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WWW.TIMESOFOMAN.COM SATUR DAY, JUNE 4, 2016
MARKE
US FED LIKELY TO AVOID RATE HIKE BEFORE BRITAIN VOTES
The US Federal Reserve may be forced to delay a rate hike at its June meeting because of mounting concern over the economic fallout from Britain’s vote on whether to leave the European Union. >B2
I ATA R E P O R T
Middle East carriers to post a $1.6 billion profit for 2015 Times News Service MUSCAT: Middle East carriers are expected to post a $1.6 billion profit, up slightly from the $1.4 billion reported for 2015. The capacity of carriers is forecast to grow at 12.2 per cent, outpacing an expected 11.2 per cent expansion of demand, a latest report of IATA shows. The International Air Transport Association (IATA) revised its 2016 financial outlook for global air transport industry profits upwards to $39.4 billion (from $36.3 billion forecast in December 2015). That is expected to be generated on revenues of $709 billion for an aggregate net profit margin of 5.6 per cent. 2016 is expected to be the fifth consecutive year of improving aggregate industry profits, the report said. For the Middle East carriers efficient hubs continue to gain market share on connecting markets for the region’s major carriers, although local markets have been weakened by the impact of falling commodity revenues. Economic changes in the region’s oil econo-
mies are manifesting themselves in a spate of increases of charges and taxes which could dampen the region’s cost competitiveness, the report stated. IATA said that in 2015 airlines generated a global aggregate profit of $35.3 billion (re-stated from $33.0 billion estimated in December 2015). All regions are making a contribution to the $4.1 billion boost over 2015 profits with improved results; but there are stark regional differences in performance. More than half of the industry profits will be generated in North America ($22.9 billion) while African carriers are forecast to continue generating an overall loss (-$0.5 billion). “Lower oil prices are certainly helping—though tempered by hedging and exchange rates. In fact, we are probably nearing the peak of the positive stimulus from lower prices. Performance, however, is being bolstered by the hard work of airlines. Load factors are at record levels,” said Tony Tyler, IATA’s Director General and CEO. “New value streams are increasing ancillary revenues. And
Tony Tyler. — Bloomberg file picture
joint ventures and other forms of cooperation are improving efficiency and increasing consumer choice while fostering robust competition. The result: consumers are getting a great deal and investors are finally beginning to see the rewards they deserve,” he added further. On average, airlines will make $10.42 for each passenger carried. “In Dublin, that’s enough to buy four double-espressos at Starbucks. Looked at from a different
angle Starbucks will earn about $11 for every $100 in sales while airlines will make $5.60. We don’t begrudge Starbucks their profitability. But here is clearly still upside for airline profits,” said Tyler. For the second year in a row and only the second time in the airline industry’s history, the return on invested capital (9.8 per cent) will exceed the cost of capital (estimated to be 6.8 per cent). This is the minimum expectation level for investors. The airline industry is beginning to generate profits that would be expected of any normal business. “The job of shoring up resilience by repairing balance sheets is under way. We have had a few years of good profits and some airlines have started to pay down debt. It will, however, take a longer run of profits before balance sheets are returned to full health,” said Tyler. Repaying accumulated debt will take several years of profitability to achieve. Airlines in North America and in some parts of Europe have seen the gearing of their balance sheets fall towards investment grade levels. But for much of
the rest of the industry, it is a continuing challenge. “Airlines are producing solid results even with some strong economic headwinds. It’s an impressive performance and the mood of the industry is generally optimistic,” said Tyler. Main forecast drivers The outlook is based on oil averaging $45/barrel (Brent) over the course of the year which is significantly lower than the $53.9 average price in 2015. The full impact of lower fuel prices is still being realised as hedges mature. Overall, fuel is expected to represent 19.7 per cent of the industry’s expenses, down from a recent high of 33.1 per cent in 2012-2013. The Global Economy Weak economic conditions prevail. Gross domestic product (GDP) is expected to expand by 2.3 per cent in 2016. That is down from 2.4 per cent in 2015 and the weakest growth since 2008 when the global financial crisis hit. Consumer spending is relatively strong, but the corporate sector is
