Airlines Expected To Extend Profits By 10% In 2016 As Fuel Prices Drop, Demand For Travel Booms

A sharp drop in oil prices and robust demand for travel are expected to boost airline profits in 2016, the International Air Transport Association (IATA) said, in an industry outlook released Thursday. After delivering a net profit of $17.3 billion in 2014, the airline industry is expected to generate a record $33 billion this year and $36.3 billion in 2016, the trade group, which represents over 250 airlines accounting for more than 80 percent of global air traffic, said.

“The industry is surpassing an important benchmark. The cost of capital is just under 7.0 percent. And our expectation is for airlines to achieve a return on capital of 8.3 percent this year, increasing to 8.6 percent in 2016,” IATA Director General Tony Tyler said Thursday. “So we are finally -- after years of destroying capital -- delivering the minimal level of profitability that an investor would expect.”

Globally, IATA expects 3.6 billion passengers to fly this year and 3.8 billion next year. “We expect almost 1 percent of world GDP to be spent on air transport in 2016, totaling almost $750 billion. Air travel is accelerating, with growth of 6.9 percent expected next year, the best since 2010, well above the 5.5 percent trend of the past 20 years,” IATA said, in its analysis.

And despite increased consumption, airlines’ fuel bill dropped $46 billion in 2015 to $180 billion, from $226 billion in 2014. As oil prices continue to drop on the back of a global oversupply -- with the price of a barrel of Brent crude oil falling below $40 earlier this week -- this expenditure is forecast to further drop to $135 billion in 2016.

“Jet fuel prices have fallen substantially and we base our forecast on an average price of $63.8/b next year, and $51/b for the Brent crude oil price,” IATA said, in its outlook. “Certainly record oil inventories suggest a significant rise in 2016 is highly unlikely, but expected stronger economic growth should pull prices up from current levels later next year.”

According to the IATA, the strongest financial performance is likely to be delivered by North American carriers, which will represent more than half of the world’s overall profit this year at $19.4 billion. In addition to record-low fuel costs, a variety of other factors -- including a strong economy and appreciating dollar -- are believed to be driving profits in the region. Next year, however, these profits are forecast to retreat slightly, dropping to $19.2 billion.

Europe is set to be the second most lucrative region, with European airlines likely to earn $6.9 billion in 2015 and $8.6 billion in 2016. Earnings of carriers based in the Asia Pacific region are expected to grow from $5.8 billion this year to $6.6 billion in 2016, while airlines in Africa -- which remains the industry’s weakest region due to ongoing conflicts and political instability -- will lose about $300 million this year.