Airlines start to feel the squeeze

Airlines are facing significant pressures from rising fuel and labour costs but the International Air Transport Association is still forecasting a rise in collective net profit to about $US33.8 billion ($NZ48.3billion) this year.

At the association conference in Sydney yesterday, the association said the net profit was a "solid performance'' despite rising costs, primarily fuel and labour, but also the increase in the interest rate cycle.

The rising costs were the main driver behind the downward revision from the previous forecast of $US38.4 billion.

IATA director-general Alexandre de Juniac said airlines earned a record $US38 million last year. Comparisons were "severely distorted'' by special accounting items such as one-off tax credits which boosted 2017 profits.

Profits at the operating level, although still high by past standards, had been trending slowly downward since early 2016, as a result of accelerating 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 time.

"At long last, normal profits are becoming normal for airlines.''

Normal profits allowed airlines to fund growth, strengthen balance sheets and reward investors, he said.

This year, the return on invested capital was expected to be 8.5%, down from 9% in 2017, but still exceeding the average costs of capital which had risen to 7.7%.

The full-year average cost of Brent Crude was expected to be $US70 a barrel this year, up from $US54.90 a barrel last year and the previous 2018 expectation of $US60 a barrel.

Jet fuel prices were expected to rise by nearly 26% to $US84 a barrel. Fuel costs would account for 24.2% of total operating costs, up from a revised 21.4% last year, Mr de Juniac said.

Providing some offset to costs was strong revenue growth as demand continued to expand. Pricing had turned positive.

Overall revenues were expected to rise 10.7% to $US834billion.

Passenger air travel was forecast to expand by 7% in 2018. That was slower than the 8.1% growth recorded last year but still faster than the 20-year average of 5.5% for the sixth consecutive year.

Passenger numbers were expected to be 4.4 billion this year, from 4.1 billion last year.

Passenger yields were expected to grow by 3.2% after a 0.8% fall last year, Mr de Juniac said.

With more than 1900 aircraft expected to be delivered to airlines in 2018, there would be a boost in capital expenditure.

In the regional outlook, Mr Juniac said Asia-Pacific airlines felt the benefit from the strong growth in cargo revenue last year since the region was the manufacturing centre of the region.

In 2017, the region generated the second-largest profit of $10.1 billion. The region is now the largest in both cargo and passenger markets, having a 37% and 33% share of those global markets respectively.

Global airlines and aviation executives warned at the conference about growing international trade tensions, saying they could damage the airline industry and the world economy.

The US President Donald Trump's Administration had renewed tariff threats against China, while key US allies Canada, Mexico and the European Union had been hit with duties on steel and aluminium.

Mr Juniac said he was very worried, highlighting the industry relied on open borders for the movement of goods and people.

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