The Economy

One Industry’s Earnings Are Flying High

This year will be the second in a row — and only the second in history — in which airlines will make an aggregate return in excess of their cost of...
Katie Kuehner-HebertJune 7, 2016
One Industry’s Earnings Are Flying High

After struggling for years to turn a profit, the fortunes of the airline industry are beginning to change, according to the International Air Transport Association, which on Tuesday predicted even higher earnings for the year.

The group revised upward its 2016 forecast for the airlines industry, now saying airlines would collectively post a net profit of $39.4 billion, up from IATA’s $36.3 billion forecast in December.

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The aggregate net profit margin will be 5.6% on collective revenues of $709 billion. Two-thousand sixteen is expected to be the fifth consecutive year of improving aggregate industry profits.

“Lower oil prices are certainly helping — though tempered by hedging and exchange rates,” IATA’s Director General and CEO Tony Tyler wrote in the report. “In fact, we are probably nearing the peak of the positive stimulus from lower [oil] prices.”

Plane Flying at SunsetEarnings performance, however, is being bolstered by record load factors, increased ancillary revenues from new value streams, and joint ventures and other forms of cooperation among airlines to improve efficiency.

“It will be only the second year in our history — and the second in a row — in which airlines will make an aggregate return in excess of the cost of capital,” Tyler wrote. “After decades of capital destruction, that’s a significant achievement.”

While investors in the industry have typically seen their capital shrink, this year the group expects the industry to generate a return on invested capital of 9.8%, IATA Economics’ chief economist Brian Pearce wrote in the adjoining report. That means for only the second year, the industry will have adequately rewarded equity owners.

On invested capital of almost $600 billion, the industry is forecast to generate $16.2 billion of value for investors this year.

“But it should be clear that $39.4 billion net profit, while exceptional for the airline industry, is really only sufficient to pay investors a ‘normal’ return for risking their capital,” Pearce wrote. “Moreover, high returns have only started to be generated outside North America in the past year and are still not widespread across all regions.”

North American airlines will generate more than half ($22.9 billion) of the profits, while airlines in Africa will collectively post a loss of $0.5 billion. Profitability throughout the industry is not evenly spread in other ways, as the passenger business continues to grow robustly while cargo stagnates.

On average, airlines will make $10.42 for each passenger carried.

The group forecast the industry’s collective fuel bill will fall to $127 billion, which will represent less than 20% of their total operating costs, for the first time since 2004. Jet fuel prices have fallen substantially and the group bases its forecast on an average price of $55.40 per barrel of fuel this year, and $45 per barrel for Brent crude oil. Brent crude was trading at $51.13 per barrel on Tuesday afternoon.

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