Airlines are expected to generate a fifth consecutive year of rising profits, thanks in part to low oil prices.
Worldwide, airlines are projected to land $39.4 billion in profits in 2016, a jump of more than 11% over 2015, according to figures released Thursday by the International Air Transport Association. The new 2016 profit estimate is even higher than the IATA's projection of $36.3 billion made six months ago.
Helping fuel profits is an expected lower price per barrel for oil. The group forecasts an average of $45 per barrel in 2016, compared with $53.90 per barrel in 2015.
West Texas Intermediate oil prices remained stable Thursday at $49, about 23% below their 52-week high of $63.90 last June. They're down about 66% from the record close of $145.31 a barrel on July 3, 2008, according to the Oil Price Information Service.
Fuel is expected to account for about 20% of the airline industry’s expenses, down from a recent high of 33% in 2012-2013, IATA says.
"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," said IATA Director General and CEO Tony Tyler in a statement. The IATA is holding its general meeting in Dublin through Friday.
U.S. airlines reported after-tax net profit of $25.6 billion in 2015, up from $7.5 billion in 2014, according to the U.S. Department of Transportation’s Bureau of Transportation Statistics. Fuel expenses totaled $27 billion, down 38% from 2014.
Consumers, meanwhile, got slightly lower airfares. The average U.S. domestic fare fell 8.3% in 2015 to $363 from $396 in 2014, according to Transportation Department figures.
Airlines are expected to generate revenue of $709 billion in 2016, down 1% from 2015, and carry more passengers (3.8 billion in 2016 vs. 3.6 billion in 2015), the IATA says.
It's not cheap fuel alone that is driving industry gains, Tyler says. "Load factors are at record levels. New value streams are increasing ancillary revenues. And joint ventures and other forms of cooperation are improving efficiency and increasing consumer choice while fostering robust competition."
Regardless, U.S. airline stocks have been challenged. The S&P 500 Airlines index is down 14.8% this year and off 9.4% over the past 12 months. The index closed Thursday at 252.84, down 1.2%; its 52-week high is 322.3, with a 52-week low of 243.8.
Low fuel prices have allowed airlines to grow the market, said Jonathan Root, vice president and senior credit officer analyst with Moody’s Investors Service, which maintains its positive rating on the global airline industry. “Slow but steady economic activity should support passenger demand, allowing the airlines to maintain their current profitability,” he said. If oil prices rise, and or demand dips, he said, “the relief valve will be to cut capacity.”
Even though the industry’s net profit of $39.4 billion "is a big number," Tyler said in a press conference, "it is shared amongst hundreds of airlines around the world. And on $709 billion of revenue, it translates to a 5.6% net profit margin."
He noted that the airline industry has struggled with profitability. "2016 will also be the second time in history — and second year in a row — for airlines to make a profit that exceeds their cost of capital," Tyler said.
The average 2016 profit per passenger for airlines is, on average, $10.42 for a one-way fare, compared to $9.9 in 2015, according to IATA estimates.
Tyler compared airline profit of $5.60 per $100 in sales to that of Starbucks, which he says makes about $11 per $100 in revenue. "We don’t begrudge Starbucks their profitability," he said. "But there is clearly still upside for airline profits."
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