Regulation, infrastructure trip up African airlines - Iata

Sydney – African airlines continue their very slow emergence from a low point in 2014 when they made a collective $900m loss, the International Air Transport Association (Iata) announced at its recent 74th annual general meeting in Sydney.

Since the 2014 low point their losses continued at about the $100m level each year. Since 2017 losses were less due to traffic, especially cargo transported to Asia, picking up.

The net loss per passenger among African airlines has also improved in 2018 to $1.55 from $1.66 in 2017.

“We did not see the improvement among African airlines that we have seen elsewhere,” Brian Pearce, Iata’s economist, told Fin24.

In his view, regulation and infrastructure are some of the main causes for airlines on the continent not performing well.

The low load factor is another big challenge which impacts negatively on the profit of African airlines.

Iata has found that African airlines are the least profitable of the global regions. Airlines in North America are the most profitable.

According to Pearce African airlines still lag way behind the rest of the world as far as profitability is concerned.

Cost of air transport

According to Pearce, air travel in the world in general will be more expensive in 2018.

“There is not a lot of head wind to travel, but there are also not the tail winds of the last few years,” he said.
At the same time, he pointed out that the cost of air transport in the world in general - both relating to cargo and passengers – actually halved over the past 20 years in inflation-adjusted real terms.

Currently fuel costs are, however, rising sharply and airlines will have to reflect some of this in higher fares, according to Pearce. Iata does not, however, expect air fares to increase more than the general rate of world inflation.

While airlines in North America and Europe are generating “significant free cash”, Iata reports that this is not the case in other regions where such “free cash” is not generated, thus limiting airlines in these regions in their ability to reduce debt or pay investors. That is why airlines in these regions are more vulnerable to rising interest rates and cost or revenue shocks.

“Confidence and the impetus behind air travel improved through 2017 and early 2018, but in the last couple of months confidence has dipped as a result of trade disputes and geopolitical uncertainties,” according to Iata’s report on airline profitability.

Iata has found that the main challenge to airlines’ profitability in 2018 is the sharp acceleration of unit costs, which began two years ago and was accelerated in 2018 due to a large increase in fuel prices.

“Fuel prices are now over $90 a barrel, which is 45% higher than this time last year,” according to Iata.

“Up to the end of last year, and probably into the first quarter of this year, airlines managed to keep unit revenues rising in line with unit costs – keeping operating margins stable. The further rise of fuel prices increases the difficulty of this cost challenge.”

Iata estimates that 80% of the increase in unit costs over the past two years came from higher fuel prices and higher labour costs. The third largest contributor to the cost increase came from higher infrastructure costs.

Mainly due to the higher fuel prices, Iata expects some decline in the average return on capital in the aviation industry this year. At the same time, investors will demand higher returns, since alternatives such as bonds are seeing higher interest rates, according to Pearce.

Nevertheless, Iata expects returns to remain higher than the cost of capital this year and expects the industry will create value for investors for the fourth successive year.

“Although investors will be looking for more (returns), the airline industry is still attractive to investors,” said Pearce.

* Fin24 was a guest of Iata at its AGM.

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