IATA predicts losses for African airlines

African airlines are projected to stay in the red in 2019. PHOTO | FILE | NATION MEDIA GROUP 

In Summary

• Iata sees a worsening business environment, with rising fuel prices expected to drive a 7.4 per cent rise in overall costs against a 6.5 per cent rise in revenues.

By MICHAEL WAKABI
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It's going to be yet another year of losses for African airlines — the fourth in a row — as the global airline industry braces for higher fuel prices and weaker global trade during 2019.

The projections are a cautionary tale for East Africa’s struggling airlines and new ones that are setting up in the region.

Releasing the mid-year airline industry economic forecast during its 75th AGM in Seoul on June 2, the International Air Transport Association (Iata) said airlines were expected to make a net profit of $28 billion during the year. This is 20 per cent lower than the $35.5 billion net profit that the association had forecast in its first outlook for 2019, last December.

“This will be the 10th consecutive year in the black for the airline industry. But margins are being squeezed by rising costs across the board, including labour, fuel and infrastructure. Weakening of global trade is expected to continue as the US-China trade war intensifies,” Iata director general, Alexandre de Juniac, said.

Despite the headwinds, Mr de Juniac said the industry has turned a corner; airlines have been in the black since 2010. The performance is not uniform, with some regions struggling more than others.

“But our sustained normal financial performance is a major shift from the boom and mostly bust cycles of the past,” he said.

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Iata sees a worsening business environment, with rising fuel prices expected to drive a 7.4 per cent rise in overall costs against a 6.5 per cent rise in revenues.

“The industry is still performing relatively well in 2019,” Iata chief economist Brian Pearce said at the AGM. “We forecast net post-tax profits to fall to $28 billion this year, but that is still much better than before 2015.”

That will translate into an average net margin of $6.12 per passenger departure, with North America leading the pack with $15 billion of the global cake and a net margin of 14.77 per passenger. Europe’s airlines will rake in $8.1 billion, equivalent to $6.75 per passenger, and Asia Pacific $6 billion or $3.51 per passenger.

Africa, the Middle East and Latin America, which continue to face significant downward pressures, are projected to stay in the red. Just like in 2018, African airlines will lose $100 million in 2019 and Middle Eastern airlines will lose $1.1 billion from $1 billion. Latin American airlines will see their position improve from the $0.5 billion lost in 2018, to a profit of $0.2 billion.

Iata says despite lower costs and higher yields, profitability for African airlines is undermined by inability to achieve sufficient load factors.

“As in the past four years, Africa is one of the weakest regions. Breakeven load factors are relatively low as yields are a little higher than average and costs are lower. However, few airlines in the region are able to achieve adequate load factors, which averaged the lowest globally at 60.6 per cent in 2019,” Mr Pearce said.

Although load factors are projected to be 0.6 per cent above breakeven load factor, airlines in the region will book a penalty of $1.54 on each passenger carried.

Iata sees the resumption of sanctions on Iran oil exports driving jet fuel prices to $87.5 per barrel, driving the industry’s consolidated fuel bill to $206 billion, representing 25 per cent of average operating costs.

The 2018 price of $71.6 per barrel of Brent is expected to continue in 2019, with an average cost of $70 per barrel projected, representing a 27.5 percent increase over the $54.9 average seen in 2017.