Airlines See Headwinds Against Further Profit Gains

Open Jaw

Airline CFOs do not expect their profits to improve over the next 12 months.

IATA says results from an early July survey also indicate that industry profitability fell slightly in year-on-year terms during Q2 2016, reflecting the impact of recent terrorist attacks and wider pressure on yields. Judging from the pattern of similar events in the past, such negative impacts should prove to be temporary.

But the results also suggest that profit margins are starting to come under pressure, as falling input costs may now be outweighed by pressure on industry yields. The weighted-average score for profitability over the previous 3 months fell below the 50 mark in July’s survey for the 1st time in 2 yr.

“To be clear, this is not a signal of an imminent drop in profitability,” IATA says in a new report. “In fact, the result reflects no expected change from what is actually a relatively healthy financial position for the industry.”

However, the airline organization says there has been a turnaround in future profit expectations over the past 18 months, typical of that seen late in profitability cycles. The weighted-average score for profitability over the next 12 months dipped to 47.1 in the July survey – its lowest level in 4 years – although it is not yet clear whether this is a temporary dip below the 50 mark or the start of a trend.

On the demand side, July’s survey results were consistent with the robust start to the year for air passenger volumes – albeit with an easing in recent demand conditions.

A strong majority (68%) of respondents expect passenger demand to increase over the next 12 months, as terrorism-related disruption fades and falling fares help to stimulate demand. Having jumped by more than 10 percentage points in the last survey, the forward-looking weighted average score remained at an elevated level.

Despite the rally in oil prices since the start of the year, the majority of survey respondents expect operating costs to fall further or remain unchanged over the next 12 months. This relates to hedging practices in the industry, but also in part to the partial recovery in most currencies against the USD in recent months.

In a reflection of strong competition in the passenger market, airline CFOs expect yields to fall by slightly more than input costs over the year ahead.

In looking at yield, 65% of survey respondents reported a year-on-year decrease in pax yields in Q2 2016 – the 2nd survey in a row in which a greater proportion of respondents reported a decrease in pax yields than a decrease in input costs. Respondents expect further yield declines over the coming 12 months. In short, headwinds to further gains in profits are expected to persist.

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