No Recession but Industry Profits to Decline
A recession “doesn’t look likely this year,” IATA Chief Economist Brian Pearce told the IATA AGM. While it is true that shrinking air cargo historically has signaled recession, global GDP growth is healthy and passenger traffic is solid, Pearce said.
The weakness in air cargo is more attributable to the collapse in global trade related to the tariff wars, than to any underlying problems in the economy. “We’re not seeing the weakness in global GDP that we are in trade,” he said.
As a result, the industry forecast is for a 10th consecutive year of profitability, with airlines predicted to earn $28 billion this year, Pearce said. However, this does represent a downgrade compared to a more upbeat forecast of $35.5 billion made in December as well as estimated earnings of $30 billion in 2018.
The difference, said Pearce, is that the business environment has deteriorated since December—costs are rising, including fuel, labor and infrastructure, while the ability to recover these costs is falling.
The good news for shareholders is that even though profits will be down, it does appear that industry will achieve a return on invested capital that exceeds the cost of capital for a fifth year—although just barely.