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Flying high on a low oil price: IBISWorld reveals the unexpected boost to the airline industry’s bottom line

July 11, 2017 Statistics & Trends No Comments Email Email

Recent IBISWorld research suggests domestic and international airlines are benefiting from a sustained period of low oil prices, which has reduced the industry’s largest cost and improved profit margins on airfares.

“The domestic and international airlines industries have undergone substantial change over the last five years with increased competition from foreign low-cost carriers, ambitious fleet renewal programs and a restructuring of route capacity. The weaker price of crude oil, however, has delivered a significant cost saving to airlines that built sustained high fuel costs into their business models,” said Mr Nick Tarrant, IBISWorld Senior Industry Analyst.

“The number of people travelling to, from and within Australia has increased over the past five years, resulting in increased passenger numbers for domestic and international carriers. Not only has the number of tourists travelling to Australia from nearby Asian countries increased strongly, so too has the number of Australian residents travelling overseas. While international airlines have generated strong revenue growth over the five-year period to 2017-18 as a result of a lower oil price and increasing passenger numbers, domestic airlines’ growth has been curtailed by continued fierce competition between Qantas and Virgin which between them, including subsidiaries, control almost 90 per cent of the domestic market,” added Mr Tarrant.

Airlines in Australia Industry Data

Industry 2016-17 Revenue ($ billions) 2017-18 Projected revenue ($ billions) Annualised growth 2017-18 to 2021-22 % Employees 2007-08 Projected employees 2017-18
Domestic airlines in Australia 14.2 14.0 1.4 29,950 24,485
International airlines in Australia 24.7 25.2 3.2 42,043 53,537

Source: IBISWorld.com.au 

Fuelling profit

Fuel is the most significant cost for international airlines. Most major players hedge against volatile fuel costs to provide some certainty in their operations. As a result, falling oil prices do not automatically result in greater profits for airlines.

“While oil prices fell sharply in 2014-15, some airlines had hedged the price of fuel at the market rate before the price plummeted. These firms were not able to benefit from the cost savings, which constrained profit margins. However, some airlines benefited from lower oil prices, such as Qantas,” said Mr Tarrant.

Qantas posted a record underlying profit of $512.0 million for its international business in 2015-16, which was a significant recovery following huge losses in 2013 and 2014. Qantas’ total fuel costs as a share of expenditure fell from 27% in 2014-15 to 22% in 2015-16.

QANTAS INTERNATIONAL*
2012 2013 2014 2015 2016 2017**
Revenue $ 5770 5496 5297 5467 5750 5615
EBIT $ -484 -246 -497 267 512 394.4
Margin -8.4% -4.5% -9.4% 4.9% 8.9% 7.0%
*Source: Qantas Databook **Estimate

 

2012 2013 2014 2015 2016 2017*
Qantas fuel cost % 28.0% 27.0% 28.0% 27.0% 22.0% 23.1%
Air New Zealand fuel cost % 32.0% 30.9% 28.7% 27.3% 21.1% 22.8%
Crude oil $US 95.1 92.7 101.0 67.5 43.0 48.8
Source: Annual Reports and IBISWorld  

“Across the Tasman, Air New Zealand’s results tell a similar story. Fuel accounted for 32.0% of Air New Zealand’s cost base in 2011-12, causing the firm to post a weak profit margin of 3.5%. In 2015-16, fuel accounted for only 21.1% of Air New Zealand’s costs, and the firm posted a significant profit margin of 15.9%,” said Mr Tarrant.

IBISWorld analysis attributed Air New Zealand’s increased profit in 2015-16 to lower fuel prices, new routes and the rising popularity of New Zealand tourism, which is a major revenue source for the airline. Inbound passenger numbers to New Zealand rose by an annualised 6.1% over the five years through 2016-17, on the back of growing demand from Asian markets. Weak consumer sentiment in Australia has also benefited New Zealand tourism, as Australians have substituted long-haul travel with shorter trips to New Zealand.

“Competition on trans-Tasman routes has intensified as Qantas and other major airlines have expanded capacity, causing Air New Zealand to lose market share and profitability on routes such as Auckland to Sydney, and Auckland to Melbourne,” added Mr Tarrant. 

Crowded skies

A sustained period of weak oil prices since mid-2015 has also negatively affected major airlines. Cheaper operating costs have made it easier for foreign airlines, such as AirAsia X, Singapore Airlines and Philippine Airlines, to expand into the Australian and New Zealand markets.

“These trends have forced larger airlines such as Qantas and Air New Zealand to alter their route capacity. An airline’s load factor, which measures how many seats are filled per flight, has risen over the past five years as operators have adapted to changing market conditions. Airlines have realigned their capacity to close unprofitable routes and make greater use of existing capacity,” said Mr Tarrant.

Qantas and Air New Zealand have tracked largely in line with major players in the United States, such as American Airlines and United Airlines, as falling oil prices and greater competition have caused airlines across the world to change tact.

Load factor 2012 2013 2014 2015 2016 2017^
Air New Zealand international* 82.4% 84.0% 85.4% 84.7% 84.8% 83.6%
Qantas international* 80.5% 81.6% 79.6% 81.5% 81.7% 81.1%
American Airlines (US international flights)** 81.2% 81.3% 78.5% 79.4% 78.3% N/C
United Airlines (US international flights)** 81.2% 82.1% 81.5% 80.9% 80.1% N/C
*Annual reports **US Bureau of Transportation, calendar year ^IBISWorld forecast

 Falling fares

“International airfares have fallen significantly over the past few years. Expanding capacity along key routes has bolstered competition, while lower oil prices have allowed firms to heavily discount flights to Europe, Asia and North America,” said Mr Tarrant.

”When oil prices fell in 2015, a lag occurred as airlines did not immediately pass their lower costs on to customers as they aimed to expand or invest in new aircraft. Although most airlines eventually reduced or eliminated their fuel surcharges on international routes due to competitive pressures, these changes took time and allowed airlines to improve their bottom line,” added Mr Tarrant.

Flash fleet

Qantas has focused on renewing its international aircraft fleet over the past five years. The company currently operates Airbus A380s, Airbus A330s and Boeing 787 Dreamliners (among other aircraft) on several international routes. These aircraft, particularly the 787, have greater fuel efficiency and longer ranges than the company’s older aircraft, such as the ageing Boeing 747.

“In August 2015, Qantas announced that it had ordered eight 787-9 Dreamliners to replace its older 747s on several international routes. While the 787-9 aircraft will have a lower seat capacity than the 747s, their greater fuel efficiency is anticipated to reduce the company’s fuel costs and enhance passenger comfort,” said Mr Tarrant.

The first Qantas Dreamliner is expected to be delivered in 2017, with an initial flight planned on the Melbourne to Los Angeles route in December. The Dreamliners will also allow Qantas to offer non-stop flights between Perth and London, replacing the previous Melbourne to London route that was serviced by its Airbus A380 fleet. This will allow Qantas to redirect its A380 fleet towards in-demand Asian routes, which IBISWorld expects will boost the firm’s passenger load factor on international routes. Air New Zealand has already benefited from this trend, taking delivery of nine 787-9 Dreamliners since 2013. Conversely, Virgin Australia has not significantly increased its international fleet, preferring to focus on codeshare agreements and on more profitable domestic routes, having lost significant market share on international flights to a growing number of competitors.

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