is “difficult”, said de Juniac.


Nevertheless, “the industry has improved its financial resilience” and “the airlines are in better shape to remain profitable while facing” challenges.


One way to deal with challenges is innovation through the use of technology.
“Smart Security, Fast Travel, the e-Air Waybill and New Distribution Capability (NDC) are all examples,” said IATA CEO, who is “particularly enthusiastic about NDC… which will fundamentally modernize the distribution process” and with which “airlines will be able to better understand the needs of their customers. And travelers will enjoy greater choice and transparency when buying travel through agents.”


Airlines are catalysts for economic development. They deliver about a third of goods traded internationally — by value.


They support some $2.7 trillion of GDP and employment levels associated with aviation have reached almost 69 million, IATA figures show.


But while global connectivity promotes prosperity, “charges and taxes dampen demand” and that comes with an “economic cost”, said de Juniac, which is “why IATA spends a lot of time fighting taxes and charges.”


The air transport association is also involved in “a constant battle to get governments to understand and fulfill the industry’s infrastructure needs,” considering that nearly four billion travelers are expected in 2017 and 7.2 billion in 2035, a growth that “will bring net economic benefits, but only if infrastructure development can keep pace.”


While admitting that “there is no magic solution for infrastructure,” de Juniac suggested that “when it comes to airports and air traffic management, that is best done [by governments] in consultation and partnership with airlines who are the users.”


That helps ensure “that we hit the mark on capacity, efficiency and affordability,” he said, also sounding a note of caution on infrastructure privatization — particularly for airports.


“Governments must take great care to effectively balance public and private interests. This starts with the selection process for the concessionaire. Finding the highest bidder should not be the prime motivation. The focus must be on finding the best long-term solution to support the local and national economy. And the entire process must be guided by iron-clad regulations to ensure that the privatised entity does not become an out-of-control monopoly,” said de Juniac.


The success of the aviation industry is judged by the success factors of any other business, but the IATA head believes that “its contribution to our world is unique and special” because “aviation is the business of freedom.”


“In connecting our world, aviation makes people’s lives better. It supports trade, creates business opportunities, facilitates the exchange of ideas, builds friendships across borders and develops global understanding,” he concluded, not before expressing concern over “the current protectionist rhetoric which is gaining popularity and geographic scope.”

Some key indicators of the strength of global connectivity:

• The average return airfare in 2017 is expected to be $351 (SR1,317), which is 63 percent below the 1995 levels.

• Average airfreight rates in 2017 are expected to be $1.48/kg, which is a 68 percent fall on the 1995 levels.

• The number of unique city pairs served by aviation grew to 18,429 in 2016, a 92 percent increase on 1995.

• The value of trade carried by air transport in 2017 is expected to be $5.7 trillion, a 4.9 percent increase on 2015.

• The global spending on tourism enabled by air transport is expected to grow by 5.1 percent in 2017 to $681 billion.

• Supply chain jobs supported by aviation are expected to grow by 3.4 percent in 2017 to some 69.7 million worldwide.

• Airlines are expected to take delivery of some 1,700 new aircraft in 2017, around half of which will replace older and less fuel-efficient aircraft. This will expand the global commercial fleet by 3.6 percent to 28,700.

• Airlines are expected to operate 38.4 million flights in 2017.