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IATA forecasts US$40 billion in airline profits in 2016

written by australianaviation.com.au | June 2, 2016
777-200LR_C-FIUF_SYDNEY_25APRIL2015_SETH JAWORSKI-2
International carriers at Sydney Airport. (Seth Jaworski)

The world’s airlines are collectively expected to post close to US$40 billion in profits in calendar 2016 as lower oil prices and demand for air travel buoy the bottom line.

The forecast, presented by International Air Transport Association (IATA) chief executive Tony Tyler at the industry body’s annual general meeting in Dublin on Thursday, was an improvement from the estimated profit of US$36.3 billion that was published in December 2015.

The result would be achieved on revenues totalling US$709 billion, representing a net profit margin of 5.6 per cent.

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IATA said the return on invested capital of 9.8 per cent would exceed the cost of capital (forecast to be 6.8 per cent) for a second straight year.

Tyler said the mood of the industry was “generally optimistic”, with airlines producing solid results despite some economic headwinds.

And while passenger markets were growing robustly, with load factors at record levels, Tyler noted the cargo market was stagnating.

Tyler said the industry was “probably nearing the peak of the positive stimulus from lower prices”.

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“Lower oil prices are certainly helping — though tempered by hedging and exchange rates,” Tyler said in his speech to delegates at the IATA AGM on Thursday.

“And your hard work is strengthening the business. Load factors are at record levels. New value streams are increasing ancillary revenues. And joint ventures and other forms of cooperation are improving efficiency and increasing consumer choice while fostering robust competition.”

On a region-specific basis, IATA said airlines in Asia-Pacific were tipped to record US$7.8 billion in 2016, compared with US$7.2 billion the prior year. The region was the second-best performing in the world in terms of profitability, IATA’s forecast showed. Capacity was expected to grow by 9.1 per cent, a little ahead of demand growth of 8.5 per cent.

Meanwhile, North American carriers continue to lead all regions in terms of making money, with profits of US$22.9 billion expected in 2016.

IATA estimated fares would fall by about seven per cent this year, which Pearce suggested was in line with the declines in the price of fuel.

“There has been some price stimulation most recently from the fall in fuel prices and we think there is more to come because the impact of hedging has delayed the benefits of the fuel price falls we saw last year coming through to airline costs,” IATA chief economist Brian Pearce said at the IATA AGM in Dublin on Thursday.

On a negative note, IATA said cargo markets remained “in the doldrums”, with revenue likely to fall to US$49.6 billion, from US$52.8 billion in 2015. Demand was expected to grow a slender 2.1 per cent in 2016 amid significant capacity additions due to the increase in passenger fleets to meet demand for air travel.

As a result, cargo yields were expected to fall eight per cent in 2016.

“Bottom line is, it is a difficult business for cargo,” Pearce said.

“Just emphasising how tough a business it’s been, this year we are expecting cargo revenues to be back where they were 10 years ago.

“That’s a combination of weakness of international trade and also the falling cost of air cargo.

“Passenger business in contrast is double what it was in revenue terms 10 years ago.”

IATA economics chart on cargo. (IATA)
Cargo has lagged passenger demand. (IATA)
IATA economics chart on cargo. (IATA)
There has been a marked decline in international trade. (IATA)
IATA economics chart on cargo. (IATA)
As a result, revenues for cargo are back at 2005 levels. (IATA)

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