Airlines will make a net profit of about USD 30 billion and fares will continue to fall during 2017, according to latest projections. A healthy airline industry is one of the cornerstones of a healthy travel industry.
Airfares are already 63% cheaper in real terms than they were 22 years ago. On average, airlines will retain USD 7.54 for every passenger carried in 2017, according to International Air Transport Association (IATA) estimates.
While airline industry profits are expected to have reached a cyclical peak in 2016 of USD 35.6 billion, a soft landing in profitable territory is expected in 2017 with a net profit of USD 29.8 billion. 2017 is expected to be the eighth year in a row of aggregate airline profitability, illustrating the resilience to shocks that have been built into the industry structure.
IATA expects the global airline industry to make a net profit in 2017 of USD 29.8 billion. On forecast total revenues of USD 736 billion, 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%).
Expected higher oil prices will have the biggest impact on the outlook for 2017. In 2016 oil prices averaged USD 44.6/barrel (Brent) and this is forecast to increase to USD 55.0 in 2017. This will push jet fuel prices from USD 52.1/barrel (2016) to USD 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.
IATA estimates that 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 negative impact of a lower load factor is expected to be offset somewhat by a strengthening of global economic growth. World GDP is projected to expand by 2.5% in 2017 (up from 2.2% in 2016). Along with structural changes in the industry, this is expected to help stabilize yields for both the cargo and passenger businesses. This is a welcome development as yields (calculated in dollar terms) have fallen each year since 2012.
IATA revised slightly downward its outlook for 2016 airline industry profitability to USD 35.6 billion (from the June projection of USD 39.4 billion) 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%).
“Airlines continue to deliver strong results,” said IATA’s director general and chief executive, Alexandre de Juniac.
“This year we expect a record net profit of USD 35.6 billion. Even though conditions in 2017 will be more difficult with rising oil prices, we see the industry earning USD 29.8 billion. That’s a very soft landing and safely in profitable territory.
“These three years are the best performance in the industry’s history – irrespective of the many uncertainties we face. Indeed, risks are abundant – political, economic and security among them. And controlling costs is still a constant battle in our hyper-competitive industry.”
Edited by Peter Needham