Airlines are forecast to have a better year in 2020. Photo / Grant Bradley
Global airline profits are tipped to climb next year by 12 per cent but the expected return of the Boeing 737Max from its grounding is forecast to eat into yields but could be good news for passengers.
The International Air Transport Association said profit would next year increase to US$29.3 billion ($44.5b) in 2020, improved over a net profit of US$25.9 billion expected in the past year.
The FAA says a long series of steps must be taken before just under 400 Max jets return to the air but when it does there will be a flood of capacity.
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Two crashes within five months of each other claimed 346 lives, leading after some delays to the grounding of the aircraft around the world and a series of investigations and lawsuits.
Yesterday more testimony before a US hearing questioned why action on flight control equipment was not taken after the first crash.
While just two airlines flying in this region have them or have them on order - Fiji Airways and Virgin Australia - the return of the planes will suddenly return hundreds of the grounded planes and the first of a further 5000 of the planes on order start being delivered.
During the past year other larger planes have been redeployed in some markets such as in China to cover for the Max and one airline executive in this country says much of the profitability of the industry over the past year has been short term, based on tighter capacity than expected.
Iata's director general and chief executive Alexandre de Juniac said in Geneva on Wednesday night that the return of the Max - and its impact on capacity - was the "big question" for 2020.
He attributed weaker than forecast economic performance this year to weaker global GDP growth of 2.5 per cent (versus 2.7 per cent forecast in June) and world trade growth of just 0.9 per cent (down from 2.5 per cent forecast in June).
These negative developments contributed to softer passenger and cargo demand and corresponding weaker revenue growth, as passenger yields fell 3 per cent and cargo yields dropped 5 per cent compared to 2018.
"Slowing economic growth, trade wars, geopolitical tensions and social unrest, plus continuing uncertainty over Brexit all came together to create a tougher than anticipated business environment for airlines. Yet the industry managed to achieve a decade in the black, as restructuring and cost-cutting continued to pay dividends.
"It appears that 2019 will be the bottom of the current economic cycle and the forecast for 2020 is somewhat brighter."
GDP is forecast to expand by 2.7 per cent in 2020 (marginally above the 2.5 per cent growth in 2019). World trade growth is expected to rebound to 3.3 per cent from 0.9 per cent in 2019, as election year pressures in the United States contribute to reduced trade tensions.
Growth is supported by actions from central banks as well as easing fiscal policy.
Slower growth over the past year contributed to lower energy demand, with crude oil prices averaging around US$65 per barrel. Oil supply is also plentiful, boosting inventories.
As a result, oil prices are expected to dip further in 2020 to US$63 (Brent).
Jet kerosene prices are also expected to dip, averaging US$75.60 per barrel versus US$77 per barrel this year.
The expected industry fuel bill of US$182b will represent 22.1 per cent of expenses, down from $188b or 23.7 per cent of expenses this year. Iata points out that the 2020 average return airfare (before surcharges and tax) is expected to be US$293 which is 64 per cent below 1998 levels after adjusting for inflation.
• The return on invested capital is forecast to be 6 per cent
• The net profit margin is forecast at 3.4 per cent.
• Overall industry revenues are forecast to reach US$872b
• Industry operating expenses are projected to climb 3.5 per cent to US$823b.
• Passenger numbers are expected to reach 4.72 billion (up 4 per cent from 2019).
• Freight tonnes carried are expected to recover to 62.4 million, up 2 per cent
• Average net profit per departing passenger of US$6.20 (US$5.70 in 2019)
North American carriers are expected to post a net profit of US$16.5b (down from $16.9b in 2019). That represents a 6 per cent net margin and a net profit of US$16 per passenger. The region managed to improve profitability in 2019, as the still strong economy and structural improvements in the industry allowed unit revenues to hold up much more than in other regions. But in 2020, unit revenue and profitability are expected to reduce. This will be the result of a slowing economy and a significant increase in aircraft deliveries particularly with the expected return to service of the 737 Max fleet.
European carriers are forecast to report a US$7.9b net profit in 2020 (up from $6.2b forecast for 2019) as airlines in the region benefit from the opposite pattern of the developments expected in North America. Economic growth is forecast to pick up and, as a result of substantial cuts in expansion plans, capacity growth is expected to be moderate, helping to improve the supply-demand balance. The net profit per passenger is expected to be $6.40 (3.6 per cent net margin). This relatively good aggregate performance for the region hides a long list of airlines just breaking even or making losses, which is why there were a series of European airline failures in 2019.
Asia-Pacific carriers will be helped by the modest recovery in world trade and air cargo, showing a US$6b net profit in 2020 (up from US$4.9b in 2019) for a 2.2 per cent net margin. Asia remains the manufacturing centre of the world and revenues from transporting many of those goods are a significant proportion of sales for many of the region's airlines. But the trade war is assumed just to be on hold; trade tariffs are not reversed. Consequently, the rise in trade and cargo volumes is moderate. The net profit per passenger is anticipated to be US$3.34.
Middle Eastern carriers are continuing a restructuring process and announced schedules point to a substantial slowdown in capacity growth for 2020. After very weak economic growth in 2019, which limited local traffic, some rebound is expected in 2020. Restructuring and stronger growth will boost performance. But this will take time and a loss is expected for a third consecutive year, estimated at US$1b, trimmed from US$1.5 billion in 2019.
Latin American carriers are expected to benefit from improvements to the underlying economies and restructurings and return to the black next year with a small profit of US$100m. Apart from currency weakness in 2019, the region's economy slowed sharply to just 0.2 per cent due to problems in Mexico, recession in Argentina and a decline by around one-third in the size of the Venezuelan economy. In 2020 airlines will be helped by the rebound to 1.8 per cent growth forecast by the IMF, led by stronger growth in Brazil and Mexico and less severe contractions in Argentina and Venezuela. This represents a US$500m positive swing compared with an expected loss of US$400 million in 2019.
African carriers continue to suffer structural problems of high costs — in large part owing to government taxes and fees - and low load factors. Economic growth in the region has been relatively good and is expected to rise in 2020, but markets are extremely fragmented and inefficiently served in the absence, so far, of a Single African Air Transport Market. As a result, they are projected to show a loss of US$200 million, similar to 2019.
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