Middle East carriers to post a $1.6 billion profit

Muscat: Middle East carriers are expected to post a $1.6 billion profit, up slightly on the $1.4 billion reported for 2015. The capacity of carriers is forecast to grow at 12.2 per cent, outpacing an expected 11.2 per cent expansion of demand, a latest report of IATA shows.
The International Air Transport Association (IATA) revised its 2016 financial outlook for global air transport industry profits upwards to $39.4 billion (from $36.3 billion forecast in December 2015).
That is expected to be generated on revenues of $709 billion for an aggregate net profit margin of 5.6 per cent. 2016 is expected to be the fifth consecutive year of improving aggregate industry profits, the report said.
For the Middle East carriers efficient hubs continue to gain market share on connecting markets for the region’s major carriers, although local markets have been weakened by the impact of falling commodity revenues. Economic changes in the region’s oil economies are manifesting themselves in a spate of increases of charges and taxes which could dampen the region’s cost competitiveness, the report stated.
IATA said that in 2015 airlines generated a global aggregate profit of $35.3 billion (re-stated from $33.0 billion estimated in December 2015). All regions are making a contribution to the $4.1 billion boost over 2015 profits with improved results; but there are stark regional differences in performance. Over half of the industry profits will be generated in North America ($22.9 billion) while African carriers are forecast to continue generating an overall loss (-$0.5 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. Performance, however, is being bolstered by the hard work of airlines. Load factors are at record levels,” said Tony Tyler, IATA’s Director General and CEO.
“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. The result: consumers are getting a great deal and investors are finally beginning to see the rewards they deserve,” he added further.
On average, airlines will make $10.42 for each passenger carried. “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 here is clearly still upside for airline profits,” said Tyler.
For the second year in a row and only the second time in the airline industry’s history, the return on invested capital (9.8 per cent) will exceed the cost of capital (estimated to be 6.8 per cent). This is the minimum expectation level for investors. The airline industry is beginning to generate profits that would be expected of any normal business.
“The job of shoring up resilience by repairing balance sheets is under way. We have had a few years of good profits and some airlines have started to pay down debt. It will, however, take a longer run of profits before balance sheets are returned to full health,” said Tyler.
Repaying accumulated debt will take several years of profitability to achieve. Airlines in North America and in some parts of Europe have seen the gearing of their balance sheets fall towards investment grade levels. But for much of the rest of the industry, it is a continuing challenge.
“Airlines are producing solid results even with some strong economic headwinds. It’s an impressive performance and the mood of the industry is generally optimistic,” said Tyler.
Main forecast drivers
The outlook is based on oil averaging $45/barrel (Brent) over the course of the year which is significantly lower than the $53.9 average price in 2015. 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 recent high of 33.1 per cent in 2012-2013.
The Global Economy
Weak economic conditions prevail. Gross domestic product (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.
Passenger Demand
Passenger demand is robust with 6.2 per cent growth expected in 2016. That is, however, a slowdown from the 7.4 per cent growth recorded in 2015. Capacity is expected to grow slightly ahead of demand at 6.8 per cent. Load factors are expected to remain high (80.0 per cent), but with a slight slip from 2015 (80.4 per cent). Yields are expected to fall by 7.0 per cent. Unit costs, driven by lower fuel prices, are expected to fall by 7.7 per cent. Overall the passenger business is projected to generate $511 billion in revenues, down from $518 billion in 2015.
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 8.0 per cent this year. Overall cargo is expected to generate $49.6 billion in revenues, down from $52.8 billion in 2015.