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Global airlines slash profit forecast by 21%

The earlier fall from the peaks of 2018 was driven by an over-supply of crude oil, partly from shale oil production in the US. But, sanction on Iran’s oil exports and limited spare capacity left in OPEC has resulted in oil prices to rise back above to USD 70 billion.

The worsening US-China trade situation and rising oil costs are putting pressure on airline earnings as the International Air Transport Association (IATA) and top aviation companies cut its forecast for 2019 industry profits by more than a fifth. According to the annual general meeting held in Seoul, global airlines slashed profit forecast by 21 percent, the reason behind is increasing trade war and higher oil prices. This can lead to industry slowdown.

IATA Director General and CEO Alexandre de Juniac said 2019 would be the tenth consecutive year in the black for the airline industry but margins are being squeezed by rising costs, including those related to labor, fuel, and infrastructure.

The International Air Transport Association (IATA), which represents more than 80 percent of the global air traffic and carriers of about 290 carriers, also said the industry is expected to ear $28 billion profit in 2019 which is lesser than last year’s December forecast of $35 billion. “Airlines will still turn a profit this year, but there is no easy money to be made,” IATA Director-General Alexandre de Juniac said at the group’s annual meeting in Seoul.

The two crashes in the month of October and March that has killed 346 people, involved Boeing Co.’s Max jetliner in both the accidents. This has pushed the world’s biggest aircraft maker into one of its biggest crises. That has also brought the industry’s “reputation in the spotlight,” de Juniac added. Halting of Boeing’s fastest-selling jet has triggered probes by regulators and calls for compensation from airline customers. There is no detailed information given by  IATA chief on the financial impact of the fatal crashes.

Boeing also faces a criminal probe, as well as civil inquiries from the US Congress and the Securities and Exchange Commission for its role in the accidents, also close ties with federal regulators. Around the world Civil Aviation Authorities have yet to agree on required measures to be taken for the jet’s re-entry into service. De Juniac informed on May 30 that the Max isn’t likely to return to the skies for at least 10 to 12 weeks.

“Trust in the certification system has been damaged among regulators, between regulators and the industry and with the flying public,” de Juniac said in a speech on Sunday in Seoul. “While Boeing and the US Federal Aviation Administration are at center stage, the close collaboration of counterpart manufacturers and civil aviation authorities around the world is essential. 

Any rift between regulators and top aviation companies is not in anybody’s interest.”

Since the two crashes in October and March that killed 346 people. Both the accidents involving Boeing Co.’s Max jetliner, have pushed the world’s biggest aircraft maker into one of its biggest crises. That also put the industry’s “reputation on the spotlight,” de Juniac added.

US carriers including American Airlines Group Inc. have been warned of headwinds arising from the industry turmoil. Boeing as paid compensation to China’s airlines for the grounding of its Max jet is on track, which has resulted in losses of more than $500 million (for the carriers).

 

“Air cargo market, which is an extra source of revenue for carriers have weakened substantially. Because this market is under direct impact of international trade, which is at zero growth rate”, added by de janiac.

IATA worries over this trade tension which has already forced many carriers n Asia to ground or delay taking deliveries of air freighters can have its effect on the passenger market.

After so much struggle, airlines are able to cover the capital in recent years by squeezing the expenditures, despite their high fixed prices which is out of their control.  Analysts have said that aviation is nearing the end of the business cycle.

Peter Harbison, a leading consultant, warned the airline CEO’s that the company’s great profits were a “temporary aberration” when he was promoted by airline’s half of the global profit relies on one region only – North America. He said that this industry’s growth continues to be stimulated by low fare, but such travels are the most vulnerable in bad times of the company.

In a $900 billion industry filled with tensions,  Lufthansa’s Germany head hit out low-cost airlines have fares which are unrealistically low, though those firms legacy carriers are expanding.

CEO Eastern Spohr said “I’m not complaining about the competition. Don’t get me wrong… but that kind of ticketing below 10 Euros is hurting the trust of public and politicians (and) congesting air traffic,”.

“I put it in the category of a discreet event more than a global phenomenon at this point. My impression is not that the tide has turned,” said sales chief Christian Scherer.

 There are plenty of airlines in Europe getting disappear after a series of failures through mergers or bankruptcies. “We have just begun to see the beginning of it,” he said.

In 2019, passenger capacity growth which reached 6.9 percent, is forecast to slow to 4.7 percent this year. With average fares following a 2.1 percent decline in 2018. The dip is a matter of concern and very significant detail because airline profits track consumer confidence and global trade.

UK-based Flybe CEO said she felt the threat of massive consolidation without independent and challenging carriers. Christine Ourmieres-Widener plans to step down on July 15, months after the sale of the low-cost airline.

 

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