- A confluence of negative factors, including Boeing’s international 737 Max scandal, have made it tough for airlines this year.
- Trade disputes spearheaded by President Donald Trump and rising oil prices, have only made things worse.
- The International Air Transport Association, which represents some 290 airlines, is warning that 2019 profits will be the lowest the industry has seen in years.
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Airline profits are set to fall to $US28 billion, the International Air Transport Association warned Sunday at its annual meeting, as rising jet fuel costs couple with Boeing’s international 737 max crisis and a trade war for one of the worst years in recent memory.
The trade group expects overall costs to grow by 7.4% in 2019, well ahead of a 6.5% rise in revenues. That difference will slash margins to 3.2% (from 3.7% in 2018), squeezing the industry’s tightly watched profit-per-passenger measure in step. The new profit estimate is down from $US35.5 billion in December.
“This year will be the tenth consecutive year in the black for the airline industry,” Alexandre de Juniac, IATA’s CEO and director general, said in a press release.
“But margins are being squeezed by rising costs right across the board-including labour, fuel, and infrastructure. Stiff competition among airlines keeps yields from rising. Weakening of global trade is likely to continue as the US-China trade war intensifies. This primarily impacts the cargo business, but passenger traffic could also be impacted as tensions rise. Airlines will still turn a profit this year, but there is no easy money to be made.”
Labour disputes kicked off the year, as Southwest in February grappled with a mechanics union which it blamed for intentional flight delays and more than 600 canceled flights. (The union, meanwhile, accused airline officials of scapegoating).
The second deadly crash of a Boeing 737 Max jet in Ethiopia on March 10, which followed a similar disaster in Indonesia in October, only made things worse for all operators of the plane, which is now grounded around the world.
Boeing’s stock price is still up 4% since the beginning of the year, but nearly 25% off its March highs as regulators around the world look into how the plane was certified to fly.
There seems to be no end in sight for the embattled company, either. Despite surviving its annual shareholders meeting unscathed, the company is now facing pressure from airlines for financial compensation, and has already paused its dividend and put financial forecasts on hold.
“Aviation needs borders that are open to people and to trade. Nobody wins from trade wars, protectionist policies or isolationist agendas. But everybody benefits from growing connectivity. A more inclusive globalization must be the way forward,” IATA’s de Juniac continued.
Taken in unison, the industry’s 2019 headaches have hurt equity valuations across the board. JETS, an exchange-traded fund that tracks global passenger airlines and some cargo carriers, is down slightly, about 0.6%, since January 1. For comparison, the S&P 500 index, a widely used stock benchmark, is up almost 10% in the same period.
There could be hope, however. Despite an increase in fares this year as fuel costs creep up, those increases could help airlines remain nimble, Morgan Stanley said last year.
“There has been a level of debate amongst investors around the implications of higher oil on Airline shares, and in our opinion, higher is a good thing,” analyst Rajeev Lalwani told clients. “This is because it instills: 1) Pricing and capacity discipline; 2) Financial constraints on costs and capex; and 3) Margin and multiple expansion.”
Oil prices since Lalwani’s call have actually fallen, to about $US55 per barrel, according to Markets Insider data.
Other analysts, like JP Morgan’s Jamie Baker, are even more optimistic for the industry in the wake of Boeing’s ongoing nightmare.
“The long-term Airline impact could have positive ramifications,” he told clients in May of the grounded plane. “Diminished domestic capacity is typically a positive; supply relief leads to better RASM, and better RASM typically leads to higher earnings multiples. Granted, growth-oriented LUV would likely see diminished earnings, given MAX constitutes the entirety of its order book.”
“We think the selling is overdone and that a “snapback” is more likely than not once we have clarity on the “fix,” he said.
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