Cancun - The International Air Transport Association (IATA) revised its 2017 industry profitability outlook upwards. Airlines are expected to report a USD 31.4 billion profit (up from the previously forecast USD 29.8 billion) on revenues of USD 743 billion (up from the previously forecast USD 736 billion).

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"This will be another solid year of performance for the airline industry. Demand for both the cargo and passenger business is stronger than expected. While revenues are increasing, earnings are being squeezed by rising fuel, labor and maintenance expenses. Airlines are still well in the black and delivering earnings above their cost of capital. But, compared to last year, there is a dip in profitability," said Alexandre de Juniac, IATA’s Director General and CEO.

In 2017 airlines are expected to retain a net profit of USD 7.69 per passenger. That is down from USD 9.13 in 2016 and USD 10.08 in 2015. The average net profit margin stands at 4.2% (down from 4.9% in 2016).

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"Airlines are defining a new epoch in industry profitability. For a third year in a row we expect returns that are above the cost of capital. But, with earnings of USD 7.69 per passenger, there is not much buffer. That’s why airlines must remain vigilant against any cost increases, including from taxes, labor and infrastructure," said de Juniac.

While overall industry performance is strong, major regional variations remain. About half the industry profits are being generated in North America (USD 15.4 billion). Carriers in Europe and Asia-Pacific will each add a USD 7.4 billion profit to the industry total. Latin America and Middle East carriers are expected to earn USD 800 million and USD 400 million respectively. Airlines in Africa are expected to post a USD 100 million loss.

Forecast Drivers

Strong Demand Environment: The demand environment has been much stronger than anticipated. Expectations for GDP growth in 2017 stand at 2.9%. If realized this will be the strongest global economic performance since 2011.

What is most important for the industry financial performance is that this surge in expected demand takes traffic growth ahead of planned capacity growth. As a result, the average passenger load factor is expected to reach 80.6% (slightly ahead of the 80.3% achieved in 2016), helping to boost unit revenues.

Air cargo typically grows strongly at the start of an economic upturn, as firms turn to rapid air transport to restock inventories – which is what we are seeing today. There are also retail trends, such as the switch to e-commerce and in pharmaceuticals – that are supporting air cargo growth.

Costs

Cost increases for fuel, labor and maintenance accelerated in the first quarter. Overall industry expenses are expected to rise to USD 687 billion, a USD 44 billion increase on 2016. Industry revenues are expected to increase to USD 743 billion, USD 38 billion more than 2016.

Yields

Yields are still expected to be down on 2016 levels, but there are signs of stabilization in the first half of the year with a slight improvement anticipated towards year-end, driven by better capacity utilization and the imperative to respond to the rise of unit costs.

Regional Round-up

North American airlines are the powerhouse of industry profitability, generating about half of the collective global profit. This is owing to the restructuring of the industry, a relatively strong economy and a resilient US dollar. The region’s carriers also face challenges. Very limited fuel hedging delivered quick benefits when fuel prices fell. Conversely, there is less of a buffer as fuel prices rise. A tight labor market is adding more pressure to profits by pushing up wages. Nonetheless, profitability remains at historically high levels, even if slightly down on 2016.

Cargo is playing a large role in the strength of the region’s carriers, which collectively account for about 40% of air cargo shipments. Cargo revenues are rising for the first time in several years and this trend should be boosted by the restocking of retailers and industry in the initial stages of the economic upturn. China continues to reorient its economy away from exports and toward domestic demand. The wider Asia region is still the key source of manufactured components and finished goods which is showing strong demand at the start of the cyclical economic upturn seen in recent quarters.

Terror incidents in 2016 have dented European demand. Performance over the first months of the year pointed towards the recovery of lost ground. However, recent terrorist attacks demonstrate that the threat continues to hang over the continent with potential negative impacts on demand.

The cargo business for the continent’s carriers is getting a demand boost from the weak Euro, improvement in world trade (with a direct positive impact on air cargo) and indications of political stability.

The continent is seeing slightly improved trading conditions with its largest economy (Brazil) emerging from recession. Political instability persists in many markets and rising costs in dollars (for fuel) presents challenges. Additionally the region suffers from an onerous regulatory burden on passenger rights. Brazil has been joined by Mexico with punitive passenger rights regimes that differ significantly from international norms. And the political chaos in Venezuela makes it unlikely there soon will be a recovery of USD 3.8 billion of airline revenues blocked from repatriation. Nonetheless, the region’s airlines are responding to these challenges and Latin America is expected to be the only region to see an improvement in its business fortunes compared to 2016.

Trading conditions for the Middle Eastern carriers have sharply declined over the last six months. Profitability and load factors are down significantly, as traffic and some business models have come under pressure. There is growing evidence that the ban on large electronic devices in the cabin and the uncertainty created around possible US travel bans is taking a toll on some key routes. Meanwhile the region is struggling with increased infrastructure taxes/charges and air traffic congestion.

African carriers remain in the red; but without a deterioration on 2016 performance. On safety, the region’s carriers achieved a major milestone with zero jet hull-losses in 2016. And a general improvement in commodity prices is helping invigorate the continent’s economies (and offset fuel price increases). This trend, however, is unlikely to accelerate substantially. The burdens of high taxes, higher-than-global-average fuel prices, competition from the Gulf and limited intra-continental liberalization remain. The balance of these factors is expected to result in continued small losses.

2016

IATA revised downwards its estimation for 2016 profits to USD 34.8 billion (from previously forecast USD 35.6 billion). Industry level profitability peaked at a historically high level in the first half of 2016 and has since been slowly declining. This is the result of margins being squeezed by unit costs which are rising faster than unit revenues. Additionally, net post-tax profits took a hit from fuel hedging losses.

The Business of Freedom

"Air transport is the business of freedom. The safe and efficient global movement of goods and people is a positive force in our world. Aviation’s success betters peoples’ lives by creating economic opportunity and supporting global understanding. We must stand firm in the face of any rhetoric that would put limits on aviation’s future success," said de Juniac.

Some key indicators of the strength of global connectivity include: