Global airline profits to fall in 2017 as oil costs rise

by Steve Creedy - editor
140
December 09, 2016

The International Air Transport Association is predicting global airline profits will fall 16 per cent next year amid higher oil prices and slower global traffic growth.

Next year will also see almost 4 billion travellers to take to the air and 55.7 million tonnes of cargo transported as the industry accounts for almost 1 per cent of global GDP.

 An IATA global forecast released on Thursday predicts 2017  will see global profits slide to  $US29.8 billion, or $US7.54 per passenger,  after reaching a cyclical peak this year of $US35.6 billion.

It also lowered its 2016 profit estimates from a June estimate of $US39.4 billion due to lower global GDP growth and rising costs., although they remain slightly ahead of 2015’s figure of $US35.3 billion.

 Nonetheless, this was still the highest absolute profit generated by the airline industry and the highest net profit margin of 5.1 per cent.

IATA director general Alexandre de Juniac said the industry continued to deliver strong results, although what were record profits for airlines were considered normal for most other businesses.

“Even though conditions in 2017 will be more difficult with rising oil prices, we see the industry earning $29.8 billion,’’ de Juniac said. “That’s a very soft landing and safely in profitable territory. These three years are the best performance in the industry’s history—irrespective of the many uncertainties we face. Indeed, risks are abundant— political, economic and security among them.’’

Next year’s profit is expected to be hit by a rise in oil prices from an average this year of  $US44.60 a barrel to $US55. This will push up jet fuel prices from $US52.10 per barrel to $US64.90.

IATA’s forecast noted that while this will account for almost 19 per cent of the industry’s cost structure next year,  it will still be less than the average of 33.2 per cent in 2012-13.

 One impact of the higher prices will be a slowing in traffic growth from 5.9 per cent this year to 5.1 per cent next year.  Although capacity growth will also slow, industry load factors are expected to fall from 80.2 percent this year to 79.8 per cent.

“The negative impact of a lower load factor is expected to be offset somewhat by a strengthening of global economic growth, ‘’ IATA said in its analysis. “ World GDP is projected to expand by 2.5 per cent in 2017 (up from 2.2 per cent in 2016).

“Along with structural changes in the industry, this is expected to help stabilize yields for both the cargo and passenger businesses. This is a welcome development as yields (calculated in dollar terms) have fallen each year since 2012.’’

Industry consolidation means North American carriers are expected to remain the most profitable with net profits of $US18.1 billion, down from $US20.3 billion this year. They will also have the strongest net margin of 8.5 per cent and the highest average profit per passenger of $US19.58. Capacity next year is expected to grow by 2.6 percent compared to demand growth of 2.5 per cent.

European carriers will see a significant fall in aggregate net profit from $US7.5 billion this year to $US5.6 billion next year, the equivalent of $US5.65 per passenger. Capacity growth of 4.3 per cent will outstrip demand growth of 4 per cent in a region IATA characterised as being  subject to intense competition “hampered by high costs, onerous regulation and high taxes’’.

The association also noted that terrorist threats remained a real risk despite returning confidence after recent incidents.

In the Asia- Pacific, carriers were expected generate a net profit of $US6.3 billion next year, down from $US7.3 billion, with per passenger profits at $US4.44. Capacity was expected to jump 7.6 per cent and outstrip a 7 per cent growth in demand.

“Improved cargo performance is expected to offset rising fuel prices for many of the region’s airlines,’’ the analysis said. “The expansion of new model airlines and progressive liberalization in the region is intensifying already strong competition. In addition, profitability varies widely across the region.’’

The forecast for the Middle East came with a warning that the region's rapidly expanding carriers face threats in the new year that included rising airport charges and growing air traffic control delays.

The  carriers were expected to make a net profit of $US300 million, down from $US900 million.

“Average yields for the region’s carriers are low but unit costs are even lower, partly driven by the strong capacity expansion, forecast at 10.1 per cent …. ahead of expected demand growth of 9.0 per cent,’’ IATA said.

Profit per passenger in Latin America is tipped to be less than $1 as the region’s carrier post a net profit $US200 million, down from $300 million this year. Capacity is expected to grow at 4.8 per cent ahead of demand growth of 4 per cent.

“Despite some signs of improvement in the region’s currencies and economic prospects, operating conditions remain challenging, with infrastructure deficiencies, high taxes, and a growing regulatory burden across the continent,’’ IATA said.

Regional conflict and low  commodity prices will again see African carriers make an overall loss of $9.97 per passenger or $US800 million. Capacity in 2017 is expected to grow by 4.7 per cent,  ahead of a 4.5 per cent growth in demand.