The International Air Transport Association (IATA) has announced that it expects the global airline industry to make a net profit in 2017 of $29.8bn. On forecast total revenues of $736bn, that represents a 4.1% net profit margin. This will be the third consecutive year (and the third year in the industry’s history) in which airlines will make a return on invested capital (7.9%) which is above the weighted average cost of capital (6.9%).
IATA revised slightly downward its outlook for 2016 airline industry profitability to $35.6bn (from the June projection of $39.4bn) owing to slower global GDP growth and rising costs. This will still be the highest absolute profit generated by the airline industry and the highest net profit margin (5.1%).
IATA expects higher oil prices to have the biggest impact on the outlook for 2017. In 2016 oil prices averaged $44.6/barrel (Brent) and this is forecast to increase to $55.0 in 2017. This will push jet fuel prices from $52.1/barrel (2016) to $64.9/barrel (2017). Fuel is expected to account for 18.7% of the industry’s cost structure in 2017, which is significantly below the recent peak of 33.2% in 2012-2013.
The demand stimulus from lower oil prices will taper off in 2017, slowing traffic growth to 5.1% (from 5.9% in 2016). Industry capacity expansion is also expected to slow to 5.6% (down from 6.2% in 2016). Capacity growth will still outstrip the increase in demand, thus lowering the global passenger load factor to 79.8% (from 80.2% in 2016).
The strongest financial performance is being delivered by airlines in North America. Net post-tax profits will be the highest at $18.1bn next year, although down slightly from the $20.3bn expected in 2016. The net margin for the region’s carriers is also expected to be the strongest at 8.5% with an average profit of $19.58/passenger.
Airlines based in Europe are expected to post an aggregate net profit of $5.6bn in 2017 which is below the $7.5bn for 2016. Nonetheless, carriers there are forecast to generate a 2.9% net profit margin and a per passenger profit of $5.65.
Airlines in the Asia-Pacific region are expected to generate a net profit of $6.3bn in 2017 (down from $7.3bn in 2016) for a net margin of 2.9%. On a per passenger basis average profits are anticipated to be $4.44.
Middle Eastern airlines are forecast to generate a net profit of $0.3bn for a net margin of 0.5% and an average profit per passenger of $1.56. This is below the $900m profit expected in 2016. Average yields for the region’s carriers are low but unit costs are even lower, partly driven by the strong capacity expansion, forecast at 10.1% this year, ahead of expected demand growth of 9.0%. IATA notes that threats are emerging to the success story of the Gulf carriers, including increases in airport charges across the Gulf States and growing air traffic management delays.
Latin American airlines are expected to post a net profit of $200m, compared with $300m forecast for 2016. Carriers in Africa are expected to deliver the weakest financial performance with a net loss of $800 million (broadly unchanged from 2016).