IATA warns on effect of Ukraine crisis

Dino D'Amore
By Dino D'Amore March 12, 2014 10:53

IATA warns on effect of Ukraine crisis

In its latest release, the International Air Transport Association (IATA) has warned that the situation in the Ukraine coupled with the increase in oil price will impact airline profitability.

“Airline profitability is highly sensitive to economic performance and geopolitical tensions. For example, while a resolution of the situation in the Ukraine is still far from clear, the rise in oil prices is being felt across the industry. Government policies cannot over-rule market forces; however they can create an environment in which aviation (and other industries) can thrive. In the case of aviation, it is a catalyst for prosperity supporting some $2.2 trillion of economic activity and over a third of world trade by value. It is therefore a common interest for governments to provide a policy environment in which airlines can successfully connect people, businesses and economies.”

IATA has also stated that the situation in Venezuela is a major concern for the industry. Ina release, the association stated that: ‘The Venezuelan government’s policies continue to ignore international obligations and block the repatriation of airline funds. In total, some $3.7 billion of airline money is being blocked.”

Tony Tyler, IATA’s Director General and CEO, commented: “The situation represents an unacceptable failure of the Venezuelan government to meet its commitments. Aviation provides vital connectivity to the Venezuelan economy. The government should not put this at risk.”

Meanwhile, IATA reports that the airline industry remains on track to deliver a second consecutive year of improved profitability, despite a slight downward revision to its industry outlook for 2014 to an industry profit of $18.7 billion from the previously forecast $19.7 billion.

The main driver of the downward revision is higher oil prices which are now expected to average $108.0/barrel (Brent) which is $3.5/barrel above previous projections. The $3 billion added cost on the industry’s fuel bill is expected to be largely offset by stronger demand, especially for cargo, which is being supported by a strengthening global economy. Overall industry revenues are expected to rise to $745 billion ($2 billion greater than previously projected).

“In general, the outlook is positive. The cyclical economic upturn is supporting a strong demand environment. And that is compensating for the challenges of higher fuel costs related to geo-political instability. Overall industry returns, however, remain at an unsatisfactory level with a net profit margin of just 2.5%,” said Tyler.

The aviation industry retains on average $5.65/passenger in net profit. This is improved from $2.05 in 2012 and $4.13 in 2013. But it is below the $6.45 achieved in 2010.

“The efficiencies of improved industry structure through consolidation and joint ventures is providing more value to passengers and helping airlines to remain profitable even in difficult trading conditions. But we still need governments to understand the link between aviation-friendly policies and broader economic benefits. In many parts of the world the industry’s innate power to drive prosperity through connectivity is compromised by high taxes, insufficient infrastructure and onerous regulation,” said Tyler.

Passenger demand has been strong throughout the recovery process. IATA expects passenger demand growth of 5.8% this year. That is slightly weaker than previously forecast (6.0%), but an improvement on the 5.3% growth for 2013. Passenger yields however are expected to deteriorate by 0.3%, it added.

Cargo demand is showing the biggest improvement. Instead of the previously projected 2.1% growth, it now appears that air cargo is headed for 4.0% growth in 2014. And the yield decline will be moderated from the previously forecast 2.1% fall to a decline of 1.5%.

Ancillary Revenues are strong, while airlines continue to introduce new product options for passengers which are boosting ancillary revenues. The average fare per departing passenger is expected to be about $181, says IATA. Ancillary services may add almost $14 on top of this.

IAAT regional performance assessment shows good news for North American airlines, which are expected to post a profit of $8.6 billion—the biggest contribution to industry profits – and $300 million better than previously projected, reflecting the strength of the economic recovery in the US. European airlines remain weak and with an estimated $3.1 billion profit – $100 million less than previously forecast, but more than double the $1.2 billion profit posted in 2013.

Asia-Pacific airlines are expected to post profits of $3.7 billion and an EBIT margin of 3.4%. This is an improvement over 2013, helped by a slightly better outlook for cargo markets. Growth is slowing however, even in China, which has resulted in IATA lowering its forecast for the profits of airlines in this region in 2014 by $400 million less than the previous projection. Middle Eastern airlines are expected to post a $2.2 billion profit. This is an improvement on the $1.6 billion profit that the region’s airlines made in 2013, but it is a $200 million downgrading from the previous forecast.

IATA expects Latin American airlines to post a $1 billion profit – some $500 million less than previously projected, following a weaker than expected improvement in 2013. But the outcome this year is still more than double the $400 million profit recorded in 2013. Poor economic performance in Argentina and Brazil are the main drivers of the reduced profitability expectations, along with the continued political and social unrest in Venezuela.

African airlines are expected to post a $100 million profit, unchanged from the previous forecast, but reversing the $100 million loss in 2013. Economic growth and network development by a handful of African airlines is leading growth. But profitability is far from being evenly spread across the continent.

Dino D'Amore
By Dino D'Amore March 12, 2014 10:53
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