Strategy

Banner Year for Airlines’ Margins, Return on Invested Capital

The industry is buoyed by low oil prices, the strong dollar, lower capital costs, and strong load factors.
Katie Kuehner-HebertJune 11, 2015

The airline industry, led by North American carriers, is enjoying higher profit margins due to low oil prices, the strong dollar, and more seats filled on flights, as well as lower capital costs, the International Air Transport Association said this week.

The group upwardly revised its 2015 outlook to a $29.3 billion net profit on expected revenues of $727 billion, for a 4% net profit margin. IATA previously had forecast a profit of $25 billion.

Net profit for 2014 was also restated, but downward, from $19.9 billion to $16.4 billion.

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North American airlines are expected to generated more half of the industry’s profit, expected to be $15.7 billion, with a margin on earnings before interest and taxation that is expected to exceed 12%.

“For the airline business, 2015 is turning out to be a positive year,” IATA’s director general and chief executive Tony Tyler said in a press release. “Since the tragic events of September 2001, the global airline industry has transformed itself with major gains in efficiency. This is clearly evident in the expected record high passenger load factor of 80.2% for this year. The result is a hard-earned 4% average net profit margin. On average, airlines will retain $8.27 for every passenger carried.”

The group also noted the achievement of “a significant milestone” — an expected return on invested capital of 7.5% due to the lower cost of capital, which is down to 6.8%, largely due to lower bond yields. It would be the first time the industry ROIC would exceed its cost of capital.

“This industry average is, however, dominated by airlines in the United States, which have benefited the most from the fall in U.S. dollar-denominated fuel prices, a strong local economy, and industry restructuring,” the IATA said. “The average non-U.S. airline is still struggling with returns below the cost of capital and a significant debt burden.”

According to a Wall Street Journal blog post, airlines are expected to spend just $191 billion on fuel this year, compared to $226 billion in 2014 — even though fuel use has increased by 4.6%. Passengers also are reaping some of the benefits, as average return fares, excluding surcharges and taxes, are set to fall to $429 from $473 last year.