Airline profitability improves with falling oil prices – IATA

Airline profitability improves with falling oil prices – IATA

GENEVA — Airlines are expected to post a collective global net profit in 2014 of some US$19.9 billion (up from the $18.0 billion projected in June), according to IATA. This looks set to rise to $25.0 billion in 2015.

Lower oil prices and stronger worldwide GDP growth are the main drivers behind the improved profitability.

Consumers will benefit substantially from the stronger industry performance as lower industry costs and efficiencies are passed through, says IATA. The airline industry is highly competitive. After adjusting for inflation, average return airfares (excluding taxes and surcharges) are expected to fall by some 5.1% on 2014 levels and cargo rates are expected to fall by a slightly bigger 5.8%.

The expected $25 billion net post-tax profit represents a 3.2% margin. On a per passenger basis, airlines will make a net profit of $7.08 in 2015. That is up on the $6.02 earned in 2014 and more than double the $3.38 earnings per passenger achieved in 2013.

The return on invested capital (ROIC) is expected to grow to 7.0%. This is a substantial improvement on the 6.1% ROIC expected to be achieved in 2014. This is still 0.8 percentage points below the 7.8% weighted average cost of capital (WACC), so there is still some ground to cover before achieving sustainable margins.

“The industry outlook is improving. The global economy continues to recover and the fall in oil prices should strengthen the upturn next year. While we see airlines making $25 billion in 2015, it is important to remember that this is still just a 3.2% net profit margin. The industry story is largely positive, but there are a number of risks in today’s global environment – political unrest, conflicts and some weak regional economies- among them. And a 3.2% net profit margin does not leave much room for a deterioration in the external environment before profits are hit,” said Tony Tyler, IATA’s Director General and CEO.

“Stronger industry performance is good news for all. It’s a highly competitive industry and consumers will see lower costs in 2015 as the impact of lower oil prices kick in. Airline investors will see ROIC move closer to the WACC. And a healthy air transport sector will help governments in their overall objective to stimulate the economic growth needed to put the impact of the global financial crisis behind them at last,” said Tyler.

Oil prices have fallen substantially in recent months and this is expected to continue into 2015 with the full-year average price expected to be $85/barrel (Brent). If that assumption is correct, it would be the first time that the average oil price has fallen below $100/barrel since 2010 (when oil averaged $79.4/barrel).

Jet fuel prices are expected to average at $99.9/barrel in 2015 for a total fuel spend of $192 billion which represents 26% of total industry costs. It is important to note that the impact of lower fuel prices will be realized with a time lag, due to forward fuel-buying practices. Improving fuel efficiency continues to be a priority for airlines. Fuel efficiency is estimated to have improved by 1.8% in 2014 and a further improvement is expected in 2015. Fuel efficiency improvements could be accelerated by reducing the 5% of wasted fuel burn as a result of airspace and airport inefficiencies.

Global GDP is expected to grow by 3.2% in 2015, up from 2.6% in 2014. This will be the first time that global GDP has broken over 3.0% since 2010 (when global GDP grew by 4.1% in a post-recession bounce back), this time boosted by the fall in oil prices.

Passenger traffic is expected to grow by 7.0% in 2015 which is well-above the 5.5% growth trend of the past two decades. Capacity growth is expected to outstrip this slightly at 7.3%, pushing the passenger load factor to 79.6% (slightly down on the 79.9% expected for 2014). The fall in the price of fuel is expected to lead to cheaper airfares for consumers. After adjusting for inflation, average return air fares (excluding surcharges and taxes) are expected to fall by 5.1% to $458 in 2015. Total passenger numbers are expected to grow to 3.5 billion and passenger revenues are expected to grow to $623 billion.

All regions are expected to report improved net profitability in 2015 over 2014. However, there are stark differences in profitability among the regions. Current and forward-looking industry financial assessments should not be taken as reflecting the performance of individual airlines, which can differ significantly.

The strongest financial performance by far is being delivered by airlines in North America. Net post-tax profits are the highest at $13.2 billion next year (up from $11.9 billion in 2014). That represents a net profit of $15.54 per enplaned passenger, which is a marked improvement from just three years earlier. Net profit margins forecast at 6% exceed the peak of the late 1990s. This improvement has been driven by consolidation, helping to raise load factors (passenger + cargo) to 65% this year, lower fuel prices and ancillaries, which together push breakeven load factors down below 60% next year.