The International Air Transport Association (IATA) has announced its airline industry outlook for 2016, which sees an average net profit margin of 5.1 per cent being generated with total net profits of US$ 36.3 billion. IATA also announced a revision to its airline industry outlook for 2015 upwards to a net profit of US$ 33 billion (4.6 per cent net profit margin) from US$ 29.3 billion forecast in June. The strengthening industry performance is being driven by a combination of factors such as lower oil prices, demand for passenger travel and strong eceonomic performance in key economies.
Tony Tyler, director general and CEO, IATA, said, “This is a good news story. The airline industry is delivering solid financial and operational performance. Passengers are benefiting from greater value than ever—with competitive airfares and product investments. Environmental performance is improving. More people and businesses are being connected to more places than ever. Employment levels are rising. And finally our shareholders are beginning to enjoy normal returns on their investments.”
In 2016 total passenger numbers are expected to rise to 3.8 billion traveling over some 54,000 routes.
Profitability in Perspective
In both 2015 and 2016 the industry’s return on capital (8.3 per cent and 8.6 per cent respectively) is expected to exceed the industry’s cost of capital (estimated to be just under 7.0 per cent in 2015 and 2016 because of low bond yields).
“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 five percent 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 US$ 10 per passenger carried. The industry’s profitability is better described as ‘fragile’ than ‘sustainable’,” said Tyler.
2016
2016 will continue the main trends from 2015. Revenues are expected to rise by 0.9 per cent to US$ 717 billion in 2016. Industry revenues peaked in 2014 at US$ 758 billion, then declined to US$ 710 billion in 2015 with the impact of the strengthening of the US dollar on non-dollar revenues. The increase in revenues in 2016 is expected to be wholly due to the contribution of the passenger side of the business (US$ 525 billion in 2015 rising to US$ 533 billion in 2016). Cargo revenues are expected to decline slightly to US$ 50.8 billion (from US$ 52.2 billion in 2015).
The demand for passenger travel is expected to grow by 6.9 per cent with 3.8 billion passengers expected to travel in 2016. Passenger capacity is expected to grow slightly ahead of demand at 7.1 per cent. Demand for air cargo is expected to accelerate in 2016 to three per cent, ahead of the 1.9 per cent growth in 2015. This is slightly ahead of GDP growth which is expected to average 2.7 per cent in 2016. Prior to the global financial crisis, this pace of economic growth would have generated much faster international trade and air cargo growth, but that pattern of growth appears to have stopped as companies bring supply chains closer to home. In total, the industry is expected to uplift 52.7 million tonnes of cargo in 2016.
The cost of travel and shipping is expected to continue to decline with average yields for passengers falling five per cent and cargo falling by 5.5 per cent in 2016. The pace of decline is a deceleration from 2015 when cargo yields are expected to fall by 18 per cent and passenger yields by 11.7 per cent. About six percentage points of the 2015 decline can be attributed to the appreciation of the US dollar and the impact this has when accounting for non-US dollar revenues.
Profits for the Asia-Pacific region are expected to grow from US$ 5.8 billion in 2015 to US$ 6.6 billion in 2016. Overall profits per passenger for 2016 are forecast at US$ 5.13. Although the Chinese economy has slowed, air travel remains strong. The region’s carriers will benefit more fully from the impact of lower fuel prices in 2016 as hedges unwind. The region is, however, in the front line for the impact of continued weakness in cargo revenues. Passenger capacity growth is expected to accelerate from six per ceng in 2015 to 8.4 per cent in 2016 as new aircraft are delivered largely to accommodate growth in the major emerging markets of India, Indonesia and China.
