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Global aviation headed for better profits despite cost pressures

Cancun, Mexico

EVEN with cost pressures on the rise, the world's airlines are now expected to post better profits this year, buoyed by robust demand in the passenger and cargo sectors.

In its latest estimates on Monday, the International Air Transport Association (Iata) raised its 2017 profitability projection for the global airline industry from its previous estimation of US$29.8 billion to US$31.4 billion; this comes on the back of anticipated revenues of US$743 billion. However, even with the more bullish outlook, it still marks a decline from 2016's peak of US$34.8 billion in profit.

"Demand for both the cargo and passenger business is stronger than expected," said Iata chief Alexandre de Juniac. But he went on to warn: "While revenues are increasing, earnings are being squeezed by rising fuel, labour and maintenance expenses."

Geographically, however, profits vary from region to region.

Meanwhile, Iata downgraded its profit calculations slightly for 2016 to US$34.8 billion from US$35.6 billion previously as margins were squeezed in H216 by rising costs and the bottom line was hit by fuel hedging losses.

With expectations for GDP growth of 2.9 per cent in 2017, passenger demand is expected to expand by 7.4 per cent - or 275 million more passengers - in what could be the largest year-on-year absolute growth in passenger volumes. This would see passenger traffic outpace capacity injection, nudging load factors up to 80.6 per cent and boosting revenue.

Cargo traffic growth is expected to more than double from 2016's figure to 7.5 per cent - four percentage points more than what Iata earlier projected. Air freight growth is being bolstered by a pick-up in the economy, as well as the growing popularity of e-commerce and demand from the pharmaceutical sector.

But costs are also projected to swell, thanks to rising fuel prices and fuel hedges, as well as cost pressures from labour and industry suppliers. Overall industry expenses will spike US$44 billion to hit US$687 billion, while the average cost of Brent crude oil should clock US$54 per barrel, up from US$44.60/bbl in 2016. This means that jet fuel prices will average US$64/bbl this year.

For the third year in a row, airlines are expected to post returns trending above the cost of capital as the world's airlines are slated to earn US$7.69 per passenger, translating to a fairly slim average profit margin of 4.2 per cent. In 2016, the corresponding figure was 4.9 per cent. "That's why airlines must remain vigilant against any cost increases, including from taxes, labour and infrastructure," Mr de Juniac stressed.

While passengers yields are expected to decline by 2 per cent this year, this is the smallest slide in recent years with signs of stabilisation emerging in the first half of the year. Cargo yields will dip by a smaller one per cent, narrowing from the whopping double-digit drops of 12.5 per cent and 17.4 per cent in 2016 and 2015 respectively.

Drilling down into region, profits are a mixed bag.

North American carriers remain the driving force, and are expected to post profits of US$15.4 billion this year, easing slightly from US$16.5 billion last year. Profits are at "historically high levels" for this region, on the back of industry restructuring, a stronger economy and a more muscular greenback. But challenges still exist - very limited fuel hedging paid off when jet fuel prices declined sharply but this means there will be little buffer on the way up. In addition, a tight labour market is also pushing salaries upwards, which may eat into profits.

In the Asia-Pacific, carriers are now slated to bank an improved US$7.4 billion in collective profits, albeit down from US$8.1 billion last year. The stronger fortunes of the region's carriers is underpinned by the recovery in the global cargo sector, where the Asia-Pacific holds a market share of some 40 per cent.

Europe's carriers are also expected to take in US$7.4 billion in profit, thanks partly to improving passenger and cargo demand, although the recent terrorist attacks could impact travel going forward.

Latin American airlines are expected to earn 33 per cent more this year with profit of US$0.8 billion, while the Middle Eastern carriers will post a bottom line of S$0.4 billion, versus US$1.1 billion last year.

"There is growing evidence that the ban on large electronic devices ... is taking a toll on key routes," noted Iata, commenting on the Middle East. "Meanwhile, the region is struggling with increased infrastructure taxes and air traffic congestion."

Finally, Africa will remain the only region bleeding red ink to the tune of US$100 million, although losses will remain on par with 2016; its performance is weighed down by higher-than-average fuel prices, burdensome taxes and intense competition from the Gulf carriers. On the other hand, the region achieved a major milestone last year with zero jet hull losses.

Members of Iata are currently gathered in Cancun, Mexico for the association's 73rd annual general meeting, with issues such as a potential expansion of the laptop ban and efforts to tame carbon emissions set to take centre stage.

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