Rising costs the main talking point at IATA’s AGM

This week saw the great and good of the aviation industry gather in Sydney Australia for IATA’s Annual General Meeting and World Air Transport Summit, with concerns over profitability being the main talking point.
Rising costs have eaten into expected airline profits, said IATA in its latest market analysis revealed at the Sydney event.
It now expects carriers to achieve a collective net profit of $33.8 billion in 2018, down from the previous forecast of $38.4 billion it made in December 2017.
However, the airline body described this as “a solid performance” in the face of rising costs, primarily fuel and labour, and the upturn in interest rates.
Operating profits are still high by past standards, but have been trending slowly downwards since early 2016, as a result of accelerating costs.
Director general and chief executive Alexandre de Juniac said: "Solid profitability is holding up in 2018, despite rising costs. The industry’s financial foundations are strong, with a nine-year run in the black that began in 2010.
“And the return on invested capital will exceed the cost of capital for a fourth consecutive year.
“At long last, normal profits are becoming normal for airlines. This enables airlines to fund growth, expand employment, strengthen balance sheets and reward our investors."
Jet fuel prices are expected to rise by over 25% to $84/barrel and fuel costs will account for 24.2% of total operating costs compared with 21.4% in 2017.
Overall unit costs are forecast to rise 5.2% this year, after a 1.2% increase in 2017; a significant acceleration, says IATA.
Rising costs will however be offset by strong revenue, as demand from shippers and passengers continues to expand well above trend.
Overall revenues are expected to rise to $834 billion (up 10.7% from $754 billion in 2017).
It says that cargo demand has benefitted from the largely unexpected acceleration in the growth of the global economy over the past year. As businesses rushed to respond, they turned to air transport to replenish inventory, producing strong growth in 2017.
With that restocking cycle at an end, cargo demand is expected to grow by 4.0%. While this is a major drop from the 9.7% growth experienced in 2017, it remains in line with the 20-year trend rate.
Total cargo carried is expected to increase to 63.6 million tonnes from 61.5 million tonnes in 2017.
Pharmaceuticals, e-commerce and other premium cargo traffics are expected to lead growth in 2018. Cargo yields are expected to improve by 5.1% compared with growth of 8.1% in 2017.
Passenger air travel is forecast to expand by 7.0% in 2018, again slower than the 8.1% growth recorded for 2017 but still faster than the 20-year average of 5.5% for the sixth consecutive year.
North American airlines are expected to post a net profit of $15.0 billion (down from $18.4bn in 2017).
The region continues to generate the highest margins, returns on capital and profit but margins are being gradually reduced by rising costs from peak levels in 2015.  
European airlines are slowly moving towards North American performance.
They are forecast to generate the second highest net post-tax profits of $8.6 billion in 2018, up from $8.1 billion in 2017.
Asia-Pacific airlines benefitted from the strong growth in cargo revenues last year, as the region is the manufacturing centre of the world. In 2017 it generated the second largest profit at $10.1 billion.
This year it slipped just behind Europe with net post-tax profits of $8.2 billion, as the end of the business inventory restocking cycle slowed cargo.
The region is now the largest in both cargo and passenger markets, with 37% and 33% shares respectively of global markets.
African airlines continue their very slow emergence from the 2014 low point ($900 million loss) of financial performance, with losses continuing at the $100 million level. This is unchanged from 2017 when losses were cut as traffic, particularly cargo to Asia, grew ahead of capacity raising load factors from previously low levels.
New board of governors chairman
At the gathering, Qatar Airways group chief executive Akbar Al Baker formally became chairman of the IATA board of governors (BoG) for a one-year term, succeeding Goh Choon Phong of Singapore Airlines.
Since he became Qatar Airways’ Group chief executive in 1997 he has spearheaded its growth from a small regional carrier into a major global operator.
However, the new IATA chairman immediately sparked controversy by reportedly telling the meeting that his job “could only be done by a man”, comments that he later quickly clarified. Improving diversity in the air industry was one of the themes of the Sydney meeting.
Think before you sell off airports, urge delegates
In other discussions, delegates urged governments to take a cautious approach to airport privatisation.
In a unanimously passed resolution, IATA members called on governments to prioritize the long-term economic and social benefits delivered by an effective airport ahead of the short-term financial gains from poorly thought-out privatization. 
De Juniac said that while cash-strapped governments are looking to the private sector to help develop much needed airport capacity, “Airlines have not yet experienced an airport privatization that has fully lived up to its promised benefits over the long term.”
It is important that governments take a long-term view focusing on solutions that will deliver the best economic and social benefits.
Currently about 14% of airports globally have some level of privatization though as these tend to be large hubs, they handle about 40% of global traffic.
IATA says its research shows that private sector airports are more expensive but there was no evidence of gains in efficiency or levels of investment. This was in contrast to airline privatization where enhanced competition has resulted in lower pricing to consumers.
Governments urged to free up airline funds
Airlines also called on governments to abide by international agreements and treaty obligations and allow foreign airlines to repatriate revenues held in their countries. According to IATA, total funds blocked from repatriation was $4.9 billion at the end of 2017. While this was down 7% compared to 2016, airline funds remain blocked in 16 countries.
By far the worst offender is Venezuela, where airlines have been unable to repatriate $3.78 billion, followed by Angola ($386m), Sudan ($170m), Bangladesh ($95m) and Zimbabwe ($76m).
However, a $600 million backlog in Nigeria has been cleared and Angola’s $500m has been reduced by $120m.
South Korea next year
IATA said that Korean Air will host next year’s annual general meeting (AGM) and World Air Transport Summit in Seoul on 2-4 June 2019. It will be the first time that the South Korean capital will host the meeting.
This year’s gathering in Sydney attracted 1,000 aviation leaders from IATA member airlines, industry stakeholders, strategic partners and members of the media.
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