Airline Industry Profitability Exceeds Expectations
The International Air Transport
Association (IATA) has revised its 2016 financial outlook for global air
transport industry profits upwards to $39.4 billion (from $36.3 forecast in
December 2015). That is expected to be generated on revenues of $709 billion
for an aggregate net profit margin of 5.6%. 2016 is expected to be the 5th consecutive year of improving aggregate industry profits.
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. Over 1/2 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. New value streams are increasing ancillary revenues. And 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," said Tony Tyler, IATA’s Director General & CEO.
On average, airlines will make $10.42
for each passenger carried.
For the 2nd year in a row and only the 2nd time in the airline industry’s history, the return on invested capital
(9.8%) will exceed the cost of capital (estimated to be 6.8%). 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
"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
Main Forecast Drivers Oil Prices: 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
realized as hedges mature. Overall, fuel is expected to represent 19.7% of the
industry’s expenses, down from a recent high of 33.1% in 2012-2013.
The Global Economy: Weak economic conditions prevail. GDP is expected to expand by 2.3% in
2016. That is down from 2.4% in 2015 and the weakest growth since 2008 when the
global financial crisis hit. Consumer spending is relatively strong, but the
corporate sector is 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% growth expected in 2016. That is,
however, a slowdown from the 7.4% growth recorded in 2015. Capacity is expected
to grow slightly ahead of demand at 6.8%. Load factors are expected to remain
high (80.0%), but with a slight slip from 2015 (80.4%). Yields are expected to
fall by 7.0%. Unit costs, driven by lower fuel prices, are expected to fall by
7.7%. 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% 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. Cargo yields are expected to fall by 8.0% this year. Overall
cargo is expected to generate $49.6 billion in revenues, down from $52.8
billion in 2015.
Regional Diversity North American carriers continue to deliver the industry’s
strongest financial performance with an expected net profit of $22.9 billion
which is an improvement on the $21.5 billion reported for 2015. Passenger
capacity is expected to expand by 4.3% in 2016, marginally outpacing an anticipated
4.0% increase in demand, but load factors are forecast to remain well above
break-even levels. Cash flow has been sufficient for airlines in this
region to improve balance sheets significantly by repaying debt, and return
cash to shareholders through dividends and share buy-backs.
European airlines are expected to post a $7.5 billion profit in 2016 (up from $7.4 billion
in 2015). Passenger capacity is forecast to grow by 5.8%, ahead of expected
demand growth of 4.9%. Terror incidents have had a dampening effect on demand
in some key tourist centers. It is difficult to describe the state of European
carriers as uniform. The major groupings have seen solid improvement based on
stronger long-haul markets, while many small- and medium-sized carriers continue
to struggle. Competition is intense (particularly on intra-Europe routes) and
the burdens of high taxes, onerous regulation and inefficient infrastructure
(particularly air traffic management) have yet to be meaningfully addressed.
Additionally, for many carriers there is a wide gap between the expectations of
labor and management.
Airlines in Asia-Pacific are expected to post a $7.8 billion profit in 2016, up from $7.2
billion in 2015. Capacity is forecast to expand by 9.1% in 2016, ahead of
demand which is likely to grow by 8.5%. Asia-Pacific carriers have a 40% share
of global air cargo markets. As a result they continue to feel the brunt of
stagnation in this sector, which is holding back the improvement in financial
performance. Challenges include intense competition as the budget sector
expands, restructuring in the Chinese economy and continuing infrastructure and
cost difficulties in the Indian market.
Middle East carriers are expected to post a $1.6 billion profit, up slightly on the $1.4
billion reported for 2015. Capacity is forecast to grow at 12.2%, outpacing an
expected 11.2% expansion of demand. 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 economies are manifesting themselves in a
spate of increases of charges and taxes which could dampen the region’s cost
Airlines in Latin America are expected to see a $100 million profit in 2016 after a $1.5 billion
loss in 2015. Demand is expected to grow by 4.2% while carriers are forecast to
add 3.7% to capacity. Two of the region’s major economies—Brazil and
Venezuela—continue in a deep economic and political crisis. The region
has been hit disproportionately by the fall in commodity prices and revenues,
which led to foreign exchange crises to add to the economic difficulties.
Such has been the falling of exchange rates in Brazil and other major commodity
economies in the region that airlines have seen hardly any decline of fuel
costs in local currencies, while outbound residents have suffered a dramatic
decline in purchasing power overseas.
African airlines are expected to post a $500 million loss in 2016, a slight improvement
on the $700 million that the region’s carriers lost in 2015. Capacity growth
(5.3%) is anticipated to outpace demand growth of 4.5%. Carriers in the region
continue to confront a plethora of challenges including intense competition on
long-haul routes, political barriers to growing intra-Africa traffic, high
costs and infrastructure deficiencies. In addition many major economies
in the continent have been hit hard by the collapse of commodity prices, and
the impact that has had on revenues and the inflow of hard currencies.
Unresolved foreign exchange crises are adding to the economic difficulties
facing airlines in this region.