The International Air Transport Association (IATA), a trade group which represents nearly 300 carriers around the world, is the latest organization to voice optimism about the effects of the trade war between the U.S. and China. As for the prospects of the airlines, this is compounded by higher fuel prices.
The organization released its statement: “The International Air Transport Association (IATA) announced a downgrade of its 2019 outlook for the global air transport industry to a $28 billion profit (from $35.5 billion forecast in December 2018). That is also a decline on 2018 net post-tax profits which IATA estimates at $30 billion (re‑stated). The business environment for airlines has deteriorated with rising fuel prices and a substantial weakening of world trade. In 2019 overall costs are expected to grow by 7.4%, outpacing a 6.5% rise in revenues. As a result, net margins are expected to be squeezed to 3.2% (from 3.7% in 2018). Profit per passenger will similarly decline to $6.12 (from $6.85 in 2018).”
In an industry in which bankruptcy is nearly an article of faith, it is likely some large carriers will not last the year financially intact. In just the last few months, German airline Germania and UK carrier FlyBMI. and WOW Air have gone under.
The IATA formula includes the following ingredients–Brent crude, not at $71 will remain above $70 this year. Labor costs will also rise. These together will press expenses across the industry up 7.4% to $822 billion. The revenue component is also ugly. Cargo yields (the non-passenger part of the industry) will be flat. Passenger yields will be flat.
And, the trade war warning: “As the US-China trade war intensifies, the immediate risks to an already beleaguered air cargo industry increase. And, while passenger traffic demand is holding up, the impact of worsening trade relations could spillover and dampen demand.” To the point, China has already said it will examine the behavior of FedEx, which it says failed to delivery key components to beleaguered China telecom company Huawei.
The airline industry expects troubled times. It is just a matter of magnitude.
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