2016 Industry Financial Update
IATA’s latest forecast points to 2016 being another strong year for global airline industry financials, with a second straight year of strong profits expected. However, the gains are neither widespread nor secure at the regional level, with a mixed performance likely for Africa & the Middle East. Even at the global level, the expected level of profits only allows the industry to achieve a return that just exceeds the cost of capital. While this is the exception in the airline industry, it is commonplace elsewhere; it needs to become the norm in air transport also.
The global airline industry is forecast to generate profits of US$33.0 and $36.3 billion this year and next, with an EBIT margin of around 8.5% in both years.
The outlook for the air passenger market remains upbeat with growth of 6.9% expected in 2016, the best since 2010. However, challenges remain for cargo, reflecting both structural and cyclical factors.
This financial performance is strong by historical industry standards, but it represents only a ‘normal’ return for investors, above the cost of capital.
While unusual for air transport, this financial performance is both commonplace and expected by investors in other industries. In order to attract the new capital required for fleet renewal and expansion, this performance needs to become the norm in air transport as well.
Global economic activity is expected to improve modestly in 2016, supporting the outlook for both air transport demand and financial performance.
The growth slowdown in key emerging economies will continue in the near-term, but is expected to reverse over the course of 2016.
Low oil prices helped to boost airline demand and profits over 2015. Although the outlook for oil prices is highly uncertain, prices are expected to remain low compared with those of 2011-14. Key risks to oil prices in 2016 relate more to geopolitical and policy considerations than the fundamental (supply and demand) drivers.
The appreciation of the US$ since mid-2014 has offset the gains from lower oil prices and has impacted regional profitability to varying degrees.
The financial improvement of recent years has been largely driven by airlines in North America, which account for more than 50% of total industry profits in 2015 and 2016.
The performance in other regions is much more mixed. In the Middle East, another year of solid financial improvement is forecast, continuing the positive trend since 2013. However, African carriers are expected to register small losses in both 2015 and 2016, highlighting the challenges facing the industry in that region.
Key uncertainties for Africa and the Middle East in 2016 relate to developments in oil (and broader commodity) prices, along with geopolitical tensions which have the potential to impact confidence and disrupt global trade, finance, and tourism flows.