Squeeze on airline margins can only intensify, says Travel Weekly’s Ian Taylor
This week’s warning of slowing demand and rising costs from airline association Iata marked official recognition of the downturn now underway in the aviation cycle.
Iata marked its annual general meeting by downgrading its forecast for carriers’ cumulative profits this year by 20%.
The association still foresees airlines making $28 billion in profits this year – a not insignificant amount. But the headline total conceals wide disparities.
For a start, Iata noted “a major gap in profitability between the performance of airlines in North America, Europe and Asia-Pacific, and those in Africa, Latin America and the Middle East”.
It forecast costs would rise 7.4%, outpacing revenue growth of 6.5%, and squeezing margins to produce estimated average revenue of $6.12 per passenger, down from $6.85 in 2018.
Return on invested capital (ROIC) was forecast at 7.4%, down from 7.9% last year, barely ahead of the 7.3% average cost of capital.
Iata warned: “Free cash flow, which enables debt to be reduced, is expected to disappear.”
It also warned of “significant downside risks” including “political instability, the potential for conflict, the proliferation of protectionist measures and escalation of trade wars”.
As a consequence: “All regions expect a reduction in profitability with the exception of North America.”
Iata nonetheless forecast global airline capacity would rise 4.7% this year.
Contrasts in outlook
The contrasts in profitability by region are significant. Iata forecast North American airlines would make $15 billion this year or half the global profits – pocketing almost $15 per passenger on average.
European carriers should make roughly half as much ($8 billion) or $6.75 per passenger “due to the highly competitive open aviation area”.
Iata expects Asia-Pacific airlines to make $6 billion or about half as much again per passenger ($3.51) as in Europe, with the association warning the region is “the most exposed to weakness in world trade”.
Middle East carriers will lose in excess of $1 billion between them, having also lost $1 billion last year, squandering an average $5 on each passenger.
Latin America’s airlines will barely turn a combined profit – Iata optimistically suggests they might make $0.50 per passenger – having lost $500 million last year.
And Africa’s carriers will lose money to the tune of more than $1.50 per passenger.
Given the outlook, it’s hard to see how Iata general secretary Alexandre de Juniac could then claim: “The good news is that airlines have broken the boom-and-bust cycle.”
He insisted: “A downturn in the trading environment no longer plunges the industry into a deep crisis.”
This sounds ominously like the ‘end to boom and bust’ claims we have heard before – notably in the run up to the global financial collapse of 2008.
What evidence is there for this other than that, in de Juniac’s words: “This year will be the tenth consecutive year in the black for the airline industry”?
The answer is very little, despite claims that the industry has never been so well managed or competitive.
The reality is the aviation boom has been fuelled by the cheap borrowing facilitated by central banks which has similarly inflated global stock markets and private-equity investments.
All bets will be off when another recession hits, as it will sooner or later.
In the circumstances, it’s ironic that Lufthansa Group chief executive Carsten Spohr took over as Iata board chairman from Qatar Airways chief Akbar Al-Baker this week.
It was Spohr who warned last November that the industry in Europe had “reached its maximum growth rate” and suggested airlines give up “the fantasy of growth going on forever”.
Yet grow they will continue to do this year.
In recent results, Lufthansa issued a profits warning and reported a first-quarter turnaround from a €52 million profit in 2018 to a €336 million loss.
IAG, owner of British Airways and Iberia, posted a first-quarter fall in profits €820 million lower than a year ago at €86 million.
Air France-KLM’s losses in the same period rose from €450 million to €257 million.
Of the non-Iata giants, easyJet reported a half-year loss of £275 million despite a 13% rise in passengers – losing almost £6 per passenger on every eat flown last winter.
Wizz reported strong annual results with a pre-tax profit of €300 million, up 4.5% year on year, but warned of a “not improving, maybe deteriorating” environment despite benefiting from higher fuel prices driving out “weaker carriers”.
Ryanair reported a 29% fall in annual profits but a 7% rise in passengers, with chief executive Michael O’Leary pledging to “keep the foot to the pedal”.
All have increased capacity for this summer despite the squeeze on margins.
These are the European airlines that can be relied on to survive the next period, of course.
As O’Leary spelled out: “Will it be painful for a year or two? Yes. Will it shake out more of the competition? Yes, it will.”
That is a much more realistic appraisal than De Juniac’s.
This is a community-moderated forum.
All post are the individual views of the respective commenter and are not the expressed views of Travel Weekly.
By posting your comments you agree to accept our Terms & Conditions.