Job creation in US falls to lowest level in five years Nonfarm payrolls increased by only 38,000 jobs last month, the smallest gain since September 2010, the Labor Department said on Friday. Employers hired 59,000 fewer workers in March and April
NOT SO ROSY: Economists polled by Reuters had forecast payrolls rising 164,000 in May and the unemployment rate falling to 4.9 per cent. — Bloomberg file picture
WASHINGTON: The US economy created the fewest number of jobs in more than five years in May, hurt by a strike by Verizon workers and a fall in goods producing employment, pointing to labour market weakness that could make it difficult for the Federal Reserve to raise interest rates. Nonfarm payrolls increased by only 38,000 jobs last month, the smallest gain since September 2010, the Labor Department said on Friday. Employers hired 59,000 fewer workers in March and April. The government said the monthlong Verizon strike had depressed employment growth by 34,000
jobs. The goods producing sector, which includes mining and manufacturing, shed 36,000 jobs, the most since February 2010. Even without the Verizon strike, payrolls would have increased by a mere 72,000. Verizon workers The Verizon workers, who were considered unemployed because they did not receive a salary during the payrolls survey week, returned to their jobs on Wednesday. They are expected to boost June employment. The jobless rate fell threetenths of a percentage point to 4.7
per cent in May, the lowest since November 2007. The decrease in the unemployment rate was in part due to people dropping out of the labor force. Economists polled by Reuters had forecast payrolls rising 164,000 in May and the unemployment rate falling to 4.9 per cent. Fed Chair Janet Yellen has said monthly gains of roughly 100,000 jobs are needed to keep up with growth in the work-age population. The US central bank has signaled its intention to raise rates soon if job gains continued and economic data remained consist-
ent with a pickup in growth in the second quarter. Rate increase Yellen said last week that a rate increase would probably be appropriate in the “coming months,” if those conditions were met. Data on consumer spending, industrial production, goods exports and housing have suggested the economy is gathering speed after growth slowed to a 0.8 per cent annualised rate in the first quarter. The Fed hiked its benchmark overnight interest rate in December for the first time in nearly a decade.
There is still no sign of meaningful wage growth. Average hourly earnings rose five cents, or 0.2 per cent, last month. That kept the year-on-year rise at 2.5 per cent. Economists say wage growth of between 3.0 per cent and 3.5 per cent is needed to lift inflation to the Fed’s 2.0 per cent target. There are, however, signs that inflation is creeping higher as the dampening effects of the dollar’s past rally and the oil price plunge dissipate. There was little change in other measures of labor market slack. A broad measure of unemployment that includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment held steady at 9.7 per cent in May. The labour force participation rate, or the share of working-age Americans who are employed or at least looking for a job, fell 0.2 percentage point to 62.6 per cent. The gains in May were broadly weak, with the private sector adding only 25,000 jobs, the smallest since February 2010. Mining employment maintained its downward trend, shedding 10,000 positions. Mining payrolls have dropped by 207,000 since peaking in September 2014, with three-quarters of the losses in support activities. Manufacturing employment fell by 10,000 jobs. The Verizon labour dispute reduced information sector jobs by 34,000. Retail payrolls rose 11,400 after shedding jobs in April for the first time since December 2014. Temporary help jobs fell 21,000. — Reuters
conserving cash and, despite some easing of government austerity budgets and low interest rates, there is little evidence of an acceleration in infrastructure spending. Passenger Demand Passenger demand is robust with 6.2 per cent growth expected in 2016. That is, however, a slowdown from the 7.4 per cent growth recorded in 2015. Capacity is expected to grow slightly ahead of demand at 6.8 per cent. Load factors are expected to remain high (80.0 per cent), but with a slight slip from 2015 (80.4 per cent). Yields are expected to fall by 7.0 per cent. Unit costs, driven by lower fuel prices, are expected to fall by 7.7 per cent. Overall the passenger business is projected to generate $511 billion in revenues, down from $518 billion in 2015. The cargo side of the business remains in the doldrums with 2.1 per cent growth in demand. Airlines are growing their fleets with long-haul wide-body aircraft to meet strong passenger demand growth. This adds cargo capacity to a flat air cargo market. S T R AT E G I C I N V E S T M E N T
