The world’s airlines will post record net profits of some $33 billion in 2015, exceeding the cost of capital for the first time, according to a revised forecast by the International Air Transport Association (IATA). But despite the sixth consecutive year of airline profitability since the 2008-2009 recession, the financials remain “fragile,” according to IATA director general and CEO Tony Tyler. “We should enjoy the benign trading conditions while they last but not get used to them,” he noted in remarks during IATA’s December 10 global media day in Geneva.
The $33 billion marks a nearly 66 percent increase from IATA’s profit forecast of a year ago, and a more than 12 percent jump from the $29.3 billion upward revision at the trade association’s annual general meeting in June. The prediction for 2016 suggests another record: $36.3 billion.
IATA chief economist Brian Pearce said the exceptional airline profits should be considered “normal.”
“In most industries, generating a return on capital at least equal to that cost is the minimum performance and is commonplace,” he said. The airline industry’s cost of capital runs at about 7 percent. Forecasts call for 2015 airline return on capital to amount to 8.3 percent, rising to 8.6 percent next year.
North American generates nearly 60 percent of the industry’s profits ($19.4 billion in 2015). Pearce attributes the performance not only to lower fuel prices but also improved passenger load factors, boosted by consolidation and restructuring in some U.S. markets. IATA expects European airline profits to rise from $6 billion to $9 billion this year and $8.5 billion next year, when hedged fuel purchases expire and enable lower fuel costs.
Tyler cautioned that “large parts of the industry are still struggling,” citing a negative result in Brazil from a previously expected $600 million profit to a $300 million loss in 2015. He said the Brazilian government is “unnecessarily making life difficult for themselves and in turn making it difficult for airlines” with policies resulting in the most expensive jet fuel prices in the region and recent changes in tax liability laws.
The outgoing IATA leader, who has announced he will retire in June, also criticized some recent regulatory actions, including the new U.S. highway bill, which increases security fees paid by air travelers but shifts the funds to road network upgrades. “It is totally unjustified and violates international agreements with more than 100 countries,” said Tyler. “Needless to say, we are protesting.” He also chided Norway’s new passenger departure tax and China’s combination lottery-auction slot allocation, which “completely ignores the well established worldwide slot guidelines.”