The prospects for air transport are bright, if not quite shining, according to the annual presentation from IATA (International Air Transport Association).
At its annual meeting in Sydney on Monday, the trade organisation of the airlines described a sector that continues to be profitable. While this may not sound exciting, it is good news for a sector that has struggled in the past to make money.
IATA calculates that airlines will on average make a 4.1% net margin in 2018, amounting to a total profit of US$33.8bn. The sector also continues to make a positive return on capital, although it is noticeable that returns in North America are running at around 14% whereas returns in the Middle East continue to be negative and Asia is only a few percent above the cost of capital.
Underlying demand is generally strong, with passenger volumes expected to rise by 7% in 2018, several percentage points above the long-term average. IATA states that cargo demand is less robust but still “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 air cargo growth in 2017.”
The cargo market is expected to grow by 4% this year, roughly in line with trend growth over the past 20 years. Although the immediate past saw the market driven by restocking rather than e-retailing, IATA suggests that towards the end of this year e-commerce and areas such as pharmaceuticals will “lead growth”. Such expansion will help sustain yields, with margins hitting 5.1%.
One problem that airlines are facing is rising costs, with fuel and labour increasing in price. In addition, even the modest climb in US interest rates is pushing up the cost of capital. This may constrain growth, however in the long term there is a clear trend for lower costs in the air transport market and this is likely to sustain reasonable demand for services.
Source: Transport Intelligence, June 6, 2018
Author: Thomas Cullen
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