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Airlines forecast $29.3 billion net profit in New Year
#1
Airlines forecast $29.3 billion net profit in New Year



27 December 2019   |

[/url][url=https://api.whatsapp.com/send?text=https%3A%2F%2Fguardian.ng%2Fbusiness-services%2Faviation-business%2Fairlines-forecast-29-3-billion-net-profit-in-new-year%2F]
[Image: IATA.jpg]
Challenges of the year 2019 notwithstanding, global airlines are warming up for more profitable 2020 with the net profit already anticipated to hit $29.3 billion. 


The profit margin is an improvement over $28 billion forecast for 2019. The key performance drivers will include economic growth, cheaper fuel, new employments, and improved passenger and cargo traffic.


The International Air Transport Association (IATA), representing 290 airlines, released the forecast recently. Actually, economic performance in 2019 was weaker than had been anticipated at the time of the June forecast. 

This aligns with weaker global Gross Domestic Product (GDP) growth of 2.5 percent, versus 2.7 per cent forecast in June, and world trade growth of just 0.9 per cent, down from 2.5 percent forecast in June.


These negative developments contributed to softer passenger and cargo demand and corresponding weaker revenue growth, as passenger yields fell 3.0 percent and cargo yields dropped 5.0 percent compared to 2018. Operating expenses did not rise as much as anticipated; 3.8 percent vs. 7.4 percent June forecast, largely owing to lower-than-expected fuel costs; but this was not enough to offset the softness in revenue.

IATA’s Director General and Chief Executive Officer (CEO), Alexandre de Juniac, observed that 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,” de Juniac said.


In 2020, economic growth will be a key economic driver. The GDP is forecast to expand by 2.7 per cent in 2020, marginally above the 2.5 percent growth in 2019. World trade growth is expected to rebound to 3.3 per cent from 0.9 per cent in 2019, as election year pressures in the USA contribute to reduced trade tensions. 

Growth is supported by actions from central banks as well as easing fiscal policy.

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 per cent of expenses, down from $188 billion or 23.7 per cent of expenses in 2019.


The total employment by airlines is expected to reach 2.95 million in 2020, up 1.6 per cent on 2019. Productivity is expected to rise 2.9 per cent over 2019 as capacity growth picks up. Unit labour cost ($/ATK) is expected to be virtually flat at $0.12, as better productivity offsets increasing wages.Passenger demand is expected to grow 4.1 per cent in 2020, in line with 4.2 per cent growth in 2019. In fact, this masks a GDP-growth-driven pick-up since the underlying growth rate fell to less than 4.0 per cent in 2019.


However, whereas passenger capacity (ASKs) rose 3.5 per cent in 2019, it is forecast to grow 4.7 per cent in 2020 – as aircraft deliveries rise significantly, causing load factors to slide to 82 per cent from 82.4 per cent in 2019. This will maintain pressure on yields, which are expected to slide 1.5 per cent after falling 3.0 per cent in 2019. Passenger revenues, excluding ancillaries, are expected to reach $581 billion, up 2.5 per cent from $567 billion in 2019.


Cargo traffic turned negative last year for the first time since 2012. The 3.3 per cent 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 2.0 percent 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 per cent decline forecast for 2020, an improvement from a 5.0 percent decline in 2019. Cargo revenues will slip for a third year in 2020 with revenues expected to total $101.2 billion, down 1.1 percent 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 percent of industry profits in 2019 and around 56 percent 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. 

North American carriers are expected to post a net profit of $16.5 billion, down from $16.9 billion in 2019. That represents a 6.0 per cent net margin and a net profit of $16.00 per passenger. The region managed to improve profitability in 2019, as the still strong economy and structural improvements in the industry allowed unit revenues to hold up much more than in other regions.


But in 2020, unit revenue and profitability are expected to reduce. This will be the result of a slowing economy and a significant increase in aircraft deliveries particularly with the expected return to service of the 737 Max fleet.
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