Mideast airlines to reap $1.7b profit

Sliding oil prices to be key to global airlines making $36.3b in profits next year

For once, oil is not playing a wild card for the global aviation industry. Falling oil prices will be driving the profitability growth for world airlines next year, according to the International Air Transport Association.

The Middle East airlines will reap $1.7 billion in net profits in 2016 as per IATA estimates, even as the financial forecast for the region’s airlines for this year has been revised downwards to $1.4 billion from the previously forecast $1.8 billion.

The aviation watchdog announced yesterday in Geneva the financial outlook for the global airline industry for next year and revised its profit outlook for the current year.

Double-digit growth

Overall the region is still generating double-digit growth with capacity expected to expand by 12.1 per cent and 12.2 per cent respectively in 2015 and 2016, largely as a result of growth in traffic over the region’s modern hubs, according to Brian Pearce, Chief Economist at IATA.

Largely calling it good news for the aviation industry, IATA said the airline industry will reap $36.3 billion in total net profits in 2016 — averaging a net profit margin of 5.1 per cent. The outlook for the industry for this year, meanwhile, was also revised upwards to a net profit of $33 billion (4.6 per cent net profit margin) from $29.3 billion forecast in June.

Lower oil prices (forecast to be $55 a barrel for Brent in 2015 and averaging a lower $51 a barrel in 2016) are giving airline profits a boost, Pearce said, adding that this is “strongly moderated in many markets by the appreciation of the US dollar”.

“These are better numbers than we have reported before. Indeed the industry is surpassing an important benchmark. The cost of the capital is just under 7 per cent. And our expectation for the airlines is to achieve a return on capital of 8.3 per cent this year, increasing to 8.6 per cent in 2016,” said Tony Tyler, Director General and chief executive of IATA. “So we are finally, after years of destroying capital, delivering the minimal level of profitability that an investor would expect.”

5.1% Airlines’ estimated average net profit margin in 2016.

While the Middle East might be losing oil revenues as prices continue to slide, it’s not a reason to worry for the region’s carriers, Tony Tyler, the managing director and CEO of IATA (International Air Transport Association), told Gulf News in an interview in Geneva.

Oil revenue is declining in the Middle East. Do you see that as a challenge for the region’s carriers next year? It is having a surprisingly small impact. The big Gulf carriers — the super connectors — are less dependent on pure Middle East revenues. The big hub carriers are carrying traffic from Europe to Australia, from Africa to China.

And the fact that the oil price is down, is actually in many ways, helping the world economy. So overall, they seem to be quite resilient to that.

The impact on the smaller airlines, meanwhile, may be more significant. The instability in the region is likely to have a greater impact.

Do you see the instability in the region hampering growth of the region’s airlines? That’s certainly having an impact now. And some of the carriers seem to be getting affected.

Do you see consolidation taking place in the Middle East aviation industry?

No, I don’t see consolidation happening within the Middle East.

I don’t personally think we will see consolidation being a major force in the region … what are the reasons for that, really [in the Middle East].

In Europe you see consolidation because you have got some weaker carriers either, sort of, been taken over or you’ve had the big carriers recognise that in an increasingly competitive world, they can be stronger together.

But I don’t think the industry is at that point in the Middle East region.