The fliers of the free skies might soon be chained by dearer boarding passes, with the aviation industry facing the heat from several issues. Rising fuel prices, labor costs, and trade restrictions are among the few reasons that have led to a cut in estimated profits of air carriers in 2018.
The International Air Transport Association (IATA) said the industry has now cut its projected profit to $33.8 billion for the year, down 12% from the $38.4-billion estimate laid out last December. Last year, the airline industry made $38 billion in profit.
The IATA, which represents around 280 carriers comprising more than 80% of air traffic worldwide, estimates passenger yields to increase by 3.2% in 2018, buoyed by expectations that a healthy economy will boost demand.
The rise in oil prices is largely to blame for the reduced profits. US oil prices reached $70 per gallon last month, representing the highest point in four years. In addition to fuel prices, US carriers are facing the burden of labor costs. American Airlines (AAL) said it would have to raise ticket prices if the current trend of fuel price rise continued. Other airlines might be pressured to do so too.
According to a Bloomberg report, airlines in North America are expected to contribute the majority of the airline industry’s profits along with the highest margins. Earnings by North American airlines is expected in the range of $15 billion. Airlines in Europe and Asia-Pacific are expected to make more than $8 billion, while all carriers in other geographies are touted to be profitable, except for Africa.
North American airlines are expected to contribute the majority of the airline industry’s profits along with the highest margins
Oil prices and labor costs are not the only things affecting global airlines. The rise in trade tensions is also harmful to the aviation industry and the global economy. IATA and the World Travel and Tourism Council (WTTC) have raised concerns over the latest incidents such as trade tariffs, the US-Iran nuclear issue as well as Brexit.
The U.S. and China are locked in a trade tariff debate while Europe, Canada, and Mexico are facing new duties on steel and aluminum. The chiefs of both agencies said that the industry depended on the free movement of people and commodities and any factor that threatened free trade and travel was harmful not just to the industry but to the world economy too.
Such restrictions in trade would cause friction in business travel, and this would affect the airline industry. Free trade was necessary for both economic growth and job creation. The Boeing Company (BA) said that the new tariffs were not likely to hit its numbers significantly as around 90% of the company’s aluminum needs were sourced domestically. Airbus SE said it was too early to figure out the exact hit on its numbers.
The WTTC said the tariffs would also affect the development of infrastructure which is also necessary for the growth of business and economy. Despite the looming threats, the IATA chief said the airline industry is doing well and is likely to see a good return on invested capital which will help growth and employment while bringing value to shareholders.
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