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Industry story Empowering industry profitability despite challenges

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Air transport connected more cities at lowered cost

In 2018, airlines continued to increase the number of city-pair routes globally. Almost 22,000 city pairs are now regularly serviced by airlines. This is an increase of 1,300 over the number of city-pair connections in 2017. Strong improvements in connectivity and in costs over the past two decades—the real, inflation-adjusted cost of air transport has halved in the past 20 years and declined further in 2018—help to ensure that aviation, the “business of freedom,” continues to distribute its array of benefits to consumers, suppliers, and economies globally.

1. Unique city pairs and real transport costs

1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 22,000 20,000 18,000 16,000 14,000 12,000 10,000 8,000 Number of unique city pairs Real cost of transport ($/ R T K , in 2014 prices)

Air transport supported economic growth and prosperity through tourism and trade

Air transport is central to world tourism and trade. Tourists traveling internationally by air are estimated to have spent about $850 billion in 2018, an increase of more than 10% over 2017. The additional number of city-pair connections and the lower cost of air transport also boosts trade in goods and services and heightens foreign direct investment and other important economic flows. Air transport accounts for only a small, less than 1%, proportion of world trade by volume but for a much larger share by value, of about 33%. In 2018, the value of goods carried by air is estimated to have been $6.7 trillion. 

2. Air tourist spending and value of trade carried by air

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 950 850 750 650 550 450 350 250 Air tourist spending ($ billion) Value of trade by air ($ billion) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000

Air travel was more accessible for more people 

Worldwide air passenger numbers continued to rise, exceeding 4.3 billion journeys in 2018. Connecting cities directly cuts the cost of air transport by saving time for shippers and travelers. Combined with cheaper fares, this enables more people to fly more often. In 2000, the average citizen flew just once every 44 months. In 2018, the time between trips had halved, to just 21 months.

3. Accessibility of air travel

50 45 40 35 30 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 Scheduled air pollution (billion) Number of months before next trip

Passenger demand was again robust

Demand for air passenger services remained strong in 2018, with industry-wide revenue passenger kilometers (RPK) increasing 7.4%. This represented a slowdown from the decade-high pace recorded in 2017, of about 8%, but still exceeded the long-run industry average growth rate by around 2 percentage points. Air passenger demand was underpinned by a generally solid global economic backdrop, especially earlier in the year, which, in turn, supports jobs, incomes, and business activity, and by fierce competition in the industry, which helps to ensure airfares remain affordable to travelers. 

4. RPK versus world GDP growth

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 16 14 12 10 8 6 4 2 0 -2 -4 9 7 5 3 1 -1 -3 RPK (% y ear on y ea r ) W orld GDP (% y ear on y ea r )

China added the most passenger journeys

There were close to 4 billion origin-destination (O-D) passenger journeys worldwide in 2018. Among them, domestic routes within China again provided the largest incremental increase in passenger trips, adding just under 50 million journeys. The domestic markets of the United States and India once more ranked second and third, with around 30 million and 18 million more passenger journeys, respectively. Of the main markets that IATA regularly tracks, India’s domestic market showed the fastest growth in passenger numbers, which increased 18.5% in 2018. That India recorded its 50th consecutive month of double-digit, year-on-year growth in RPK in October highlights the consistently strong performance of its market

5. Top 10 increasing O-D markets

0 5 10 15 20 25 30 35 40 45 50 China domestic US domestic India domestic Indonesia domestic Russia domestic Mexico domestic Spain domestic Japan domestic Brazil domestic Iran domestic r A dditional pax in 2018 (million) 10.5 5.7 18.5 9.3 13.3 12.0 13.3 3.7 4.5 32.8 % y ea r - on - y ear g r o w th r a t es

6. Largest O-D air passenger markets

60% 50% 40% 30% 20% 10% 0% 600 500 400 300 200 100 0 Market size (milllion pax) Cumulative share of total pax U S dom China dom India dom Indonesia dom J apan dom B r azil dom A ust r alia dom Russia dom M e xi c o dom Spain-UK T ur k e y dom Spain dom

The US O-D passenger market remained the world’s largest

Although China’s domestic market added the most passenger journeys in 2018, the US domestic market—where almost 590 million passenger journeys were undertaken in 2018—continues to be the world’s largest single O-D market. China comes second, with 515 million, followed by India some distance back, at 116 million. Unsurprisingly, domestic markets dominated the rankings. The top 12 markets accounted for almost half of the total number of O-D passenger journeys in 2018.

Air freight demand growth eased

Air freight grew slightly in 2018 compared with 2017. Buoyed by the global inventory restocking cycle, industry-wide freight tonne kilometers (FTK) increased 9.7% in 2017. In 2018, FTK likewise grew, but a mere 3.4%. This was in line with global trade volumes, which trended broadly sideways in the first part of 2018 and contracted in the year’s fourth quarter. The lesser increase for air freight also reflected the typical slowdown following an inventory rebuild. 

The second half of the year also saw the industry face a number of headwinds. There was a moderation in world trade—a result in part of the heightened trade tensions between the United States and China—and a deterioration in some leading indicators, such as the new export orders component of the global Purchasing Managers Index. Having said that, not all air freight sectors were equally affected. E-commerce and pharmaceuticals continued to perform strongly.

