Despite airlines being on course to achieve another
year of solid results, there are challenges ahead as
Dominik Sipinski reports
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SCENE
Good Times, Warning Signs
A
ccording to the
International Air
Transport Association
(IATA), a global
organisation of 275
airlines carrying 83%
of the world’s air traffic,
2017 will be another
great year for airlines.
The industry in total,
including non-IATA members (such as
Ryanair, easyJet and Southwest Airlines), is
forecast to earn $31.4 billion net profit and
$55.7 billion operating profit. Both values are
slightly lower than the industry’s earnings in
2016, estimated by IATA at $34.8 billion and
$62.1 billion respectively.
However, in a long-term context, this year
will still be the second or third best for the
world’s airlines since IATA started keeping
track of their total results in 2004.
Nearly half of the profits will be generated by
airlines in North America, which are expected
to earn $15.4 billion in total and record an
impressive 11.6% earnings before interest and
tax (EBIT) margin, significantly outperforming
the global average 7.5% EBIT margin.
The European and Asia-Pacific regions
are forecast to earn $7.4 billion each, while
Africa will be the only region where airlines
will not turn a profit this year. The forecast
puts this continent at a $0.1 billion net loss.
Speaking during the organisation’s
summit in Cancun, Mexico, Alexandre de
Juniac, IATA’s Director General, said: “This
will be another solid year of performance
for the airline industry. Demand for both the
cargo and passenger business is stronger
than expected. Airlines are still well in the
black and delivering earnings above their
cost of capital.”Record passenger numbers
A major driving force behind the results is
the increase in passenger numbers. IATA
forecasts that this year, for the first time in
history, more than four billion people will
take to the skies. Total air traffic, measured
in revenue-passenger-kilometres (RPKs), will
grow by 7.4% with the bulk of the growth
concentrated in the Asia-Pacific region,
which is forecast to expand by 10.4%.
Europe, the Middle East, Latin America and
Africa are all expected to grow by around
7-7.5% each in terms of RPKs, while North
America will lag behind with 4% growth.
The current economic climate for airlines
is so good that IATA’s full-year forecast for$31.4 billion in net profit is $1.6 billion more
than the $29.8 billion net profit forecast IATA
issued in December 2016. The increase
is mostly a sign of business confidence,
slower than expected fuel price increases
and a steady flow of passengers.
Data published by airlines so far this year
underscores IATA’s forecasts. American
Airlines, the world’s largest airline, posted
a $1.04 billion net profit in the first half of- Delta Air Lines earned $1.83 billion,
while both United Airlines and Southwest
Airlines have each posted a net profit of
around a billion dollars.
European airlines are no less profitable.
The Lufthansa Group earned €672 million
in the first half of 2017, the International
Airlines Group €567 million and Ryanair, the
largest European low-cost carrier, posted a
€397 million net profit for the three months
from April to June alone.
But while it is hard not to be optimistic
when looking at these numbers, both IATA
and the airlines themselves see some dark
clouds behind the record profits.
Plummeting yields
IATA forecasts airlines’ revenues will grow
by 5.3% to $743 billion this year. Out of this
total, $527 billion will come from passenger
traffic and $50.7 billion from freight, with
the rest originating from other sources of
revenue.
But revenue growth is slower than traffic
growth, which means yields (the revenue
per passenger or tonne per kilometre
flown) from both passenger and freight
traffic are declining. IATA points out that
both passenger and freight yields have
been plummeting since 2012 and in 2017
are expected to go down by 2% and 1%
respectively.
De Juniac said: “While revenues are
increasing, earnings are being squeezed
by rising fuel, labour and maintenance
expenses. Compared to last year, there is a
dip in profitability.”
There are other warning signs, too. Net
profit from departing passengers will reach
$7.70 per passenger carried this year, less
than the $9.10 in 2016 and $10.10 in 2015. It
is worth noting, though, that this number will
vary in 2017 between $16.30 per passenger
in North America and -$1.50 per passenger
in Africa.
Return on invested capital is expected
to drop by 1.1% to 8.8% in 2017. The
operating margin will drop to 7.5% this yearfrom 8.5% in 2015 and 8.8% in 2016. Even
the estimated net profit is lower than $34.
billion in 2016 and $35.9 billion in 2015.
All these numbers are still well above
pre-2015 numbers, when the airline
industry could only dream of exceeding 5%
operating profit and double-digit total net
profits were a rarity.Industry worries
Yet the industry is worried that although
a fall in yields can be compensated by
the sheer growth in traffic in the current
favourable conditions, this cannot last.
The biggest worry is the rising fuel
price. In 2012 and 2013, according to IATA
numbers, fuel was responsible for about a
third of airlines’ total costs, although for low-
cost carriers the number was higher due to
other costs being lower. For example, for
Ryanair in fiscal year 2013, fuel was 45% of
its total costs.