Airlines should make more money than previously expected this year, the International Air Transport Association (IATA) said on Thursday, helped by low oil prices and work by airlines to fill planes and drive ancillary revenues.
IATA, representing over 260 airlines accounting for 83 percent of global air traffic, is now forecasting they will make a collective net profit of $39.4 billion this year, up from a previous estimate of $36.3 billion and with more than half of all profits generated by North American carriers.
That would be the fifth straight year of improving profits and give a net profit margin of 5.6 percent, while the industry’s return on capital is also expected to exceed the cost of capital for only the second time, a boost for investors in the often beleaguered sector.
“It’s an impressive performance given the economy is pretty weak. So I think it’s a sign of change,” IATA Chief Economist Brian Pearce said at the association’s annual meeting in Dublin.
However, the picture was mixed across the globe, and profitability is set to vary widely depending on region and type of carrier, meaning potential investors need to be choosy.
While North American carriers are expected to account for more than half of this year’s industry profits, Latin American economies have been hurt by the fall in oil prices and the region’s carriers are seeing hardly any decline of fuel costs due to slumping exchange rates.
Aviation banker Bertrand Grabowski said it was a good time to invest in airlines if you were selective, citing for example U.S. airlines’ discipline on capacity and costs.
“In Europe, the legacy carriers have been squeezed by the low-cost carriers and the Middle East carriers and they have started working to improve profitability and that is beginning to show,” he added.
Some state-owned carriers in emerging economies have done little to improve profitability, he said.
In the United States activist investors are also getting more involved in aviation, as shown at United Continental Holdings, where hedge funds successfully pushed for board changes.
PwC analysts said the improved profits were piquing investor interest, not only in airlines, but also in other fields in aviation, such as infrastructure.
“Investors will be looking for those opportunities where they’re not constrained by some of the structural issues, such as legacy labour agreements or difficult regional markets,” PwC transportation and logistics director Bryan Terry told Reuters.
Aer Lingus boss Stephen Kavanagh said the Irish airline’s takeover by British Airways and Iberia’s owner IAG was a sign of how Aer Lingus had worked to become an attractive asset.
“There are a significant number of major airline companies and groups that are focused on that return, and that puts discipline on the entire industry,” he added.
Falling ticet prices have been a concern for airlines over recent months and IATA estimates fares will drop 7 percent this year, but unit costs will fall faster, by 7.7 percent.
The improved performance is not only down to the low oil price but is also due to airlines becoming better at filling planes and generating extra revenue, IATA head Tony Tyler said.
Nevertheless, fuel is expected to account for just under 20 percent of expenses this year, down from a 33 percent high in 2012-2013.
Tyler said while it was becoming more normal to make a profit there was still room for improvement, especially on the debt front.
“It will, however, take a longer run of profits before balance sheets are returned to full health,” he said.