Airline profitability improves with falling oil prices

The International Air Transport Association (IATA) announced an outlook for improved industry profitability in its Economic Performance of the Air Transport Industry report. Airlines are expected to post a collective global net profit in 2014 of some US$19.9bn (up from the US$18.0bn projected in June). This looks set to rise to US$25.0bn in 2015. Lower oil prices and stronger worldwide GDP growth are the main drivers behind the improved profitability. Consumers will benefit substantially from the stronger industry performance as lower industry costs and efficiencies are passed through. The airline industry is highly competitive. After adjusting for inflation, average return airfares (excluding taxes and surcharges) are expected to fall by some 5.1% on 2014 levels and cargo rates are expected to fall by a slightly bigger 5.8%. The expected $25bn net post-tax profit represents a 3.2% margin. On a per passenger basis, airlines will make a net profit of $7.08 in 2015. That is up on the $6.02 earned in 2014 and more than double the $3.38 earnings per passenger achieved in 2013. The return on invested capital (ROIC) is expected to grow to 7.0%. This is a substantial improvement on the 6.1% ROIC expected to be achieved in 2014.This is still 0.8 percentage points below the 7.8% weighted average cost of capital (WACC), so there is still some ground to cover before achieving sustainable margins.“The industry outlook is improving. The global economy continues to recover and the fall in oil prices should strengthen the upturn next year. While we see airlines making US$25bn in 2015, it is important to remember that this is still just a 3.2% net profit margin. 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. And a 3.2% net profit margin does not leave much room for a deterioration in the external environment before profits are hit,” said Tony Tyler, IATA’s Director General and CEO.