Qatar Airways content with 15% IAG stake DUBLIN: Qatar Airways Chief Executive Officer Akbar Al Baker said he’s happy with the level of the company’s 15 per cent stake in British Airways owner IAG and won’t seek a seat on the Londonbased company’s board. Al Baker said he views the holding as a strategic investment that will aid cooperation in areas such as joint fleet purchases, rather than a financial stake, and has no plans to raise it beyond the current level. Fuelled speculation Qatar Air bought 9.99 per cent of IAG in January last year before building its position via a series of further purchases. While the Gulf carrier can’t take a majority holding because of European Union rules limiting foreign ownership to 49 per cent, the move has fuelled speculation in Britain about Al Baker’s aims. ‘We are not a hedge fund,” the CEO said in a briefing in Dublin, where he’s attending the International Air Transport Association’s annual meeting. “We are not an investor that wants to get in and get out quickly and make big bucks.” IAG CEO Willie Walsh said separately at IATA that there’s no prospect of the UK company taking a reciprocal stake in Qatar Airways, given the Gulf airline’s 100 per cent state ownership. ‘Completely separate’ “The way we need to look at Qatar is that there are two distinct elements to the relationship,” he said. “The equity stake is completely separate to the cooperation we have, which we’d do whether they had a stake or not.” — Bloomberg News
R E A L E S TAT E M A R K E T
Gulf investors hold back from UK property deals on Brexit fears
DEMAND EASES: The value of residential property in upmarket areas popular among Gulf investors fell between 3.5 and 7.5 per cent on the year in May, according to estate agent Knight Frank. — Bloomberg file picture
DUBAI/LONDON: Gulf Arab investors, some of the biggest buyers of British real estate, are holding back from new deals because they fear a property price slump if Britain leaves the European Union, according to legal and investment sources. Sovereign and private investors from Qatar, Saudi Arabia, Kuwait and the United Arab Emirates have been prolific buyers of British assets in the past decade, snapping up billions of dollars worth of property, mostly in London. “Sovereign wealth funds are concerned that Brexit is taking its toll on the property market in London,” said a London-based lawyer who works with some of the largest Gulf funds. He declined to be named, citing the confidential nature of his work.
Brexit vote “The situation will further deteriorate if there’s a Brexit vote.” The value of residential property in upmarket areas popular among Gulf investors — including Chelsea, South Kensington and Knightsbridge — fell between 3.5 and 7.5 per cent on the year in May, according to estate agent Knight Frank. Gulf family businesses and private investors are heavily involved in London real estate. Investors from the UAE accounted for more than 20 per cent of buy-to-let property sales in the UK in 2015, said Amit Seth, the Middle East and North Africa head of international residential developments at London-focused real estate agency Chestertons. “At the moment it seems clear
people are little bit more sceptical on making an investment today because of Brexit,” said Seth, who is based in Dubai, referring to private Gulf investors in residential real estate. He said investors were still researching opportunities and discussing them with his company, but not finalising deals. London landmarks Gulf investors also have broader worries about their investments in other sectors and how a possible Brexit in a June 23 EU referendum could affect the British economy, the sources said. A YouGov poll for the Times newspaper showed an even split between “Remain” and “Leave” voters on Wednesday. There is no suggestion long-
term investors from the Gulf will exit assets en masse if Britain votes out, but many are worried about the impact on portfolios and wider economic effects, a senior Gulf government official said. “Of course we are worried about what will come next if the British decide to leave the EU,” the official said. “We think that there will be a negative impact on our investments in the UK because the selling (prices) will go down and the banks in England will face some difficulties.” Asked to comment on Gulf investor concerns, Tobias Ellwood, a British Foreign Office minister, said the EU referendum was a significant event that had been discussed as part of regular bilateral engagements covering a wide variety of areas. — Reuters