SPECIAL REPORT: Aviation industry outlook for 2015
The International Air Transport Association (IATA) this week announced an upward revision of its 2015 industry outlook to a $29.3 billion net profit.
On expected revenues of $727 billion, IATAb said the industry would achieve a 4.0% net profit margin.
The significant strengthening from the $16.4 billion net profit in 2014 (re-stated from $19.9 billion) reflects the net impact of several global factors, including stronger global economic prospects, record load factors, lower fuel prices, and a major appreciation of the US dollar.
All regions are expected to see an improvement in profitability in 2015 compared with 2014, however there are stark differences in regional economies.
Tony Tyler, IATA’s director general and CEO, revealed: "The industry’s fortunes are far from uniform. Many airlines still face huge challenges.”
Over half the global profit is expected to be generated by airlines based in North America ($15.7 billion). For these airlines, the margin on earnings before interest and taxation (EBIT) is expected to exceed 12%, more than double that of the next best performing regions of Asia-Pacific and Europe.
“For the airline business, 2015 is turning out to be a positive year.
"Since the tragic events of September 2001, the global airline industry has transformed itself with major gains in efficiency.
"This is clearly evident in the expected record high passenger load factor of 80.2% for this year.
"The result is a hard-earned 4% average net profit margin.
"On average, airlines will retain $8.27 for every passenger carried,” Tyler revealed.
At the industry level, a significant milestone has been achieved with an expected return on invested capital (ROIC) of 7.5%.
For the first time, the industry-level average ROIC will be in excess of its cost of capital, which has fallen to 6.8% largely due to lower bond yields.
This industry average is, however, dominated by US airlines, which have benefitted the most from the fall in US dollar-denominated fuel prices, a strong local economy and industry restructuring.
IATA asserts that the average non-US airline is still struggling with returns below the cost of capital and a significant debt burden.
The recent decline in fuel prices is a welcome development and the 2015 industry outlook is based on an average Brent crude oil price of $65/barrel, which is 36% below the 2014 price of $101.4.
Jet fuel prices are expected to decline at a slower rate for a full year price of $78/barrel (33% below the $116.6 level of 2014).
Fuel still represents approximately 28% of the industry’s operating cost structure and the full impact of the fall in fuel prices is being moderated by a 20% rise in the value of the US dollar over the past 12 months as well as by airline hedging policies, which have locked about half of the 2015 fuel supply at higher levels.
The impact of the stronger US dollar can be seen in a 0.7% decline in the industry’s overall revenues, which are expected to be $727 billion ($733 billion in 2014).
The cargo business is expected to grow 5.5% this year, which is a slightly slower pace than the 5.8% realised in 2014.
There was a strengthening of the cargo business in 2014 that continued into this year. Expected revenues, estimated at $62 billion, would have exceeded the $67 billion peak in 2011 were it not for the appreciation of the US dollar.
The improvement is delivered through a volume increase with a record 54.2 million tonnes of air cargo expected in 2015.
Yields are expected to fall around 7% this year (a decline exaggerated by the strength of the US dollar). The longer-term prospects for air cargo remain challenging, with a continuing post-financial crisis trend of slower trade growth relative to GDP
All regions will see improved profitability in 2015 compared with 2014 and capacity expansions, but these are expected to broadly match the expansion in demand, according to IATA, and this aligns with the global expectation for capacity to expand 6.2%, slightly behind the projected 6.7% increase in demand.
Aside from these few similarities, the regions are expected to deliver widely divergent levels of profitability.
Middle Eastern airlines are expected to post a collective $1.8 billion net return for 2015 for an average net margin of 3.1% ($9.61/passenger), and is the only region expected to see double-digit expansion in passenger numbers.
African airlines are expected to post a collective profit of $100 million for a net margin of 0.8% ($1.59/passenger), the thinnest of all regions.
Although in the black, this continues the relatively poor performance of the past few year; in 2014, traffic growth for African airlines was weak due to various problems that disrupted tourism, but market share also continues to be lost.
Currencies have been weak, particularly for oil exporters, so the benefits of lower fuel prices will be limited in this region and African airlines are also expected to see the slowest growth among developing markets with capacity and demand expansion of 3.3% and 3.2% respectively this year.