Iata lowers ME airlines’ 2014 profit by Dh734m

Higher oil prices could hit regional airline’s profitability

International Air Transport Association (Iata) on Wednesday revised down Middle East airlines profits by $200 million (Dh734 million) to $2.2 billion (Dh8 billion) in 2014, blaming higher oil prices.

An Iata press statement forecast that the regional carriers will post $2.2 billion profit in 2014 as compared to $1.6 billion last year, an increase of 37.5 per cent.

“Oil revenues from high oil prices are benefiting the home markets and the region’s carriers continue to win market share in long-haul connections through the region’s hubs. Cargo, in particular is experiencing strong growth as a result, partly, of tapping into newly emerging trade lanes such as those between Africa and Asia. This follows significant investments by Chinese companies in Africa,” Iata statement said.

The global aviation body also slightly lowered outlook for 2014 to an industry profit of $18.7 billion from the previously forecast $19.7 billion mainly due to higher oil prices.

“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),” the statement said.

Fuel currently accounts for some 30 per cent of the average airline cost structure. Recent tensions, including in the Ukraine, have sparked an upward trend… Jet fuel prices are also expected to be higher at $124.6/barrel which is a $1.7/barrel increase from previously forecast (and unchanged from 2013). Overall, fuel costs are expected to rise by some $3 billion to $213 billion compared to the December forecast.

Tony Tyler, Iata’s Director General and CEO, said: "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 per cent."

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.

Passenger demand has been strong throughout the recovery process. “We expect passenger demand growth of 5.8 per cent this year. That is slightly weaker than previously forecast (6.0 per cent), but an improvement on the 5.3 per cent growth for 2013. Passenger yields however are expected to deteriorate by 0.3 per cent,” Iata said.

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

Iata said global trading conditions remain challenging, but positive macro-economic trends are providing a much-needed boost. There are however, several major changes which continue to challenge the cargo business. Traditionally air cargo has grown only slightly less than world trade, at twice the rate of expansion of industrial production. The recent trend is for air cargo, world trade and industrial production to grow in tandem. The industry is growing more slowly than normal at this stage of the economic cycle.

(Home page image courtesy Shutterstock)

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