Lower oil prices are set to provide the backdrop for airlines to deliver their strongest profit performance in 2015, but uncertainty over how long oil prices will remain low and continuing geopolitical issues mean that risks remain in the operating environment.

IATA today lifted its industry profit forecast by almost $2 billion for this year, to $19.9 billion, and in its first take on 2015 the airline body outlined expectations that net profits will grow to $25 billion.

While $19.9 billion beats the previous highest industry net profit of $17.3 billion in 2010, a net margin of 2.9% is only the third best margin of the last decade. But a $25 billion net profit on revenues projected to increase 4% to $783 billion in 2015 would mark the industry's return both at an absolute level and also at a net margin level of 3.2%.

"It's getting better," says IATA chief economist Brian Pearce. "The fall in oil prices is going to mean better times for passengers, shippers and also investors. I think we are going to see an improvement in profitability, and we think on average we are going to see investor returns on capital of about 7%."

But he notes this is still not a good return compared with other sectors. "If the industry is going to attract the capital it needs to serve the expansion that's expected, it needs to improve profitability," he says.

The relief from the unexpected fall in oil prices is at the heart of the improved outlook. The rapid fall in oil prices over recent months has driven the cost of a barrel of crude oil down from over $100 to as low as $66 earlier this month. IATA is basing its 2015 outlook on an average crude-oil barrel price of $85 – the first time it will have averaged under $100 since 2010.

As airlines are well hedged, much of the benefit in terms of lower costs for airlines will not come through until 2015. IATA sees the airline fuel bill down nearly 6% at $192 billion. This still represents more than a quarter of airline costs.

"Once airlines see costs coming down, that is almost always followed by a reduction in fares or cargo rates because it is such a competitive industry," says Pearce. "Many airlines have got a significant proportion of the fuel bill hedged. So a lot of airlines are not seeing the benefit yet. But that will start to come through in 2015, which is why we think fares will fall.

"The stimulus to air travel from lower fares, more city-pair connections and stronger economic growth is expected to produce the fastest-growing air travel market since 2010."

Passenger traffic is set to grow 7% – though short of the foreseen 7.3% extra capacity – on global GDP growth of 3.2%. The result is passenger numbers set to pass the 3.5 billion mark for the first time in 2015.

But despite the positives, there remain several risks – not least from some of the political and social issues that airlines have struggled with this year, such as fallout from the Ukraine crisis, Ebola and Venezuela's currency crisis.

"It is still a very risky business environment," says Pearce "There are still lots of things that could go wrong. There are lots of geopolitical conflicts in the Middle East and in Russia, eastern Europe and in Asia. Ebola hopefully won't lead to a shock, but there are a number of issues that could cause problems.

"Airlines are going to be aware of that and will take a cautious view, I would imagine."

Source: Cirium Dashboard