Notorious for destroying capital throughout its history, finally our shareholders are beginning to enjoy normal returns on their investments” says Tony Tyler, IATA’s Director General and CEO
This is “a good news story. The airline industry is delivering solid financial and operational performance. Passengers are benefiting from greater value than ever - with competitive airfares and product investments. Environmental performance is improving. More people and businesses are being connected to more places than ever. Employment levels are rising. And finally our shareholders are beginning to enjoy normal returns on their investments,” said Tony Tyler, IATA’s Director General and CEO.
He was speaking on the release of the International Air Transport Association (IATA) 'Airline industry outlook for 2016' which sees an average net profit margin of 5.1% being generated with total net profits of $36.3 billion. IATA also announced a revision to its airline industry outlook for 2015 upwards to a net profit of $33 billion (4.6% net profit margin) from $29.3 billion forecast in June. In 2016 total passenger numbers are expected to rise to 3.8 billion traveling over some 54,000 routes.
In both 2015 and 2016 the industry’s return on capital (8.3% and 8.6% respectively) is expected to exceed the industry’s cost of capital (estimated to be just under 7.0% in 2015 and 2016 because of low bond yields).
“This is an historic achievement for an industry that has been notorious for destroying capital throughout its history. But let’s keep that achievement in perspective. With net profit margins still in the 5% range there is little buffer. Achieving returns that barely exceed the cost of capital means that airlines are finally meeting the minimum expectations of their shareholders. For most other industries this is the norm and not the exception. And this is coming as expectations build that we are nearing the top of the business cycle. On average airlines will still make less than $10 per passenger carried. The industry’s profitability is better described as ‘fragile’ than ‘sustainable’,” said Tyler.
There are several indicators that improvements in airline profitability are likely to slow. The first is found in the cyclical nature of the airline business. Historically the airline industry profitability cycle is 8-9 years from peak to peak (or trough to trough). The low point of this cycle was 2009. The second is the anticipation of the economic impact of interest rates rising from current exceptionally low levels. And lastly, airlines will soon have realized the maximum positive impact of lower fuel prices with most of the higher-than-market hedges due to unwind in 2016.
Profits for the Asia-Pacific region are expected to grow from $5.8 billion in 2015 to $6.6 billion in 2016. Overall profits per passenger for 2016 are forecast at $5.13, well behind both the US and Europe. Although the Chinese economy has slowed, air travel remains strong. The region’s carriers will benefit more fully from the impact of lower fuel prices in 2016 as hedges unwind. The region is, however, in the front line for the impact of continued weakness in cargo revenues. Passenger capacity growth is expected to accelerate from 6.0% in 2015 to 8.4% in 2016 as new aircraft are delivered largely to accommodate growth in the major emerging markets of India, Indonesia and China.