FLYING HIGH

Airline profits are soaring—to a barely acceptable level

Airlines are slated for a record year of profits in 2016. Thanks to cheap gas and a growing US economy, airline earnings are forecasted to rise 10% to $36.3 billion next year—an all-time industry high, the International Air Transport Association announced today (Dec. 10).

This year, profits are expected to reach $33 billion—nearly double 2014’s $17.3 billion—the agency said.

While that all sounds great, the industry’s bullish outlook is dampened by the fact that returns are narrowly covering costs. The airline industry’s cost of capital is estimated at just under 7% for 2015 and 2016, and the return on that capital is projected to reach 8.3% and 8.6%, respectively. And while that wouldn’t excite many industries, it’s actually good news for airlines.

“This is an historic achievement for an industry that has been notorious for destroying capital,” said IATA CEO Tony Tyler, in a statement.

“But,” he cautioned, “let’s keep that achievement in perspective. … Achieving returns that barely exceed the cost of capital means that airlines are finally meeting the minimum expectations of their shareholders. For most other industries this is the norm and not the exception.”

On average, carriers still make less than $10 on every passenger, the IATA reported.

Furthermore, the anticipated gains are being driven by forces largely outside the industry’s control, like fuel prices and the global economy, rather than carriers’ business strategies.

As jet fuel prices dropped this year, major airlines posted large profits instead of passing the savings onto consumers through lower fares. And the strengthening US economy and appreciating US dollar fueled the industry’s growth, with North American carriers projected to generate more than half of the industry’s overall profits in 2015 and 2016.

Beyond 2016, profitability is projected to slow due to the cyclical nature of the industry, rising interest rates, and as carriers realize the maximum benefits of cheap gas, according to the IATA.

“The industry’s profitability is better described as ‘fragile’ than ‘sustainable’,” said Tyler.

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