Airlines Slash Outlook for Profit Due to Fuel Cost Increase

On Monday, global airlines slashed forecasts for their profits this year due to an increase in fuel costs and warned that interest rates that have become higher and several geopolitical tensions increased operating risks.

The International Air Transport Association or IATA, which has over 280 carriers it represents, said that the industry would post profits of $33.8 billion in 2018, which is 12% below a forecast previously released of $38.3 billion.

However, passenger yield, which is a proxy for future air fares, should rise by more than 3.2% in 2018, the first gain for a year since 2011 as a strong worldwide economy helps to drive an increase in demand, said IATA.

It is true that 2018 will be a more difficult year, but the airlines continue to do well, said IATA’s Director General Alexandre de Juniac during the annual meeting of the association, adding that the majority of decline in profit was because of the price of oil increasing.

IATA is expecting that the prices of oil will average $70 per barrel in 2018, up from last year’s average of $54.90 and a prediction it released earlier of $60.

The earnings outlook, which was not as upbeat, is a sizable drop from 2017 when profits hit a record $38 billion, but comparing that figure is difficult since it was distorted due to special items related to accounting such as the tax credits that were one-off that increased airlines’ annual profits, said the industry group.

IATA did warn that airlines still operate on the edge when compared to many other industries.

The IATA director general said that the forecast for this year’s profit represented 4.1% of an estimated $750 billion in sales.

Four percent does not represent a big number, as the industry remains fragile, he told reporters.

De Juniac also warned that airlines may be hit with the effects of political force that are pushing protectionist agendas, without going into specifics of which political force it was that he was most worried about.

He said that there has not been any significant drop in passenger counts or in cargo related to protectionist barriers or trade wars up to this point, but if that continues it is inevitable.

The U.S. and China have threatened tariffs on goods that are worth as much as $150 billion for each, while a handful of European countries are expressing their anger over new tariffs by the U.S. on aluminum and steel.

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