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Global airfares seen dipping 3.5% this year

The logo of Brazilian airline Gol is seen on the wing of one of their airplanes after takeoff from Belo Horizonte airport May 27, 2014.

NACHO DOCE/REUTERS

Airfares are expected to fall 3.5 per cent in 2014 although the global airline industry anticipates a slightly weaker year of profits on concerns over China's economic growth and various geopolitical risks.

The International Air Transport Association (IATA) said on Monday that airlines are forecast to earn $18-billion (U.S.) in profits in 2014, down from a previous forecast of $18.7-billion, for a net profit margin of 2.4 per cent.

That's up from earnings of $6.1-billion in 2012 and $10.6-billion last year, the Geneva-based organization said.

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Consumers are expected to spend a total of $746-billion on air travel this year, 1 per cent of world GDP, said IATA.

IATA director-general Tony Tyler said airlines "remain burdened with high taxes and weak profitability. There is a mismatch between the value that the industry contributes to economies and the rewards that generates for those who risk their capital to finance the industry."

The $18-billion in profits amounts to $5.42 per passenger carried, according to IATA calculations.

Among the factors IATA cites for the dip in forecast profits are an economic environment that has deteriorated since March, a slowing in world trade and concerns over China's economy and political instability in various hot spots.

The latest profit forecast is based on expected global GDP growth of 2.8 per cent in 2014, down from 2.9 per cent anticipated in March, and world-trade growth of 3.6 per cent, down from 4.5 per cent.

"Economic prospects are, however, expected to improve as the year progresses," said IATA.

Overall passenger growth is expected to remain strong with a 5.9 per cent increase over 2013.

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All regions are expected to see improved profitability in 2014, but not in a uniform way, says the organization.

The global airline industry faces challenges that include rising infrastructure costs, inefficiencies in air-traffic management, a heavy tax burden and costly regulation, said Mr. Tyler.

The average return on invested capital for airlines is 5.4 per cent, up from 1.4 per cent in 2008, but still far off from the 7 to 8 per cent cost of capital considered the minimum in most industries, said IATA.

IATA represents 240 carriers.

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About the Author
Quebec Business Correspondent

Bertrand has been covering Quebec business and finance since 2000. Before joining The Globe and Mail in 2000, he was the Toronto-based national business correspondent for Southam News. He has a B.A. from McGill University and a Bachelor of Applied Arts from Ryerson. More

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