(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% to $38.4bn (£28.7bn) in 2018, and the outlook is encouraging, IATA said on Tuesday as it raised its 2017 forecast to $34.5bn, up from an earlier $31.4bn estimate, but still lower than 2016.
Of the $38.4bn, $27.9bn 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.
Not all positive news
After declining for six years in a row, passenger yields, a measure of ticket pricing, are also expected to rise by 3% next year, after falling 1.5% in 2017.
But not all the forecasts are so positive, with passenger demand measured in revenue passenger kilometres set to rise by only 6%, slightly less than 2017’s 7.5% increase.
And cargo demand, also a bright spot in 2017 with demand up 9.3% after a tough few years, is expected to moderate to 4.5% in 2018. IATA said the forecast increase in passenger fares was in line with expected inflation.
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 $9.8bn this year, from a previous estimate of $8.6bn, and profits should rise further to $11.5bn 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.
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.
Shift to cost control
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 labour costs set to weigh.
IATA predicts unit costs will rise 4.3% in 2018, after 1.7% in 2017, and it predicts an average jet fuel price of $73.8 per barrel next year, up 12.5%.
“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.
Pilot shortage not a concern
However, IATA said it was not concerned there was a pilot shortage after high-profile cancellations at Ryanair and American Airlines due to rostering issues and after some US 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.