Global demand for air travel is poised to grow in the next year, though airline capacity growth could outstrip demand, according to Fitch Ratings. Continued growth in travel demand remains a positive factor for aircraft original equipment manufacturers (OEM) and lessors and global airline industry profits are expected to remain above historical averages. However, supply and demand dynamics, along with higher oil prices and labor costs, are likely to affect global airline profits.

Airline prospects vary by region. Fitch Ratings' airline sector outlooks for North America; Europe, the Middle East, and Africa (EMEA); and Latin America are stable for 2017, but industry dynamics vary by region. North America is again poised to be the most profitable, but operating margins will likely decline from peak levels in 2016. EMEA is seeing stable traffic growth but faces uncertainty from the U.K.'s Brexit referendum and heavy competition. Fundamentals in Latin America are improving, but ratings in the region remain under pressure.

Growth continues in China. Fitch expects China's revenue per passenger kilometre (RPK) growth to be in the high single digits to low teens over the next five to ten years. This is due to strong travel demand underpinned by falling air fares due to low oil prices and increasing competition, ongoing urbanization, rising household incomes, improving infrastructure and consumer lifestyle changes in favor of leisure travelling, especially international. RPK growth of international routes will likely continue to outpace domestic routes, as it did in 2015 and 2016.

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Aircraft delivery growth is also likely to continue. Fitch expects large commercial aircraft deliveries from Airbus and Boeing to rise to approximately 1,500 aircraft in 2017 (up 4.5%) and 1,600 aircraft in 2018 (up 7%). Bombardier and Embraer are likely to deliver 135 to 145 aircraft in 2017. There are several signs that the positive momentum in some demand indicators is slowing and a delivery peak is looming. Fitch expects aircraft orders and the order backlog to decline in 2017.

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Order books at Airbus and Boeing totaled 12,419 aircraft at the end of April 2017, equivalent to more than eight years of deliveries. Fitch estimates the value of the backlog is USD 850 billion to USD 875 billion. The backlog, which serves as a significant cushion to downside scenarios, was flat in 2016, the first time it did not rise since the financial crisis.

Crude oil prices are up significantly from lows in early 2016, presenting a headwind for airlines globally. Rising fuel prices may influence airline capacity decisions, as some marginal flying becomes less profitable due to higher costs. New or efficient aircraft technology is made more attractive by higher crude prices, though Fitch expects that most airlines will continue to make fleet decisions based on longer-term prospects rather than short-term swings in fuel prices.

Share repurchase activity remains high among U.S. airlines. Fitch expects U.S. carriers to pare back repurchases in a downturn, but more aggressive repurchase activity would be a credit concern. Although global airline profits have improved, the industry remains vulnerable to shocks such as terrorrism, pandemics, or rising trade protectionist sentiments. Cost overruns or delays on new programs are potential concerns for OEMs, as is the production ramp on new technology engines.