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Global carriers cruise towards record year but profits remain fragile: Iata

Friday, December 11, 2015 - 05:50
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Mr Tyler said "we are finally delivering the minimal level of profitability an investor would expect".

Geneva

ROBUST travel demand and cheaper jet fuel have prompted the International Air Transport Association (Iata) to yet again revise projected profits for the global aviation industry this year upwards from US$29.3 billion to US$33 billion - a figure which is expected to climb even higher in 2016.

But Asia-Pacific carriers - once the darlings of the industry - are expected to lag behind counterparts in North America and Europe, where the rebound in their respective economies is giving their bottom lines a boost. On the other hand, the region's carriers, which account for the lion's share of the cargo market, are seeing their profits dragged down by weak cargo demand owing to sluggish trade growth.

In its biannual forecast, Iata unveiled an even rosier outlook for 2016 with collective profits of US$36.3 billion - more than double the profits earned for 2014 and translating to an average net profit margin of 5.1 per cent. This is against revenues of US$717 billion, up from US$710 billion this year.

"This is a good-news story. The airline industry is delivering solid financial and operational performance," said Iata chief Tony Tyler.

"We are finally - after years of destroying capital - delivering the minimal level of profitability that an investor would expect," he added, speaking to reporters at an annual media conference in Geneva on Thursday.

Jet fuel prices, once a major headache for the world's airlines, have nearly halved from almost US$115 per barrel in 2014 to about US$68 per barrel (pb) this year, in line with lower crude oil prices. Jet fuel prices are expected to ease further to an average of US$64 pb in 2016.

However, it is also worth noting that some carriers are not reaping the full benefits of the plunge in oil prices, thanks to the stronger greenback as well as hedges locked in above the current spot rate.

Other tailwinds cited for 2016 include robust expansion in passenger travel as well as a slight improvement in global GDP growth - which is expected to clock 2.7 per cent next year, up from 2.5 per cent this year. In addition, airlines are working their planes harder, with load factors being nudged over the 80 per cent threshold.

The fortunes of passenger and cargo businesses remain disparate, with passenger travel likely to grow 6.7 per cent this year and 6.9 per cent next year as improving economies fuel travel. This is despite the recent terror attacks in Paris, which have prompted some travellers to steer clear of the city. Bookings to France - particularly from Asia - have fallen sharply and will continue to be impacted into the early part of next year, according to Iata's chief economist Brian Pearce, who expects this to be offset by travellers opting for other destinations. Citing historical trends from prior incidents in London and Madrid, travel typically rebounds in 6-9 months, he added.

Where capacity is concerned, global capacity for the passenger market is expected to grow 5.5 per cent in 2015 and 7.1 per cent in 2016, with the latter outstripping projected demand.

In contrast, cargo demand growth is a meagre 1.9 per cent this year, which will accelerate to expand by 3 per cent next year. The cargo industry is being hit by both weak yields as well as tepid trade growth.

Yields for both cargo and passenger travel will continue to come under pressure, depressed by intense competition and the stronger USD, the airline association warned.

Meanwhile, the return on capital for this year and next is expected to hit 8.3 per cent and 8.6 per cent respectively, exceeding capital costs.

But Mr Tyler cautioned against popping the champagne just yet, stressing that the industry's profitability remains fragile, given the slim profit margin of roughly 5 per cent. He also pointed out that the airline industry is finally reporting merely a "normal" level of profits, driven largely by the performance of the North American carriers.

"Achieving returns that barely exceed the cost of capital means that airlines are finally meeting the minimum expectations of their shareholders," declared Mr Tyler. "The industry's results are good but they are not outstanding when compared to the profits that are generated in other parts of the global economy."

The airline association (which represents some 260 airlines) also flagged that the industry's growth trajectory could be thrown off balance by a hike in interest rates by the US Federal Reserve, which is widely seen as imminent.

Carving out the outlook by region, the fortunes of the different markets appear to diverge, with North American airlines single-handedly generating over half of industry profits this year while Latin American and African carriers are poised to bleed red ink.

North American carriers will see profits of US$19.4 billion this year and US$19.2 billion next year, on the back of the bounce-back in the US economy, the stronger USD, lower fuel costs and restructuring efforts.

Similarly, European carriers will turn in a profit report card of US$6.9 billion, which will rise to US$8.5 billion next year, while Asia-Pacific will continue to feel the impact of ongoing weakness in cargo revenues. Iata puts the profits for the region's carriers at US$5.8 billion this year and US$6.6 billion in 2016, with capacity injection to pick up next year as airlines in India, Indonesia and China take delivery of new planes.

On the other hand, Middle East carriers will earn US$1.4 billion in profits this year - lower than the US$1.8 billion Iata projected previously - owing to the diverging performance of successful Gulf carriers which have focused their attention on the long-haul market and the regional airlines, which are feeling the impact of softer domestic demand.

Latin American airlines will end the year with a US$300 million loss but will pull themselves back into the black next year with US$400 million in profits, as Venezuela and Argentina are expected to build a more business-friendly environment in the wake of recent elections.

African carriers, however, will remain in the red both this year (-US$300 million) and next (-US$100 million), buffeted by political instability, economic weakness and tough competition from international rivals.

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