Airlines are forecast to make a record $38 billion profit this year from unprecedented passenger demand. But as chief executive officers descend on Sydney for their annual jamboree, rising fuel prices risk ruining the party.
Some 4.3 billion people, or more than half the world’s population, will take a flight this year, according to the International Air Transport Association. They’d better get ready to pay higher fares after Brent crude oil rose 54 percent in the past year to hover near a 3 1/2-year high of $80 a barrel.
“We are probably at the peak of the cycle,” Alexandre de Juniac, IATA’s chief executive officer, said in Sydney on Thursday. Given the price of fuel, this year’s profit forecast looks unreachable and IATA will issue a revised outlook on June 4, he said.
So, from kerosene to a shortage of pilots, here are topics and trends set to dominate this year’s three-day IATA meeting starting June 3.
It’s the single-biggest expense for most carriers (for U.S. airlines, wages top the list) and the proportion of revenue swallowed by the fuel bill is set to grow this year for the first time since 2012, IATA projections show. Companies including Qantas Airways Ltd. have contained some of the damage by hedging fuel needs and swapping gas-guzzling Boeing Co. 747s for Dreamliners. But hedges can go wrong as Cathay Pacific Airways Ltd.’s losses have shown. A technological solution may be years off: Airbus SE, Rolls-Royce Holdings Plc and Siemens AG are developing a hybrid-electric propulsion system for planes. A demonstrator is expected to fly only in 2020.
2. Low-Cost, Long Haul
Once the subject of ridicule, these spartan endurance tests are on the rise with the likes of Norwegian Air Shuttle ASA and Iceland’s Wow Air Ehf, while British Airways-owner IAG SA is expanding quickly in the space. Long-haul budget carriers have almost doubled their market share to 5.1 percent in the past six years, the CAPA Centre for Aviation says. In the ultimate compliment, Japan Airlines Co. is the latest full-service carrier to join the trend. Still, it’s not clear if charging for luggage and leg space is viable in the long term: Norwegian is struggling to fend off suitors as the carrier balances debt with rapid expansion plans.
3. Where’s Our Pilot?
Airlines are losing the fight for manpower. By 2036, they’ll need 637,000 new pilots, according to Boeing. That number has jumped 28 percent in the past five years and the shortfall is most acute in Asia. Chinese carriers are paying lavish salaries to attract overseas aviators while Qantas is setting up its own pilot school.
4. Bet on Asia
Traffic volumes within Asia will go some way to offsetting fuel costs and staff shortages. The Asia-Pacific region will produce more than half of all new flyers in the next two decades and China is on course to surpass the U.S. as the world’s biggest air travel market as early as 2022, according to IATA. But a looming problem is building enough airports and paying for the planes: Boeing estimates Asia-Pacific carriers will need 16,050 new aircraft valued at $2.5 trillion by 2036. And all this as profitability at Asia-Pacific carriers falls and trails North American rivals, IATA data show.
5. A Seller’s Market
Tie-ups and takeovers among plane manufacturers are reducing competition and limiting choice for airlines — just as they need to buy more aircraft. Airbus SE is taking over Bombardier Inc. C Series program while Boeing Co. is in talks to form a joint venture that would give it control of Embraer SA’s commercial jets.
–With assistance from Benjamin Katz, Dong Lyu and Mary Schlangenstein.
©2018 Bloomberg L.P.
This article was written by Angus Whitley, Kyunghee Park and Anurag Kotoky from Bloomberg and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to firstname.lastname@example.org.