IATA: Costs to outpace revenue growth in 2019, downside risks are 'significant'

IATA reported (02-Jun-2019) the following drivers for its outlook for airlines for 2019:

• Costs: Overall expenses are expected to rise 7.4% year-on-year to USD822 billion;
  • Fuel expected to average USD70 per barrel (Brent) for 2019, continuing high price of fuel from 2018 (USD71.6 per barrel Brent). This is 27.5% up from 2017. Fuel costs will account for 25% of operating costs, up 1.5ppt;
  • Non-fuel unit costs are expected to rise 0.8% to USD0.395 per ATK, because of higher labor, infrastructure and other costs;
• Revenues: USD865 billion, +6.5%. Overall revenues are not keeping pace with the rise in costs;
• Cargo market: Cargo volumes of 63.1 million tonnes, -0.3%. Essentially flat because of the impact of higher tariffs on trade. After an exceptional performance in 2017 (+9.7% growth), cargo demand growth slowed to 3.4% in 2018;
  • Cargo yields are expected to be flat in 2019 after a 12.3% improvement in 2018, as cargo load factors fall further, and supply demand conditions weaken;
• Passenger market: Demand is expected to be more robust than for cargo as global GDP growth is expected to remain relatively strong (+2.7%), albeit slower than in 2018 (+3.1%);
  • Total passenger demand, measured in RPKs, is expected to grow by 5.0% (down from 7.4% in 2018);
  • Airlines have responded to the slower growth environment by trimming capacity expansion to 4.7% (ASKs);
  • Total passenger numbers are expected to rise to 4.6 billion, +4.5%;
  • Passenger yields are expected to remain flat in 2019 after a 2.1% fall in 2018;
• Cash Flow: Free cash flow is expected to "disappear at the industry level" because cash from operations will be reduced by slower demand growth and higher costs;
  • Debt-to-earnings ratios, which had fallen significantly are starting to rise once more. Average debt-to-earnings ratios for airlines in Europe and North America are not far above the levels rated as investment grade by the credit rating agencies, which provides a degree of security in the event of a deterioration in the business environment. Africa, Middle East and Latin America still have high levels of debt (six to seven times annual earnings), which leaves them more vulnerable to cash flow shocks (increasingly likely) or rising interest rates;
• Risk factors:
  • Downside risks are significant. Political instability and the potential for conflict "never bodes well for air travel". Even more critical is the proliferation of protectionist measures and the escalation of trade wars;
  • 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. [more - original PR]