Home Aviation Global airlines’ profitability to hit $19.9bn despite falling oil prices

Global airlines’ profitability to hit $19.9bn despite falling oil prices


The International Air Transport Association (IATA) has announced an outlook for improved industry profitability in which airlines are expected to post a collective global net profit of $19.9 billion in 2014 (up from the $18.0 billion projected in June).
In its Economic Performance of the Air Transport Industry report published recently, the director general and chief executive of the association said the projection looks set to rise to $25.0 billion in 2015.
He added that lower oil prices and stronger worldwide gross domestic product growth are the main drivers behind the improved profitability.
“The industry outlook is improving. The global economy continues to recover and the fall in oil prices should strengthen the upturn next year. While we see airlines making $25 billion in 2015, it is important to remember that this is still just a 3.2% net profit margin. The industry story is largely positive, but there are a number of risks in today’s global environment—political unrest, conflicts, and some weak regional economies- among them. And a 3.2% net profit margin does not leave much room for deterioration in the external environment before profits are hit.
“Stronger industry performance is good news for all. It’s a highly competitive industry and consumers—travelers as well as shippers—will see lower costs in 2015 as the impact of lower oil prices kick in. Airline investors will see ROIC move closer to the weighted average cost of capital (WACC). And a healthy air transport sector will help governments in their overall objective to stimulate the economic growth needed to put the impact of the global financial crisis behind them at last,” said Tyler.
Consumers will benefit substantially from the stronger industry performance as lower industry costs and efficiencies are passed through. The airline industry is highly competitive. After adjusting for inflation, average return airfares (excluding taxes and surcharges) are expected to fall by some 5.1% on 2014 levels and cargo rates are expected to fall by a slightly bigger 5.8%.
The expected $25 billion net post-tax profit represents a 3.2% margin. On a per passenger basis, airlines will make a net profit of $7.08 in 2015. That is up on the $6.02 earned in 2014 and more than double the $3.38 earnings per passenger achieved in 2013.
The return on invested capital (ROIC) is expected to grow to 7.0%. This is a substantial improvement on the 6.1% ROIC expected to be achieved in 2014.This is still 0.8 percentage points below the 7.8%  WACC, so there is still some ground to cover before achieving sustainable margins.
For the 2015 forecast drivers, IATA noted that oil prices have fallen substantially in recent months and this is expected to continue into 2015 with the full-year average price expected to be $85/barrel (Brent).
“If that assumption is correct, it would be the first time that the average oil price has fallen below $100/barrel since 2010 (when oil averaged $79.4/barrel),” he said.
It also said aviation fuel prices are expected to average at $99.9/barrel in 2015 for a total fuel spending of $192 billion which represents 26% of total industry costs.
“It is important to note that the impact of lower fuel prices will be realized with a time lag, due to forward fuel-buying practices. Improving fuel efficiency continues to be a priority for airlines. Fuel efficiency is estimated to have improved by 1.8% in 2014 and a further improvement is expected in 2015. Fuel efficiency improvements could be accelerated by reducing the 5% of wasted fuel burn as a result of airspace and airport inefficiencies,” said Tyler.
The organisation also said global gross domestic product is expected to grow by 3.2% in 2015, up from 2.6% in 2014; passenger traffic is expected to grow by 7.0% in 2015 which is well-above the 5.5% growth trend of the past two decades, while cargo volumes are expected to grow by 4.5% in 2015 (slightly ahead of the 4.3% growth expected for 2014).
Regional trends show that all regions are expected to report improved net profitability in 2015 over 2014. However, there are stark differences in profitability among the regions.
It noted that the strongest financial performance by far is being delivered by airlines in North America saying their net post-tax profits are the highest at $13.2 billion next year (up from $11.9 billion in 2014).
European airlines, it said, continue to struggle as evidenced by the highest breakeven load factors among all regions. It said the airlines are hampered by high regulatory costs, infrastructure inefficiency and onerous taxation. Net profits of $4 billion next year (up from $2.7 billion in 2014) represent only $4.27 per passenger and a net profit margin of 1.8%.
Airlines in the Asia-Pacific region are expected to achieve a net profit of $5.0 billion in 2015 (up from $3.5 billion in 2014) for a 2.2% net profit margin.
For the Middle East airlines, passenger capacity is expected to expand by 15.6% in 2015 (up from 11.4% in 2014); post-tax net profits are expected to grow to $1.6 billion in 2015 (up from $1.1 billion in 2014). This represents a profit of $7.98 per passenger and a net profit margin of 2.5%.

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