Airlines are getting better at managing themselves as businesses, and the result is showing up on their bottom lines. But some of these gains come from consolidation, and are limited to the U.S.. On the whole, airlines are always vulvernable to reversals from changes in policy, fuel costs, or events they can't predict.
IATA’s industry outlook predicts net profits for 2015 of $33 billion, for a margin of 4.6%, and continued strong profitability in 2016, expecting $36.3 billion profit for a 5.1% net margin.
“The strongest financial performance is being delivered by airlines in North America,” Brian Pearce, Chief Economist, IATA says. “Net post-tax profits will be the highest at $19.2 billion next year. That represents a net profit of $21.44 per passenger, which is a marked improvement from just 3 years earlier. Net margins forecast at 9.5% exceed the peak of the late 1990s. This improvement has been driven by consolidation, helping to raise load factors (passenger + cargo) over 64%, and ancillaries, which together with lower fuel costs push breakeven load factors down to 55.4% next year.”
Better Than Boeing, But Not Starbucks
But it’s not all good news, IATA Director General and CEO, Tony Tyler points out. Compared to other industries, aviation is still underperforming and profits can be viewed as modest.
“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. 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. On average airlines will still make less than $10 per passenger carried. The industry’s profitability is better described as ‘fragile’ than ‘sustainable’,” said Tyler.
IATA says it finds “several indicators” that improvements in airline profitability could slow. The organization points to the cyclical nature of the airline business, wiith a profitability cycle is “eight to nine years from peak to peak (or trough to trough).” IATA marks the last low of the industry in 2009, and anticipates a second from the economic impact when interest rates rise from current lows. lATA also reports that airlines have reaped the benefits they could from low oil prices and “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.”
Troubles in the Latin America aviation market affect U.S. carriers and others who service the region, cargo demand, which would supplement any unexpected dips in passenger demand, continues to be weak.
“One of our CEOs at the Board of Governors meeting last week described the state of the airlines as ‘less poor than we were before,'” Tyler said. “With average passenger profit of less than $10, I would say the profitability is still better described as ‘fragile’ rather than ‘sustainable.’ And, as I well know from decades in the industry, we should enjoy the benign trading conditions while they last but not get used to them!'”
IATA Reports that U.S. airlines have better operating profits than CVS, Ford, Boeing, Marriott, ExxonMobil, and Royal Caribbean but not quite as good as Chipotle, Verizon, Starbucks, Coca Cola, McDonalds, CSX and Apple.
Passengers Benefit from Profits
Industry profitability, IATA argues, benefits the flying public in aviailablility of services and historic low fares.
“Consumers will see a substantial increase in the value they derive from air transport this year, though in dollar terms measures have been distorted downwards by the sharp rise of the US dollar,” says Pearce. “New destinations should rise 2.2% this year, with frequencies up too. We expect almost 1% of world GDP to be spent on air transport in 2016, totalling almost $750 billion. Air travel is accellerating, with growth of 6.9% expected next year, the best since 2010, well above the 5.5% trend of the past 20 years. This is being driven mainly by forecast stronger economic growth. But price is also attracting consumers. The average return fare (before surcharges and tax) of $375 in 2016 is forecast to be 61% lower than 21 years earlier, after adjusting for inflation.”
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Photo credit: A Boeing 747 LCF Dreamlifter cargo plane takes off at Jabara airport in Wichita, Kan. Jaime Green / Wichita Eagle/MCT