The last year has been another dynamic one for the airline industry; headline profits and traffic are on the rise, while the shape of the industry continues to evolve through acquisitions and partnership activity.
Airlines can be profitable
After years of losses in the last decade, airlines are not only now enjoying one of their longest run of profits, but also finally delivering returns above the cost of capital. Bolstered by a strong summer performance, IATA lifted its industry forecast for 2015 and now expects airlines to generate a profit of $33 billion. It means 2015 will be a sixth consecutive year in the black and the most profitable year for airlines on record.
Not all regions are equal
While the industry as a whole is enjoying strong profits, this is largely driven by its most mature markets. North American carriers, following their restructuring and consolidation, contributed over half the industry profit in 2015. And after a particularly bright summer, European carriers enjoyed their most profitable year in absolute terms last year. Carriers from the Europe and North America together will account for around four-fifths of total industry airline profits in 2015.
Fuelling the gains
While a benign – if mixed- economic backdrop has helped airline profits, the most significant factor has been sharp fall in the oil price. This has made significant inroads in lowering what remain airlines’ biggest single cost. IATA estimates the airline fuel bill was down around a fifth in 2015. But the gains have not been spread equally. Those heavily hedged carriers are only seeing the gains once these agreement unwind, while sharp currency movements against the strong US dollar meant the gains for some airlines limited or wiped out the gains of the lower oil price.
In some cases exchange rate volatility was connected to wider economic and geopolitical challenges, and while overall the economic climate was steady, some regions and countries faced altogether tougher conditions. Notably two of the BRIC nations, Brazil and Russia, were among the hardest hit markets in 2015 and carriers from both countries suffered as a result. Russian operators in particular faced a grueling environment and seven airlines – including the country’s second biggest operator Transaero – collapsed in 2015.
Spending new found gains
The strong profits performance, particularly among US carriers, has seen several carriers return to the acquisition trail. Delta and United both continued their equity partnerships; the Atlanta-carrier making fresh investment moves in China Eastern, Gol and Aeromexico, while United took a stake in Brazilian operator Azul. The latter also secured investment from China’s HNA Group, which continued to be active in the market including taking a stake in South African operator Comair.
For more on these themes, together with a snapshot of airline start-ups and failures, capacity and fleet development in 2015 from Flightglobal’s data products, download our Airline Market Review 2015.