LDN - Business

Airlines set for record profit in 2018, fare rise forecast

[December 05, 2017] By Victoria Bryan

GENEVA (Reuters) - Improving economies and robust travel demand will return global airlines to record profit in 2018, with fares also set to rise, the International Air Transport Association (IATA) said.

Overall profits are expected to rise 11 percent to $38.4 billion in 2018, and the outlook is encouraging, IATA said on Tuesday as it raised its 2017 forecast to $34.5 billion, up from an earlier $31.4 billion estimate, but still lower than 2016.

Of the $38.4 billion, $27.9 billion will come from North American and European airlines.

"We are eight years into this air travel cycle, but we see no reason at present to expect that cyclical pattern to repeat itself," IATA Chief Economist Brian Pearce said, with reference to a trend that would usually indicate a major downturn was due.

After declining for six years in a row, passenger yields, a measure of ticket pricing, are also expected to rise by 3 percent next year, after falling 1.5 percent in 2017.

But not all the forecasts are so positive, with passenger demand measured in revenue passenger kilometers set to rise by only 6 percent, slightly less than 2017's 7.5 percent increase.

And cargo demand, also a bright spot in 2017 with demand up 9.3 percent after a tough few years, is expected to moderate to 4.5 percent in 2018.

IATA said the forecast increase in passenger fares was in line with expected inflation.

EUROPEAN UPGRADE

Rising ticket revenues have helped major European airlines report better than expected profits this year, and IATA said it was upgrading its net profit forecast for Europe to $9.8 billion this year, from a previous estimate of $8.6 billion, and profits should rise further to $11.5 billion next year.

While tough competition has seen the demise of some carriers, improving economies and robust demand rather than consolidation are key to rising profit in Europe, Pearce said.

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A passenger plane flies through aircraft contrails in the skies near Heathrow Airport in west London, April 12, 2015. REUTERS/Toby Melville

In good news for airline investors, the industry's return on capital is expected to exceed its cost of capital for a fourth year in a row next year.

With global profitability now on a more sustainable footing, IATA said airlines' main focus was on keeping costs under control, with rising fuel prices and labor costs set to weigh.

IATA predicts unit costs will rise 4.3 percent in 2018, after 1.7 percent in 2017, and it predicts an average jet fuel price of $73.8 per barrel next year, up 12.5 percent.

"The industry is reacting to that cost pressure. We know from the announced schedules that we are likely to see some slowdown in the increases in capacity in 2018," Pearce said.

However, IATA said it was not concerned there was a pilot shortage after high-profile cancellations at Ryanair <RYA.I> and American Airlines due to rostering issues and after some U.S. airlines awarded high pay increases to pilots this year.

Pearce said air travel demand had grown faster than expected, outpacing the supply of new pilots.

"We expect to see the training sector respond and produce more pilots over time," he said.

(Reporting by Victoria Bryan; Editing by Maria Sheahan and Alexander Smith)

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