Airline profits to hit record levels on low oil, booming travel

On a regional basis, it is North American airlines that are earning the lion’s share of the profits, at US$19.4 billion (RM82.6 billion) this year, but will see that slip to US$19.2 billion in 2016. The airline industry is delivering solid financial and operational performance.

Other than cheaper fuel, other tailwinds for 2016 include a slight improvement in global GDP growth, which is expected to clock 2.7 per cent next year, as well as robust expansion in passenger travel.

The net profit forecast for 2015 is revised upward to $33B from $29.3B.

While that all sounds great, the industry’s bullish outlook is dampened by the fact that returns are narrowly covering costs.

“The airline industry has strengthened its profitability to an ordinary, but not extraordinary, level” IATA Director General Tony Tyler told journalists in Geneva, citing a net profit margin of 4.6 percent and 5.1 percent for this year and next. “This is a good news story”. Next year’s profit margin will be about 5.1 percent, and the industry’s return on capital will exceed borrowing costs for the first time ever over both years, it said. Profits next year should reach $36.3 billion, with return on capital inching up further to 8.6%. 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, according to IATA.

This is as a result of a strong U.S. economy, the appreciating USA dollar, lower oil prices and a restructured industry. Profit expectations for North America, along with other regions, are summarized in the following table.

The airline outlook for next year revealed that the passenger capacity growth in Asia-Pacific region is expected to accelerate as new aircraft are delivered in major emerging markets such as India. IATA expects to recover most of the lost ground with a $1.7 billion net profit in 2016. That would represent an nearly doubling of earnings after carriers combined to deliver a net profit of $17.3 billion in 2014. The success of Gulf airlines in the long-haul sector isn’t enough to carry the Middle East region, where the 2015 profit is now seen as coming in at $1.4 billion instead of the earlier forecast $1.8 billion as regionally-focused airlines are penalised by instability in the region.

The performance of carriers in Latin America is weak on the back of the deepening economic crisis in Brazil, weak commodity prices and adverse currency fluctuations.