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Travel industry news

13 Jun 2019

BY Gary Noakes


Why it's not all doom and gloom in the aviation sector

Despite high-profile issues surrounding faulty aircraft and airline collapses, it’s not all doom and gloom for aviation. Gary Noakes reports.

Airport on a wet evening

Spend billions on aircraft, fuel and running costs, face natural hazards, terrorist threats and global economic uncertainty and, if you still want to run an airline, you’ll be rewarded this year with a modest profit of £4.83 per passenger.

That’s what the world’s carriers will make on average on each sale in 2019 according to Iata, which predicts a fall from last year’s figure of £5.41. The association says average profit margins will drop from 3.7% last year to 3.2% in 2019, while the world’s airlines will see total after-tax profits fall to £22 billion, downgrading December’s £28 billion forecast for the year.

The good news is 2019 will be the tenth consecutive year the industry is profitable, but speaking at Iata’s gathering in Seoul, director-general and chief executive Alexandre de Juniac said that while carriers generally would be in the black this year, “there is no easy money to be made”.

He points to rising oil prices and a threatened US-China trade war as key factors in inflating costs and dampening demand, but also mentions one glaring fact – that “stiff competition among airlines keeps yields from rising”. Put simply, there are too many airlines to enable good profitability; bargains for consumers in the short term are not good for the industry long term.

In the US, the disappearances of Continental, Northwest and US Airways into (respectively) United, Delta and American Airlines may have pushed up fares, but they have ensured three profitable carriers no longer struggle. Iata predicts North American carriers will make an average of £11.67 per passenger – a figure it says is “underpinned by consolidation”.

Contrast this with Europe, where net profit per passenger is expected to drop to £5.33 this year. Despite this being the industry’s second-strongest result, Iata says Europe’s airlines have the highest breakeven load factor – the average amount of seats they need to fill before a profit is made – at 70%. This, it says, “is caused by low yields due to the highly competitive aviation area”, combined with high costs and factors such as air traffic control strikes and delays.

Size matters

Iata is not the first to point out Europe’s predicament. Lufthansa Group chief executive Carsten Spohr believes this year will be the start of a shrinking process in Europe, particularly in short-haul.

There have already been some casualties: Air Berlin, Primera Air, Wow Air and flybmi are recent failures, while Flybe was rescued by Virgin-led consortium Connect Airways. Among those remaining, it’s a mixed bag, as recent financial results have shown.

Hungary’s Wizz Air is in a strong position. A record £259 million net profit and an impressive net profit margin of 12.5%, plus 93% load factors and €1.15 billion in cash in the bank, means Wizz has plenty of funds to grow.

Wizz estimates 2019/20 profits in the region of £284 to £310 million and, while Ryanair is more profitable, its current focus is now less on expansion. Ryanair saw its latest full-year profits drop 29% to £905 million due to a 6% fall in average fares, and rising fuel and passenger compensation costs.

IAG’s first-quarter figures revealed operating profits down 60% to £117 million. Chief executive Willie Walsh blamed “fuel and foreign exchange headwinds” plus “market capacity”, and said profits this year would be in line with last.

Virgin Atlantic voiced similar sentiments when it posted a loss of £26.1 million for 2018.

It warned it would remain in the red until 2021.

Bright side

Nick Wyatt, head of travel and tourism research and analysis at GlobalData, believes there will be some jostling among carriers.

He said: “The US has seen great consolidation in the past 10 years and that has fed into improved profitability. In Europe, there’s huge competition. There’s still some scope for consolidation.”

There will be winners and losers and probably fewer airlines in 2020 than this year. But if that seems pessimistic, Iata’s report at least offers some reassurance, ruling out wholesale failures.

The good news is airlines have broken the boom-and-bust cycle – “a downturn in the trading environment no longer plunges the industry into a deep crisis”, said De Juniac.

Further reassurance comes from Wyatt, who agrees with Iata’s viewpoint. “I don’t think it’s pessimistic, it’s cautious. There’s no need to panic.”

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