"This will be another solid year of performance for the airline industry. Demand for both the cargo and passenger business is stronger than expected. While revenues are increasing, earnings are being squeezed by rising fuel, labour and maintenance expenses. 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," said Alexandre de Juniac, director general and chief executive officer, IATA at the organisation's annual general assembly in Cancun, Mexico.
Global Connectivity Indicator: The 2017 average return airfare is expected to be $353 (2016 dollars), which is 64% below 1996 levels after adjusting for inflation.
IATA's forecast says airlines are expected to retain a net profit of $7.69 per passenger in 2017. That is down from $9.13 in 2016 and $10.08 in 2015. The average net profit margin stands at 4.2% (down from 4.9% in 2016).
"Airlines are defining a new epoch in industry profitability. For a third year in a row we expect returns that are above the cost of capital. But, with earnings of $7.69 per passenger, there is not much buffer. That's why airlines must remain vigilant against any cost increases, including from taxes, labour and infrastructure," says de Juniac.
While overall industry performance is strong, major regional variations remain. About half the industry profits are being generated in North America ($15.4 billion). Carriers in Europe and Asia-Pacific will each add a $7.4 billion profit to the industry total. Latin America and Middle East carriers are expected to earn $800 million and $400 million respectively. Airlines in Africa are expected to post a $100 million loss.
Global Connectivity Indicator: Average air freight rates in 2017 are expected to be $1.51/kg (2016 dollars) which is a 69% fall on 1996 levels
The European annual profit prediction of $7.4 billion is actually down from the $8.6 billion recorded in 2016 and is equal to $6.94/passenger. Passenger demand is expected to grow by 7.0%, slightly ahead of expected capacity growth of 6.9%. IATA says terror incidents in 2016 have "dented European demand" and while the performance over the first months of the year pointed towards the recovery of lost ground, recent terrorist attacks demonstrate that the threat continues to hang over the continent with potential negative impacts on demand.
The more upbeat global prediction is a result of the demand environment being much stronger than anticipated. Expectations for GDP growth in 2017 stand at 2.9%. If realised this will be the strongest global economic performance since 2011. Passenger demand is expected to grow by 7.4% over the course of 2017. That is the same growth rate as 2016 and 2.3 percentage points higher than previously forecast.
This 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, predicts IATA. If achieved, this would be the largest year-on-year growth in absolute passenger numbers ever recorded.
Global Connectivity Indicator: The number of unique city pairs served by aviation is forecast to grow to 19,699 in 2017, a 99% increase on 1996
What is most important for the industry financial performance is that this surge in expected demand takes traffic growth ahead of planned capacity growth. As a result, the average passenger load factor is expected to reach 80.6% (slightly ahead of the 80.3% achieved in 2016), helping to boost unit revenues.
Cargo demand is expected to grow by 7.5% in 2017, predicts IATA. That is more than double the 3.6% growth realised in 2016 and 4.0 percentage points above the previous forecast for this year. Total cargo carried is expected to reach 58.2 million tonnes. This is higher than previously forecast (by 2.5 million tonnes) and 3.9 million tonnes over 2016 levels.
Air cargo typically grows strongly at the start of an economic upturn, as firms turn to rapid air transport to restock inventories - which appears to be what we are seeing here. There are also retail trends, such as the switch to e-commerce and in pharmaceuticals - that are supporting air cargo growth.
Global Connectivity Indicator: The global spend on tourism enabled by air transport is expected to grow by 5.2% in 2017 to $685 billion
Cost increases for fuel, labour and maintenance accelerated in the first quarter. Overall industry expenses are expected to rise to $687 billion, a $44 billion increase on 2016. Industry revenues are expected to increase to $743 billion, $38 billion more than 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 likely be insufficient to offset the rise of other operating costs. The total industry fuel bill is predicted to be $129 billion, slightly below the 2016 level of $133 billion, and accounting for 18.8% of the industry's total costs, notes IATA.
The forecast anticipates an average oil price of $54.0/barrel for Brent Crude (up from $44.6/barrel in 2016 but close to current levels) reflecting a broad balance between OPEC supply cuts and new supply from US shale oil producers. That will lead to jet kerosene prices averaging $64.0/barrel this year.
Global Connectivity Indicator: Airlines are expected to take delivery of some 1,850 new aircraft in 2017, around half of which will replace older and less fuel-efficient aircraft, growing the global commercial fleet by 3.8% to 28,645.
Aside from the effect of fuel prices and hedging, 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 IATA expects unit labour costs to rise by almost 3%, continuing what has already been evident in the first quarter.
Yields are still expected to be down on 2016 levels, but there are signs of stabilisation in the first half of the year with a slight improvement anticipated towards year-end, driven by better capacity utilisation and the imperative to respond to the rise of unit costs. Passenger yields are expected to fall by 2.0% over the course of the year. This is the smallest decrease in recent years (-8.8% in 2016, -11.9% in 2015, -5.5% in 2014, -3.9% in 2013).
"Air transport is the business of freedom. The safe and efficient global movement of goods and people is a positive force in our world. Aviation's success betters peoples' lives by creating economic opportunity and supporting global understanding. We must stand firm in the face of any rhetoric that would put limits on aviation's future success," adds Mr de Juniac.