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Airlines profit from falling oil prices – IATA

By BusinessNews Staff on December 16, 2014

The International Air Transport Association (IATA) has said airlines are profiting from falling oil prices, which is projected to remain below $100 dollars till middle of 2015 and beyond.

Director General and CEO of IATA, Tony Tyler, made this known while addressing journalists at the IATA Media Day in Geneva last week. He attributed stronger gross domestic product (GDP) growth world-wide to the improved profitability.
However, he said while air accidents in Africa continue to reduce, the continent has remained the weakest region in the last two years in terms of profitability as profits are barely positive.

He projected that airlines in the region would make about $200 million in 2015 which is an improvement on the break-even performance in 2014. This represents just $2.51 per passenger.
The IATA boss noted that break-even load factors are relatively low, as yields are a little higher than average while costs are lower in Africa where performance is improving but slowly, remarking that few airlines in the region are able to achieve adequate load factors, which are the lowest among the regions by almost five percentage points.
Tyler said airlines are expected to post a collective global net profit in 2014 of some $19.9 billion (up from the $18.0 billion projected in June) and is expected to rise to $25.0 billion in 2015.
He noted that consumers will benefit substantially from the stronger industry performance as lower industry costs and efficiencies are passed through.

“The airline industry is highly competitive. After adjusting for inflation, average return airfares (excluding taxes and surcharges) are expected to fall by some 5.1 per cent on 2014 levels and cargo rates are expected to fall by a slightly bigger 5.8 per cent.
“The expected $25 billion net post-tax profit represents a 3.2 per cent margin. On a per passenger basis, airlines will make a net profit of $7.08 in 2015. That is up on the $6.02 earned in 2014 and more than double the $3.38 earnings per passenger achieved in 2013,” Tyler said.
The international air transport body said the return on invested capital (ROIC) is expected to grow to 7.0 per cent, which is a substantial improvement on the 6.1 per cent ROIC expected to be achieved in 2014.This is still 0.8 percentage points below the 7.8 per cent weighted average cost of capital (WACC), so there is still some ground to cover before achieving sustainable margins, noted Tyler.

“The industry outlook is improving. The global economy continues to recover and the fall in oil prices should strengthen the upturn next year. While we see airlines making $25 billion in 2015, it is important to remember that this is still just a 3.2 per cent net profit margin. The industry story is largely positive, but there are a number of risks in today’s global environment—political unrest, conflicts, and some weak regional economies- among them. And a 3.2 per cent net profit margin does not leave much room for a deterioration in the external environment before profits are hit,” said IATA’s CEO said.

“Stronger industry performance is good news for all. It’s a highly competitive industry and consumers—travelers as well as shippers—will see lower costs in 2015 as the impact of lower oil prices kick in. Airline investors will see ROIC move closer to the WACC. And a healthy air transport sector will help governments in their overall objective to stimulate the economic growth needed to put the impact of the global financial crisis behind them at last,” Tyler added.
He noted that oil prices have fallen substantially in recent months and this is expected to continue into 2015 with the full-year average price expected to be $85/barrel (Brent).

“If that assumption is correct, it would be the first time that the average oil price has fallen below $100/barrel since 2010 (when oil averaged $79.4/barrel).”
Tyler also noted that jet fuel prices are expected to average at $99.9/barrel in 2015 for a total fuel expenditure of $192 billion which represents 26 per cent of total industry costs.

“It is important to note that the impact of lower fuel prices will be realised with a time lag, due to forward fuel-buying practices. Improving fuel efficiency continues to be a priority for airlines. Fuel efficiency is estimated to have improved by 1.8 per cent in 2014 and a further improvement is expected in 2015. Fuel efficiency improvements could be accelerated by reducing the 5 per cent of wasted fuel burn as a result of airspace and airport inefficiencies,” he said.

[ThisDay]

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