7. Air freight versus global goods trade growth

25 20 15 10 5 0 -5 -10 -15 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 25 20 15 10 5 0 -5 -10 -15 Industry FTK (% year on year) World goods trade (% year on year) 25 20 15 10 5 0 -5 -10 -15 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 25 20 15 10 5 0 -5 -10 -15

8. Regional passenger and freight demand outcomes

10% 8% 6% 4% 2% 0% Africa Asia-Pacific Europe Latin America Middle East North America Industry RPK F TK 10% 8% 6% 4% 2% 0%

Regional outcomes for passenger and freight demand were mixed

Regions saw varied performance in passenger and freight demand in 2018. Airlines from Asia-Pacific led the way in passenger growth, which increased 9.5% in that region, followed by airlines in Europe and in Latin America. For freight, it was the Latin American carriers that outperformed, followed by carriers in North America. Freight volumes for African airlines were broadly stable in 2018, but this should be viewed in the context of their robust 24% growth in volume in 2017. 

9. Industry passenger and freight load factors

56 54 52 50 48 46 44 42 40 85 83 81 79 77 75 73 71 69 67 65 Passenger load factor (% of available capacity) Freight load factor (% of available capacity) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Passenger load factor achieved a record as demand growth exceeded capacity 

Available seat kilometers (ASK) increased 6.9% globally in 2018 compared with 2017, slightly lower than the 7.4% RPK increase in passenger demand. As a result, the passenger load factor (PLF) ticked up slightly to a record 81.9%. The PLF has risen more than 10 percentage points over the past 15 years. And this increase is behind the improved industry financial performance of recent years. Available freight tonne kilometers (AFTK), meanwhile, grew 4.5% year on year, easily outpacing the 3.4% growth in FTK. The freight load factor, therefore, fell about 1 percentage point in 2018, partly unwinding 2017’s gain. 

10. World oil and jet fuel prices

100 90 80 70 60 50 40 100 90 80 70 60 50 40 Brent crude oil Jet fuel $/barrel (monthly average data) J an-18 F e b -18 Ma r -18 Ap r -18 M a y -18 Jun-18 Ju l -18 A u g -18 Se p -18 Oc t -18 N o v -18 De c -18 J an-19 F e b -19

Oil prices had a bumpy ride 

The jet fuel price opened the year under review about $80 a barrel and was initially stable. At the end of the year’s first quarter, though, the fuel price began to track upward, increasing more than 20%, to peak at $96 per barrel in October 2018. In November and December, however, market sentiment turned sharply down amid signs of a deteriorating global economy and strong supply from US tight oil producers. The price quickly tumbled, falling more than 25% to end the year averaging about $72 in December. The price of jet fuel has subsequently begun to rise in the early months of 2019. But the sharp and unanticipated nature of the decline at year-end means that many airlines that hedge their fuel exposure are unlikely to have seen much benefit from the price adjustment so far.

11. Breakeven and achieved load factors

70 68 66 64 62 60 58 70 68 66 64 62 60 58 Achieved load factor (% of ATK) Breakeven load factor (% of ATK) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Airlines raised their achieved load factor and maintained a gap above the breakeven level 

With oil prices, interest rates, and such other key costs as labor rising further in 2018, the estimate for the industry-wide breakeven load factor increased to 65.9%. Aided, however, by the record PLF cited previously, the combined achieved load factor also rose, enabling airlines to maintain a solid gap above the level required for financial breakeven. The gap between the breakeven and achieved load factors is driving profitability and returns and was again a critical contributor to the industry’s financial performance in 2018. 

Another solid financial performance generated an above cost of capital return for the fourth consecutive year

12. Industry return on investment and the cost of capital

12 11 10 9 8 7 6 5 4 3 2 1 0 12 11 10 9 8 7 6 5 4 3 2 1 0 Cost of capital (WACC) % of invested capital Return on capital (ROIC) % of invested capital 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
The global airline industry experienced another year of robust financial outcomes in 2018. IATA estimates that airlines generated a net posttax profit of $30 billion on an operating (EBIT) margin of 5.8%. These outcomes are modestly lower than for 2017 and, as such, reflect 2018’s more challenging business environment and particularly its rising cost pressures. Despite a moderation in industry-wide returns, to 8.0%, the air transport’s return on capital exceeded its average cost of capital, which increased to 7.3%, for the fourth consecutive year. Creating value for investors on a more sustainable basis than the industry has managed to do historically will be an increasingly crucial element in attracting the capital necessary to fund fleet renewal and replacement in the years ahead.

13. Regional profit performance

16 14 12 10 8 6 4 2 0 -2 Industry North-America Europe Asia-Pacific Middle East Latin America Africa Net post-tax profit per passenger ($) 6.85 14.66 8.20 4.74 2.77 -1.09 -1.65

14. Airline profitability per passenger

Operating margin (% of revenue) 10 8 6 4 2 0 -2 Industry North America Europe Asia-Pacific Middle East Latin America Africa 5.8 9.1 6.2 4.5 -2.0 2.7 1.5

Regional financial performance was again mixed

Regionally, the industry’s financial performance remained considerably varied. The financial performance of the North American airlines continued to lead the way, delivering an operating (EBIT) margin of 9.1% in 2018. Airlines in Europe, Asia-Pacific, and Latin America also yielded solid profitability, while carriers in the Middle East and in Africa faced especially challenging operating environments.

On a per passenger basis, the airline industry is a high-volume, low-margin industry. Considering net profits on a per passenger basis highlights this and presents an alternative perspective on regional airline profitability. By this measure, the industry generated a modest $6.85 per passenger in 2018. Regionally, the North American carriers were the best performers, earning $14.66 per passenger. At the other end of the spectrum were airlines in Africa and Latin America. In aggregate, they averaged a loss of $1.09 and $1.65, respectively, for every passenger they carried.