Airline trends: Cautious optimism extends into 2019

The future looks bright for India’s aviation industry as business soothsayers predict impressive numbers in the next three years. According to the findings by India Brand Equity Foundation, the civil aviation industry in India has emerged as one of the fastest growing industries in the country during the last three years. India is currently considered the third largest domestic civil aviation market in the world. India is expected to become the world’s largest domestic civil aviation market in the next 10 to 15 years. India is also expected to displace the UK to become the third largest air passenger* market by 2025.

India’s passenger* traffic grew at 16.52 percent year on year to reach 308.75 million. It grew at a CAGR of 12.72 percent during FY06-FY18.

Domestic passenger traffic grew YoY by 18.28 percent to reach 243 million in FY18 and is expected to become 293.28 million in FY20E. International passenger grew YoY by 10.43 percent to reach 65.48 million in FY18 and traffic is expected to become 76 million in FY20E.

In FY18, domestic freight traffic stood at 1,213.06 million tonnes, while international freight traffic was at 2,143.97 million tonnes.

India’s domestic and international aircraft movements grew 14.40 percent YoY and 9.40 percent YoY to 1,886.63 thousand and 437.93 thousand during 2017-18, respectively.

During Apr-Aug 2018, passenger traffic in India stood at 141.77 million. Out of which domestic passenger traffic stood at 113.44 million while international traffic stood at 28.32 million. Total freight traffic handled in India stood at 1.49 million tonnes during the same time. As of May 2018, there are nearly 558 commercial aircraft in operation in India.

Meanwhile, the International Air Transport Association (IATA) forecasts the global airline industry net profit to be $35.5 billion in 2019, slightly ahead of the $32.3 billion expected net profit in 2018 (revised down from $33.8 billion forecast in June).

Lower oil prices and solid, albeit slower, economic growth (+3.1%) are extending the run of profits for the global airline industry after profitability was squeezed by rising costs in 2018. It is expected that 2019 will be the tenth year of profit and the fifth consecutive year where airlines deliver a return on capital that exceeds the industry’s cost of capital, creating value for its investors.

“We had expected that rising costs would weaken profitability in 2019. But the sharp fall in oil prices and solid GDP growth projections have provided a buffer. So we are cautiously optimistic that the run of solid value creation for investors will continue for at least another year. But there are downside risks as the economic and political environments remain volatile,” said Alexandre de Juniac, IATA’s Director General and CEO.

Performance Drivers in 2019

Economic Growth: GDP is forecast to expand by 3.1% in 2019 (marginally below the 3.2% expansion in 2018). This slower but still robust growth is the main driver of continued solid profitability. There are significant downside risks to growth from trade wars and political uncertainties such as with BREXIT, but the consensus view is that these factors will not offset the positive impetus from expansionary fiscal policy and growing business investment in major economies.

Fuel Costs: The 2019 industry outlook is based on an anticipated average oil price of $65/barrel, which is lower than the $73/barrel (Brent) experienced in 2018, following the increase in US oil output and rising oil inventories. This is a welcome relief for airlines which have seen jet fuel prices fall, albeit at a slower pace owing to the impact of low-sulfur environmental measures undertaken by the marine sector that have increased demand for diesel (which competes with jet fuel for refinery capacity). Nonetheless, jet fuel prices are expected to average $81.3/barrel in 2019, lower than the $87.6/barrel average for 2018). The full impact of this decline will be delayed due to heavy levels of hedging in some regions. Fuel is expected to account for 24.2% of the average airline’s operating costs (an increase from 23.5% forecast for 2018).

Labor: Total employment by airlines is expected to reach 2.9 million in 2019, up 2.2% on 2018. Wages are also rising, reflecting the tightness of labor markets, and it is expected that unit labor costs will increase by 2.1% in 2019 after a long period of stability. Aviation jobs are getting more productive. In 2019 we expect productivity to increase by 2.9% to 535,000 available tonne kilometers/employee. 

Passenger: Passenger traffic (RPKs) is expected to grow 6% in 2019, which will outpace the forecast capacity (ASKs) increase of 5.8%, and remains above the 20-year trend growth rate. This, in turn, will increase load factors and support a 1.4% increase in yields (partially clawing back the 0.9% fall experienced in 2018). Passenger revenues, excluding ancillaries, are expected to reach $606 billion (up from $564 billion in 2018).

Cargo: The 3.7% annual increase in cargo tonnage to 65.9 million tonnes is the slowest pace since 2016, reflecting the weak world trade environment impacted by increasing protectionism. Cargo yields are expected to grow by 2.0%. This is well below the exceptional 10% yield growth in 2018. It does, however, continue the recent strengthening of the cargo business, since cost increases are lower. Overall cargo revenues are expected to reach $116.1 billion (up from $109.8 billion in 2018).

“Air travel has never been such a good deal for consumers. Not only are fares staying low, but the options for travelers are also expanding. Some 1,300 new direct links between cities were opened in 2018. And 250 million more journeys by air occurred in 2018 than in 2017,” said de Juniac.

APAC NET PROFIT

Asia-Pacific carriers are expected to report a $10.4 billion net profit in 2019 (up from $9.6 billion in 2018). The net profit per passenger is expected to be $6.15 (3.8% net margin). This is a region of diverse markets, some of which are seeing strong growth from new LCC entrants while others are very dependent on outbound cargo from key manufacturing centers. Cargo revenue growth has slowed from the strong performance of 2017 but remains positive for airlines in the region. Lower fuel costs, low levels of fuel hedging and strong regional economic growth are supporting profitability in 2019 in this region.

HIGHLIGHTS OF EXPECTED 2019 PERFORMANCE

  • The return on invested capital is expected to be 8.6% (unchanged from 2018)
  • The margin on net post-tax profits is expected to be 4.0% (basically unchanged from 3.9% in 2018)
  • Overall industry revenues are expected to reach $885 billion (+7.7% on $821 billion in 2018)
  • Passenger numbers are expected to reach 4.59 billion (up from 4.34 billion in 2018)
  • Cargo tonnes carried are expected to reach 65.9 million (up from 63.7 million in 2018)
  • Slower demand growth for both passenger traffic (+6.0% in 2019, +6.5% in 2018) and cargo (+3.7% in 2019, +4.1% in 2018)
  • Average net profit per departing passenger of $7.75 ($7.45 in 2018)

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

VOYAGER'S WORLD
%d bloggers like this: