The Business Times

Iata forecasts record profits for airlines as fuel costs dive

US carriers are expected to fare the best in 2014, and Asia-Pacific airlines next best, with oil prices 20% down from 2013

Nisha Ramchandani
Published Wed, Dec 10, 2014 · 09:50 PM


LIFTED by slumping oil prices and stronger global GDP growth, the world's airlines are expected to chalk up a record net profit of US$19.9 billion this year, up from an earlier estimate of US$18 billion. In its latest industry forecast, the International Air Transport Association delivered a rosy outlook for 2015, with a projected bottom line of US$25 billion and a profit margin of 3.2 per cent.

This year, revenues will total US$751 billion, nearly 5 per cent more than a year ago, and translating to a still-slim net profit margin of 2.7 per cent. Iata chief Tony Tyler, speaking at the Iata Global Media Day, said that airlines will make US$6.02 per passenger - less than the price of a Starbucks coffee in Switzerland.

Following a period of consolidation, US carriers are by far expected to turn in the strongest report card this year, with a net profit of US$11.9 billion. Asia-Pacific airlines will be the second-best performers by region, with US$3.5 billion.

Oil prices, once a major expense headache for the industry, have come down some 20 per cent from last year, bringing some cheer. Brent crude is expected to fall to an average of US$85 per barrel next year, marking the first time since 2010 that the average price has slipped below US$100/bbl; this year's average was US$101.40/bbl.

Meanwhile, jet fuel prices are expected to hover at just under that US$100/bbl threshold, by averaging US$99.90/bbl in 2015, down from this year's average of US$116.60/bbl. The industrywide jet fuel bill for next year is expected to be US$192 billion, making up 26 per cent of total costs.

While the current operating environment will eventually spell good news for travellers in the form of lower fares, fuel hedging means that it will take some time for lower fuel prices to filter down to the bottom line. Singapore Airlines (SIA), for instance, has hedged 65.3 per cent of its fuel needs at about US$116/bbl for the six months to March 2015.

Analysts have said that some Asian carriers could find themselves getting burnt by the lower fuel prices as a result of wrong-way hedging.

Average airfares are expected to dip by 5.1 per cent next year; cargo rates will decline by a sharper 5.8 per cent. The good news for the industry's investors takes the form of an anticipated rise in the return on invested capital to 6.1 per cent this year and 7 per cent next year, up from just 4.9 per cent last year.

Mr Tyler said: "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. A 3.2 per cent net profit margin does not leave much room for a deterioration in the external environment before profits are hit."

Although all regions are expected to record fatter profits next year, performance will vary by region. North American carriers will remain the strongest performers with US$13.2 billion; the Asia-Pacific's airlines, the backbone of the cargo industry, will net some US$5 billion, driven by a pick-up in the cargo market and easing fuel expenses. Africa will remain the weakest region, as it has been for the last two years, with profits of a mere US$200 million.

Global passenger traffic will expand by 7 per cent next year, surging above the 5.5 per cent level that has trended over the last two decades. However, capacity will outstrip demand slightly, with growth of 7.3 per cent, nudging the passenger load factor down to 79.6 per cent.

The cargo market, which has suffered tepid demand and struggled with intense competition since 2011, can expect cargo volumes to expand 4.5 per cent next year.

And in the year where aviation celebrated its 100th year of commercial service, the industry witnessed two tragedies - the disappearance of Malaysia Airlines MH370 and the downing of MH17 - which have had far-reaching consequences.

A cross-industry task force spearheaded by Iata submitted its report to the International Civil Aviation Organization (ICAO) at the start of this week. The recommendations will be considered as ICAO works to develop a global aeronautical distress and safety system (GADSS); the report, which drew up performance criteria for aircraft tracking, recommends airlines compare their existing tracking capabilities against the benchmark and close any gaps within a year.

In the wake of MH17, United Nations (UN) aviation body ICAO is helming a taskforce to enhance the sharing of safety information, especially for flights over conflict zones.

Mr Tyler said: "The system works today, but clearly, there are gaps that must be filled. We are also calling on ICAO to work within the UN framework to implement the responsible design, manufacture and deployment of weapons with anti-aircraft capabilities into international law."

This has already been done for other forms of weaponry, including chemical weapons, land mines and biological weapons.

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