Airline profitability remains fragile

IATA is forecasting 2016 to be another good year for the global airline industry but warned that growth could then start to slow.

Releasing its industry outlook today, IATA is forecasting an average net profit margin of 5.1% in 2016, with total net profits of $36.3 billion, thanks to lower air prices, stronger demand, and better efficiency,

It also revised its airline industry outlook for 2015 to a net profit of $33 billion, representing a 4.6% net profit margin, from $29.3 billion forecast in June.

"This is a good news story," said Tony Tyler, IATA’s director general and CEO. "The airline industry is delivering solid financial and operational performance."

But he said it was important to keep the growth in perspective.

"With net profit margins still in the 5% range there is little buffer," he said.

"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. On average airlines will still make less than $10 per passenger carried. The industry’s profitability is better described as ‘fragile’ than ‘sustainable’."

He warned of several indicators that improvements in airline profitability are likely to slow.

"The first 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."

IATA is forecasting revenues will rise by 0.9% to $717 billion in 2016.

"Industry revenues peaked in 2014 at $758 billion, then declined to $710 billion in 2015 with the impact of the strengthening of the US dollar on non-dollar revenues," it said.

The increase is expected to be wholly due to passenger traffic.

Meanwhile, demand for passenger travel is expected to grow by 6.9%, similar to the 6.7% growth expected in 2015, with 3.8 billion passengers expected to travel in 2016.

"Passenger capacity is expected to grow slightly ahead of demand at 7.1%, which is an acceleration from the 5.5% capacity expansion in 2015," added IATA.

It said North American carriers are leading the industry’s performance and are expected to generate considerably more than half the industry’s total profits in both 2015 ($19.4 billion) and 2016 ($19.2 billion).

European airlines are expected to deliver performance improvements with net profits increasing from $6.9 billion in 2015 to $8.5 billion in 2016.

Much of the benefit of lower fuel costs will be seen in 2016 for European airlines, it said.

But it said performance in Europe is ‘very patchy’ with intense and increasing competition on intra-European markets reducing the financial performance of some of those exposed to these markets.

Capacity growth is expected to accelerate from 3.9% in 2015 to 6.2% in 2016, with Turkey being a major driver.