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Iata sees record-high 2016 profits for global aviation

Friday, December 9, 2016 - 05:50

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Global economic woes will barely make a dent on the global airline industry's profitability in 2016 as it looks towards chalking up record profits of US$35.6 billion for the year on gains from restructuring.

Geneva

GLOBAL economic woes will barely make a dent on the global airline industry's profitability in 2016 as it looks towards chalking up record profits of US$35.6 billion for the year on gains from restructuring.

But though global growth is expected to pick up next year, rising oil prices will drag on the industry's profits, while stronger protectionist rhetoric sentiment will cloud the industry's growth, said International Air Transport Association (Iata).

"This (2016) is the best performance in the industry's history - irrespective of the many uncertainties we face," said Alexandre de Juniac, director-general and chief executive officer of Iata, at its Geneva office on Thursday.

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But looking ahead, Mr de Juniac stressed that the aviation industry as a "business of freedom", or one that connects people and businesses all around the world, was under threat as "protectionist rhetoric" gains popularity and geographic scope. "It's in the interest of our, of all businesses to lift these barriers. We are worried about what we see, because it's not good news for air traffic."

In its latest biannual economic forecast, Iata said that the US$35.6 billion profit for 2016 was a new but lower target. In June, the 269-member trade association had projected US$39.4 billion. The step-down was due to slower global gross domestic product (GDP) growth and rising costs. For 2017, Iata sees net profit of US$29.8 billion.

But even so, this will still be the highest absolute profit generated by the airline industry and the highest net profit margin at 5.1 per cent.

Iata's upbeat assessment comes even as global growth seems to be weakening. It sees global GDP growth at 2.2 per cent for 2016, slower than 2.6 per cent in 2015. Key airline industry indicators from Iata also portray a slowing trend. Though passenger departure numbers are expected to grow in 2016 by 5.7 per cent to 3.8 billion, this will be slower than 2015's 7.2 per cent growth. The story is similar for revenue passenger kilometre (RPK). It will grow 5.9 per cent to US$7.08 trillion, slower than the 7.4 per cent in 2015.

The record profitability for 2016 is thus due to lower oil and jet fuel prices improving airlines' bottom lines, said Brian Pearce, chief economist at Iata. This is seen in the lower breakeven load factors, or percentage of seats they must sell at a given price level to cover costs. It will fall to 60.8 per cent from 61.3 per cent in 2015.

But falling oil prices are only part of the story behind strong profits for the industry, said Mr Pearce. Airlines' efforts at structural improvements in profitability and returns on capital form the larger part of the story.

Since the 2009 global financial crisis, the industry had stepped up efforts in increasing asset utilisation through consolidation, fleet retirement and behaviourial change.

Since then, "the global economy hasn't been doing very well, but the airline industry has been improving its financial core, and that's what you're seeing here", said Mr Pearce.

Taken together, the fall in oil prices and airlines' restructuring will help to improve returns on invested capital (ROIC), or how efficient a company can sweat its capital to generate returns, in 2016. Equity investors can thus expect to be better rewarded this year with ROIC reaching 9.4 per cent, above the weighted average cost of capital (WACC) at 6.7 per cent. This is better than last year's ROIC of 9.3 per cent and WACC of 6.9 per cent.

The industry is thus expected to generate US$5.8 billion of value for investors this year on an invested capital of almost US$600 billion.

But the situation will not last. Iata sees 2017's ROIC falling to 7.9 per cent and WACC climbing back to 6.9 per cent - even as it puts global GDP growth at a faster 2.5 per cent. This is due to expected increases in fuel costs. Iata forecasts Brent oil prices of US$55 per barrel, or a rise of over US$10 per barrel from this year. Airlines' fuel bill will thus rise to US$129 billion, which represents about 18.7 per cent of average operating costs.

Other political, economic and security risks are also expected to cloud the industry next year. How the industry reacts to such risks will have implications on global trade, Iata said in its report.

For one, airfreight has an outsized influence on global trade. A 2014 estimate puts the volume of goods transported by airlines at about one per cent of world trade, but their total value is around 35 per cent as there is increasing demand for pharmaceutical and precision engineering products to be delivered in the shortest amount of time.

In terms of job creation, Iata estimates 67.7 million for 2016 , a 4.6 per cent increase from 2015. There will be 3.4 per cent more next year, totalling 69.7 million.

Air travel is also beneficial to tourism and economic development worldwide, Iata said. The number of unique city pairs worldwide, defined as jets and turboprops larger than 20 seats and flying at least once a week between two destinations, will break the 18,000 mark for the first time, a 92 per cent rise from a decade ago.

But even as the industry is expected to expand more next year on the back of stronger global GDP growth, Mr de Juniac expressed his worry at a stronger "protectionist rhetoric", underscored by the United Kingdom's vote to exit the European Union, and real-estate mogul Donald Trump emerging victorious in the US presidential elections.

There is thus a need for governments to keep in mind the "unique and special" contributions aviation has to the global economy.

Governments will have to take a long-term view in terms of aviation policies, infrastructure and keeping borders open in order to support economic growth, said Mr de Juniac.

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