Rising fuel costs and geopolitical tensions along with a host of other factors are adding to the risks of the airlines industry, despite a stronger global economy pushing up passenger yields.
On Monday, airline operators across the globe have slashed their profit forecasts for 2018 on account of rising cost of fuel and higher interest rates. They also stated that geopolitical tensions are likely to add to their operating risks.
According to the International Air Transport Association (IATA), which represents around 280 carriers, the airlines industry is expected to post a profit of $33.8 billion in 2018, 12% below its previous forecast of $38.4 billion.
The IATA also mentioned that passenger yields are expected to rise by 3.2% this year – their first annual gain since 2011.
A stronger global economy is driving up global economic growth, said IATA.
“It’s certainly true to say that 2018 is a tougher year, but airlines are doing a good job,” said Alexandre de Juniac, IATA’s Director General at its annual meeting.
IATA’s forecast factors in average crude oil prices at $70 a barrel for 2018, up from $54.90 in 2017.
Incidentally, the downturn in IATA’s 2018 earnings outlook, compared to the $38 billion in 2017, is skewed by special accounting items which includes one-off tax credits; these have boosted annual profits, said IATA.
The profits of airline operators could cover the industry’s high cost of capital for 4 years in a row; this could attract further investments in infrastructure development and modernization of their fleet. However, IATA warned that airline operators are still operating on a knife-edge margins in comparison to many industries.
“Four percent is not a big number. It is still a fragile industry. Our capacity to resist big shocks is limited,” said De Juniac in reference to 2018’s profit forecast.
De Juniac however warned that the operations of airline operators could be effected by “political forces pushing a protectionist agenda”. He however declined to identify the political forces he was referring to. “We haven’t faced any significant decline in numbers of passengers or cargo related to trade wars or protectionist barriers up to now, but if it continues it will happen”.