World’s Airlines Likely To See Lower Profits In 2017

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The world’s airlines will continue their streak of collective profitability in 2017, but anticipated higher costs coupled with a sluggish global economy lead IATA forecasters to believe 2017’s industry net profit will be almost $6 billion lower than 2016’s expected profit.

If the global airline industry posts a net profit of $29.8 billion in 2017, as IATA said it expects in its forecast released in December, then it would break a three-year run in which the world’s airlines have posted record profits year-over-year.

IATA also revised downward its outlook for 2016 airline profitability to $35.6 billion from a June projection of $39.4 billion owing to slower global GDP growth and rising costs. That will still make 2016 the year the industry made its highest absolute profit and highest net profit margin at 5.1%.

But that record-setting streak is expected to end next year as airline unit costs continue to go up, mostly because of rising oil costs but also because of increased labor costs, IATA chief economist Brian Pearce said during a forecast briefing in Geneva.

IATA believes the global airline industry will make a net profit of $29.8 billion in 2017 on revenues of $736 billion, for a 4.1% net profit margin. Although down on 2016’s expected profit and margin, it will still be the industry’s third consecutive year in which airlines will make a return on invested capital (7.9%) that is above the weighted average cost of capital (6.9%).

That is a sign that airline restructuring and better business management is making the industry more resilient to outside factors like oil price hikes. But stronger, more consistent financial performance remains a regional story, with North American airlines dominating industry totals with the majority of its airlines generating above-cost-of-capital returns.

Outside of North America, it’s a much more mixed picture: some European and Asian carriers are performing well, but others are doing considerably worse. In Latin America, where countries like Argentina, Brazil and Peru are reeling from a variety of social, economic and political issues, the environment for airlines is harsh and, in IATA’s opinion, exacerbated by some of the world’s highest aviation taxes and fees as well as onerous regulation.

By region, North American carriers are expected to post a net profit of $20.3 billion for 2016 and $18.1 billion for 2017. European carriers are forecast to post a 2016 profit of $7.5 billion and a 2017 profit of $5.6 billion. For Asia-Pacific carriers, the 2016 and 2017 profit forecasts are $7.3 billion and $6.3 billion; for Middle East airlines, $900 million and $300 million; for Latin American airlines $300 million and $200 million; while African carriers are expected to make a loss of $800 million in each year.

On average, airlines are expected to make an average of $7.54 for every passenger carried in 2017, when passenger numbers are expected to reach a fraction below 4 billion, which will be a record.

Despite the still-slow global economy, demand for air travel continues to grow and airlines increased the number of unique city-pair connections in 2016 by more than 700 to over 18,000. At the same time, strong competition drove down air fares by an average of 8%.

Pearce noted that oil prices had increased by about $10 a barrel at the end of the year, taking it to about $55 a barrel, but there was a “mindset change” in the industry that was allowing it to stay profitable despite oil price increases. Higher utilization of airline assets and ancillary fees were contributors to this. “The conversation has changed,” he said. “It’s now about how to deliver a good return; that’s a step change behaviorally and structurally and that will stay that way … this industry lived for a long time with oil at $20 a barrel and it still lost money, so oil is not the magic key to profitability.”

Key trends

Among key trends that IATA anticipates for 2017 are lower real travel costs; continued growth in the number of new city pairs, which have doubled over the past 20 years; a dipping of load factors as demand slows faster than capacity; a rise in average breakeven points as unit costs rise more than unit revenues; but despite all the year’s pressures, airlines will keep a firm eye on maintaining profitability and returns to investors.

New unique city-pair connections are forecast to rise by 4.1% ­— or by 700 new pairs — compared with 2016 to over 18,000 in 2017, with frequencies also up.

This is largely the result of new-generation aircraft that can do long, thin routes profitably and open up ultra-long haul destinations combined with liberalization and the opening of new markets.

At the same time, the average roundtrip fare will be $351 before taxes and fees — down 8%, or 12% after inflation — and 63% lower than 22 years earlier after inflation.

IATA’s forecast is based on Brent oil prices of around $55 per barrel, a rise of just over $10 per barrel. That means airlines’ total fuel will rise to $129 billion, representing 18.7% of average operating costs. Still, airlines are in a better place than ever before to handle the increase with new, more efficient aircraft, and better operations and asset utilization; in short, smarter management. In turn, that also means that airlines will continue to be better placed to deliver a return on invested capital even as oil prices rise.

“Profitability does seems to have run out of steam a bit and we are seeing that trend continue into 2017,” Pearce noted. “Essentially, unit costs are no longer falling so they have crossed over unit revenues and that’s where there is pressure. But what has changed is that a GDP drop does not deliver the shock to the airline industry that it used to do — since 2010 the global economy has not been performing well but the airline industry has continued to improve because of restructuring.”

Similarly, because of restructuring and a new mindset among airline executives, oil price fluctuations are no longer the boom-or-bust factors in airline performance that they once were.

Put together, airlines are becoming businesses in a way that is historically unprecedented; 2017 may be a tougher challenge, but a $30 billion profit in a more difficult environment will, if anything, be a more remarkable achievement than 2016’s $35.6 billion profit.