2017 was, arguably, the best year ever experienced for airline profitability and traffic growth. This creates a favorable momentum heading into 2018. According to the International Air Transport Association (IATA)’s research, the aviation industry is forecast to have the fourth consecutive year of sustainable profits with strong growth continuing in 2018 and the expected net profit rising to $38.4 billion (+11% on $34.5 billion in 2017) despite the challenges of increasing of fuel, labour and infrastructure expenses.
Strong demand in air transport
People are travelling across the world more than ever. The report shows that passenger numbers are expected to grow impressively to 4.3 billion in 2018, while passenger traffic (revenue passenger kilometers, or RPKs) is forecast to remain strong (+6.0%) as economic growth offsets the drag from the rise in oil prices. Revenues from the passenger business are expected to increase to $581 billion (+9.2% in comparison with 2017). Passengers will see a substantial growth in the value they derive from air transport in 2018, including stability in airfares which has been adding several % points to RPK growth over the past few years. New destinations are forecast to rise next year, with frequencies up too, both boosting consumer benefits. IATA's report expects 1% of world GDP to be spent on air transport in 2018, totaling $861 billion.
Most regions are expected to have a positive outlook in 2018 with improved profitability and growth capacity expansion. Financial performance is led by the North American airlines with expected net profit of $16.4 billion in 2018, which contributes approximately 50% of the whole industry’s profit. Meanwhile, European airlines are predicted to deliver a net profit of $11.5 billion in 2018 (+17% in 2017) along with an increased capacity of 6%, supporting a strengthening of the region’s performance. Carriers in the Asia Pacific are forecast to achieve $9 billion profit, especially the local cargo business that has seen a significant growth accounting for 37% of the world's cargo capacity. In 2018, carriers in Latin America and the Middle East are forecast to gain a $900 million and $600 million in net profit respectively. In contrast, African airlines are expected to continue to lose $100 million following a collective net loss of $100 million in 2017 due to slowing economic growth.
Oil prices are considered to be one of the biggest challenges to profitability in 2018: it is predicted that Brent Crude will cost around $60/barrel (+10.7% from $54.2 in 2017). While jet fuel prices are estimated to increase even more quickly to $73.8/barrel (+12.5% on $65.6 in 2017). Airlines' fuel costs constitute 20% to 30% of total costs, and for Low-Cost Carriers even 40%. Therefore, the impact on the industry of fuel expenses requires airlines to adjust their business models including capacity decisions, route planning, airfare prices, fleet modernisation and employee hiring to allow for a reasonable increase in cost. Furthermore, airlines are expecting total employment to exceed 2.7 million in 2018 (+2.6% compared to 2017), while labour costs, which have been accelerating strongly, are now a larger expense than fuel (30.9% in 2018). Wages and jobs will rise as employees share the benefits of improved performance. Nevertheless, along with rising fuel costs, labour is one of the major contributions to the upward pressure on unit costs this year and the squeeze on airline profit margins.