Airline profits set to increase

Air New Zealand, landing Tauranga Airport. Photo / George Novak

Airlines are forecast to make profits of close to US$39.4 billion ($55 billion) this year, in what will be the fifth consecutive year of improving aggregate results for the industry.

The International Air Transport Association (IATA) said the profit is expected to be generated on revenues of US$709 billion for an aggregate net profit margin of 5.6 per cent.

On average, airlines will make US$10.42 for each passenger carried, the association's director general Tony Tyler said at its annual meeting in Dublin.

"In Dublin, that's enough to buy four double espressos at Starbucks. Looked at from a different angle, Starbucks will earn about $11 for every $100 in sales while airlines will make $5.60.

"We don't begrudge Starbucks their profitability. But there is clearly still upside for airline profits," he said.

All regions were making a contribution to the $4.1 billion boost over last year's profits.

More than half of the industry profits ($22.9 billion) will be generated in North America, where the market has recovered strongly, while African carriers are forecast to continue an overall loss (-.5 billion).

"Lower oil prices are certainly helping - though tempered by hedging and exchange rates. In fact, we are probably nearing the peak of the positive stimulus from lower prices," Tyler said.

Load factors are at record levels and there were new ways of increasing ancillary revenues.

"Joint ventures and other forms of co-operation are improving efficiency and increasing consumer choice while fostering robust competition."

Passengers were getting great deals and investors were finally starting to see the rewards they deserved, he said.

In 2016, the average return airfare (before surcharges and taxes) is expected to be $366, a 62 per cent reduction on 1995 levels (after adjusting for inflation). Passenger numbers are expected to reach 3.8 billion.

On the radarOil prices:The profit outlook is based on oil averaging US$45 a barrel over the course of the year which is significantly lower than the $53.9 average price last year. The full impact of lower fuel prices is still being realised as hedges mature. Overall, fuel is expected to represent 19.7 per cent of the industry's expenses, down from a high of 33.1 per cent in 2012-2013.

The global economy: Weak economic conditions prevail. GDP is expected to expand by 2.3 per cent in 2016. That is down from 2.4 per cent in 2015 and the weakest growth since 2008 when the global financial crisis hit. Consumer spending is relatively strong, but the corporate sector is conserving cash and, despite some easing of government austerity budgets and low interest rates, there is little evidence of an acceleration in infrastructure spending.

Cargo: The cargo side of the business remains in the doldrums with 2.1 per cent growth in demand. Airlines are growing their fleets with long-haul, wide-body aircraft to meet strong passenger demand growth. This adds cargo capacity to a flat air cargo market. Cargo yields are expected to fall by 8 per cent this year. Overall cargo is expected to generate US$49.6 billion in revenue, down from $52.8 billion in 2015.