Global airline profitability hits new levels, driven by North American carriers

22nd January 2016 By: Keith Campbell - Creamer Media Senior Deputy Editor

Strong growth in passenger travel has resulted in record profitability for the global airline industry. “Our outlook for this year has improved to a $33-billion net profit expectation, for a margin of 4.6%,” highlighted International Air Transport Association (Iata) director-general and CEO Tony Tyler at the Iata Global Media Day, in Geneva, Switzerland, last month. “And profitability continues to strengthen in 2016 with the expectation of a $36.3-billion profit, which constitutes a 5.1% net margin.”

These are, he pointed out, better figures than Iata published before. “Indeed, the industry is surpassing an important benchmark,” he stressed. “The cost of capital in the industry is just under 7%. And our expectation is for airlines to achieve a return on capital of 8.3% this year [2015], increasing to 8.6% in 2016. So, we are finally – after years of destroying capital – delivering the minimal level of profitability that an investor would expect. In fact, one of our [airline] CEOs at our board of governors meeting last week described the state of the airlines as ‘less poor than we were before’. With average per passenger profit of less than $10, I would say that the profitability is still better described as ‘fragile’ rather than ‘sustainable’. And, as I well know from decades in the industry, we should enjoy the benign trading conditions while they last, but it would be a mistake to get used to them.”

Unfortunately, this profitability has not been worldwide. “The strongest financial performance in the airline industry is being seen amongst the US airlines,” reported Iata chief economist Brian Pearce. “While this performance appears exceptional for airlines, it is clear that airlines are only generating what other industries would consider normal levels of profitability.

“More importantly, we expect this to be the first year the industry pays its investors a ‘normal’ return, by which I mean above the average cost of capital,” added Pearce. “The airline industry has never achieved this before! It really should be commonplace if the industry is to attract capital.” It is estimated that airlines worldwide will need some $5-trillion in new capital over the next 20 years to replenish their fleets.

Although low fuel costs have helped, they are not the only or main source of these improved returns. In fact, during the decade before 2014, airlines improved their return on capital despite their unit fuel costs quadrupling. A key factor has been the sustained increased asset use by the airlines. “The industry has been using its assets, its aircraft, much more intensively,” he cited. “High asset utilisation is a key factor for profitability in such a capital-intensive industry.”

“Another important ‘other’ driver of profitability has been an improvement by airlines in their productivity – the dollar of revenue earned per dollar invested – of their capital,” he added. “This has been achieved by extending the life of aircraft, by selling value-added ancillary services to passengers and, of course, by filling seats.” Further, operating margins have risen, helped by the fall in fuel prices.

But Africa has largely missed out on this improvement. The continent’s carriers are hampered by the restrictive air traffic access policies imposed by too many African countries, preventing African airlines from developing the critical mass necessary to compete internationally. Infrastructure is often poor, but expensive. Taxes on aviation are very heavy. African (and Latin American) airlines made losses last year.

“[T]he rise in net post-tax profits in recent years has been dominated by airlines in North America, who we expect to be responsible for more than half of industry profits this year and next,” noted Pearce. Comparing operating profit margins in 2016 with those in 2010, he says: “It’s clear the North American airlines are way ahead of the pack. We’re seeing some improvements in Europe as well – parts of Europe. But we’ve seen all other regions – [Africa, Asia Pacific, Latin America and the Middle East] – move backwards.”

Keith Campbell attended the Iata Global Media Day as a guest of the organisation.