Dublin - After years of operating in the red, the airline industry has started to make notable profits again that see it becoming a normal business that ensures return on capital.
Tony Tyler, director general of the International Air Transport Association (IATA), on Thursday addressed the state of the industry as the global trade body revised upward its profit forecast for this year.
The global airline industry is now expected to make US$39.4 billion in net earnings this year, up from $36.3 billion in December last year, largely due to stronger traffic demand and lower-than-expected fuel prices.
The industry would have combined revenues of $709 billion, for an aggregate net profit margin of 5.6%.
This revised profitability will make 2016 the fifth consecutive year of improving aggregate industry profits.
Last year, airlines generated a global aggregate profit of $35.3 billion, up from $33 billion estimated in December 2015.
This year will mark the second year in a row and only the second time in the airline industry’s history that the industry's returns on invested capital, at 9.8%, will exceed the cost of capital, estimated to be 6.8%.
This is the minimum expectation level for investors, Mr Tyler pointed out in his report on the air transport industry to the 72th IATA annual general meeting that began on Thursday here in this Irish capital.
On average, airlines will make $10.42 for each passenger carried this year, compared to $9.89 recorded last year.
“In Dublin, that’s enough to buy four double-espressos at Starbucks.
"Looked at from a different angle Starbucks will earn about $11 for every $100 in sales while airlines will make $5.60.
"We don’t begrudge Starbucks their profitability. But here is clearly still upside for airline profits,” said Mr Tyler.
“The job of shoring up resilience by repairing balance sheets is under way. We have had a few years of good profits and some airlines have started to pay down debt.
It will, however, take a longer run of profits before balance sheets are returned to full health,” the IATA chief noted.
Mr Tyler explained: “Lower oil prices are certainly helping — though tempered by hedging and exchange rates.
"In fact, we are probably nearing the peak of the positive stimulus from lower prices.
Performance, however, is being bolstered by the hard work of airlines.
Load factors are at record levels. New value streams are increasing ancillary revenues and joint ventures and other forms of cooperation are improving efficiency and increasing consumer choice while fostering robust competition.
Main drivers leading to the upward revision of 2016 profitability include oil prices, the global economy, passenger demand and cargo.
Oil prices
The outlook is based on oil averaging $45/barrel (Brent) over the course of the year which is significantly lower than the $53.9 average price in 2015.
The full impact of lower fuel prices is still being realized as hedges mature. Overall, fuel is expected to represent 19.7% of the industry’s expenses, down from a recent high of 33.1% in 2012-2013.
Global economy
Weak economic conditions prevail. GDP is expected to expand by 2.3% in 2016.
That is down from 2.4% in 2015 and the weakest growth since 2008 when the global financial crisis hit.
Consumer spending is relatively strong, but the corporate sector is conserving cash and, despite some easing of government austerity budgets and low interest rates, there is little evidence of an acceleration in infrastructure spending.
Passenger demand
Passenger demand is robust with 6.2% growth expected in 2016. That is, however, a slowdown from the 7.4% growth recorded in 2015.
Capacity is expected to grow slightly ahead of demand at 6.8%. Load factors are expected to remain high (80.0%), but with a slight slip from 2015 (80.4%).
Yields are expected to fall by 7%. Unit costs, driven by lower fuel prices, are expected to fall by 7.7%.
Overall the passenger business is projected to generate $511 billion in revenues, down from $518 billion in 2015.
Cargo
The cargo side of the business remains in the doldrums with 2.1% growth in demand.
Airlines are growing their fleets with long-haul wide-body aircraft to meet strong passenger demand growth.
This adds cargo capacity to a flat air cargo market. Cargo yields are expected to fall by 8.0% this year.
Overall cargo is expected to generate $49.6 billion in revenues, down from $52.8 billion in 2015.