Wednesday, December 11, 2019

Lower Aviation Fuel Costs Anticipated Making Airline Outlook Positive - but Cargo Demand Falling

Industry Reports a Decade in the Black as Annual Freight Figures Slip Away
Shipping News Feature

WORLDWIDE – The International Air Transport Association (IATA) forecasts in a report published this month that the global airline industry will produce a net profit of $29.3 billion in 2020, improved over a net profit of $25.9 billion expected in 2019, which was revised downward from a $28 billion forecast in June. If achieved, 2020 will mark the passenger and air cargo industry's 11th consecutive year in the black.

Economic performance in 2019 was weaker than had been anticipated at the time of the June forecast. This aligns with weaker global GDP growth of 2.5% (versus 2.7% forecast in June) and world trade growth of just 0.9% (down from 2.5% forecast in June). These negative developments contributed to softer passenger and cargo demand and corresponding weaker revenue growth, as passenger yields fell 3% and cargo yields dropped 5% compared to 2018.

Operating expenses did not rise as much as anticipated (3.8% versus 7.4% June forecast) largely owing to lower-than-expected fuel costs; but this was not enough to offset the softness in revenue. Alexandre de Juniac, IATA's Director General and CEO, said:

"Slowing economic growth, trade wars, geopolitical tensions and social unrest, plus continuing uncertainty over Brexit all came together to create a tougher than anticipated business environment for airlines. Yet the industry managed to achieve a decade in the black, as restructuring and cost-cutting continued to pay dividends.

“It appears that 2019 will be the bottom of the current economic cycle and the forecast for 2020 is somewhat brighter. The big question for 2020 is how capacity will develop, particularly when, as expected, the grounded 737 MAX aircraft return to service and delayed deliveries arrive.”

Economic Growth: GDP is forecast to expand by 2.7% in 2020 (marginally above the 2.5% growth in 2019). World trade growth is expected to rebound to 3.3% from 0.9% in 2019, as election year pressures in the US contribute to reduced trade tensions. Growth is supported by actions from central banks as well as easing fiscal policy.

Fuel Costs: Slower-than-expected global economic growth in 2019 contributed to lower energy demand, with crude oil prices averaging around $65 per barrel (Brent), compared to $71.60 in 2018. Oil supply is also plentiful, boosting inventories. As a result, oil prices are expected to dip further in 2020 to $63 (Brent). Jet kerosene prices are also expected to dip, averaging $75.60 per barrel versus $77 per barrel in 2019. The expected industry fuel bill of $182 billion will represent 22.1% of expenses, down from $188 billion or 23.7% of expenses in 2019.

Cargo: Cargo traffic turned negative last year for the first time since 2012. The 3.3% annual decline in demand was the steepest drop since 2009 during the Global Financial Crisis. Freight carriage, meanwhile, slipped to 61.2 million tonnes from 63.3 million tonnes in 2018. Cargo traffic is expected to rebound moderately with 2% growth in 2020, with tonnes forecast to reach 62.4 million, which is still below the 2018 result. Yields will continue to slide with a 3.0% decline forecast for 2020, an improvement from a 5% decline in 2019. Cargo revenues will slip for a third year in 2020 with revenues expected to total $101.2 billion, down 1.1% from 2019.

The regional profit picture is mixed in both 2019 and 2020. Africa, Middle East and Latin America are all expected to lose money in 2019, with carriers in Latin America returning to profit in 2020 as regional economies strengthen. Airlines in North America continue to lead on financial performance, accounting for 65% of industry profits in 2019 and around 56% of aggregate earnings in 2020. Financial performance is expected to improve or remain the same compared to 2019 in all regions except for North America, where expected capacity growth owing to new aircraft deliveries could put pressure on earnings.