IATA Says Historic Airline Profits Fragile

Open Jaw

IATA has raised its industry forecast for 2015, now projecting net profits of $33 billion, up from the $29.3 billion forecast in June. 2016 is forecast to be even better, with an average net profit margin of 5.1% being generated with total net profits of $36.3 billion.

North American airlines are expected to generate more than 50% of the industry’s profits this year and next. IATA says this is as a result of a strong U.S. economy, the appreciating greenback, lower oil prices and a restructured industry. 

The airline association says the strengthening industry performance is being driven by a combination of factors:

  • Lower oil prices are giving airline profits a boost; however this is strongly moderated in many markets by the appreciation of the USD.
  • Strong demand for pax travel is making up for disappointing cargo demand growth.
  • Stronger economic performance in some key economies (including a faster than expected recovery in the Eurozone) is outweighing the overall impact of slower growth in China and the downturn in the Brazilian economy. Global GDP growth is expected to improve to 2.7% in 2016 (up from 2.5% for 2015).
  • Efficiency gains by airlines are illustrated by record high load factors (80.6% in 2015, tapering slightly to 80.4% in 2016). Capacity is increasing and is expected to move ahead of demand growth in 2016. Yields, however, continue to deteriorate amid stiff competition. 

“This is a good news story. The airline industry is delivering solid financial and operational performance,” said Tony Tyler, IATA’s Director General & CEO. “Passengers are benefiting from greater value than ever - with competitive airfares and product investments. Environmental performance is improving. More people and businesses are being connected to more places than ever. Employment levels are rising. And finally our shareholders are beginning to enjoy normal returns on their investments.”

In both 2015 and 2016 the industry’s return on capital (8.3% and 8.6% respectively) is expected to exceed the industry’s cost of capital (estimated to be just under 7.0% in 2015 and 2016).

 

“This is an historic achievement for an industry that has been notorious for destroying capital throughout its history. But let’s keep that achievement in perspective,” Tyler said.

 

“With net profit margins still in the 5% range there is little buffer. Achieving returns that barely exceed the cost of capital means that airlines are finally meeting the minimum expectations of their shareholders. For most other industries this is the norm and not the exception. And this is coming as expectations build that we are nearing the top of the business cycle.”

 

Tyler added that the industry’s profitability is better described as ‘fragile’ than ‘sustainable.’

 

IATA says there are several indicators that improvements in airline profitability are likely to slow.

 

The 1st is found in the cyclical nature of the airline business. Historically the airline industry profitability cycle is 8-9 years from peak to peak (or trough to trough). The low point of this cycle was 2009.

 

The second is the anticipation of the economic impact of interest rates rising from current exceptionally low levels. And lastly, airlines will soon have realized the maximum positive impact of lower fuel prices with most of the higher-than-market hedges due to unwind in 2016.

 

The industry’s performance varies dramatically by region. North American carriers are leading the industry’s performance and are expected to generate considerably more than 1/2 the industry’s total profits in both 2015 ($19.4 billion) and 2016 ($19.2 billion). On a per passenger basis, profits of $21.44 in 2016 also place their performance at the top of the industry. This is as a result of a strong US economy, the appreciating USD, lower oil prices and a restructured industry. Capacity growth by North American airlines is expected to accelerate from 3.7% in 2015 to 4.8% in 2016 on the strength of the US economy.





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