Cheap oil, stronger economies to drive airline profits

Falling fuel prices and stronger economic growth mean global airlines will report their strongest profit margin in more than five years in 2015, the International Air Transport Association (IATA) said.

The Geneva-based association, which represents around 250 airlines accounting for 84 per cent of global air traffic, said net profit would rise to $25 billion in 2015, giving a profit margin of 3.2 per cent.

The last time the industry reported a margin nearly that high was in 2010, when it reached 3.1 per cent.

"The industry outlook is improving. The global economy continues to recover and the fall in oil prices should strengthen the upturn next year," IATA director General Tony Tyler said.

However, Mr Tyler added a note of caution.

“A 3.2 per cent net profit margin does not leave much room for a deterioration in the external environment before profits are hit,” he said.

IATA also increased its profit forecast for 2014 to $19.9 billion in 2014, up from a previous estimate of $18 billion.

Airlines’ spend on fuel will drop to $192 billion in 2015, from an expected $204 billion this year, IATA said.

Airline stocks have risen in recent weeks fuelled by the falling price of oil.

Brent crude oil slipped below $66 a barrel on Wednesday, just above a five-year low, a fall of more than 40 per cent since June.

But analysts have warned lower fuel prices often go hand-in-hand with lower yields.

During the sharp drop in oil in 2008, airlines increased seats, leading to overcapacity and lower ticket prices, BofA Merrill Lynch said earlier this week.

IATA’S global outlook also reflects differing fortunes for airlines in different parts of the world. North American airlines, which have undergone a period of consolidation and restructuring, are expected to make the highest profit margins in 2015 of six per cent, exceeding peaks seen in the late 1990s.

In Europe, the profit margin is forecast at just 1.8 per cent. IATA says profitability is hampered by intense competition in the region while regulatory and tax burdens are high and infrastructure is inefficient.

Lufthansa, Europe's largest airline group by revenue, in October cut its 2015 profit target, citing economic slowdown and intense competition.

Reuters