Airline-Industry Profit Outlook Improves as Europe Bounces Back

(Bloomberg) -- Global airline earnings will fall less than previously forecast this year as Europe rebounds from a weak 2016 and Asian carriers tap a surge in cargo shipments, according to the industry’s main trade group.

Net income is likely to total $31.4 billion worldwide in 2017, the International Air Transport Association said Monday. While that’s $1.6 billion higher than suggested last December, it would still represent a near 10 percent decline from 2016’s $34.8 billion figure.

Passenger and cargo demand has been “stronger than expected” this year, Alexandre de Juniac, IATA’s chief executive officer, told airline leaders at the body’s annual meeting in Cancun, Mexico. European earnings should be 1.8 billion euros higher than first projected as bookings recover from a spate of terrorist attacks, while the outlook for Asia was lifted by $1.1 billion as freight volumes surge in a region that accounts for two-fifths of global shipments.

Though revenues are gaining, earnings face a squeeze from an increase in spot prices for jet fuel, and the average net margin is set to shrink to 4.2 percent from 4.9% in 2016, De Juniac cautioned, adding that recent terrorist attacks in the U.K. demonstrate the potential for “negative impacts” on demand.

“There is not much buffer,” said De Juniac, who was previously CEO of Air France-KLM Group. “That’s why airlines must remain vigilant against any cost increases, including from taxes, labor and infrastructure.”

Passenger Gains

Some $15.4 billion of the industry’s net income will be generated by carriers in North America, $2.7 billion less than previously forecast but still around half of the industry total, IATA said. Europe and the Asia-Pacific should each contribute about $7.4 billion. Latin American and Mideast carriers are expected to earn $800 million and $400 million respectively, while those in Africa may lose $100 million, all improvements on prior projections.

Passenger demand is forecast to increase by 2.3 percentage points compared with IATA’s previous estimate, to 7.4 percent, matching 2016’s growth rate.

That will boost passenger numbers by about 275 million to 4.1 billion and -- crucially -- ensure traffic expansion exceeds planned capacity hikes, spurring the average load factor or occupancy level to 80.6 percent, up from 80.3 percent in 2016. The gain should allow airlines to boost fares or unit revenues.

IATA, which represents 275 carriers accounting for 83 percent of global air traffic, reckons a barrel of oil will average $54 in 2017, a dollar less than previously predicted. While that’s up from $44.6 in 2016, the price trend won’t yet translate into a higher fuel for all carriers, with hedging positions meaning that the industry-wide bill will be $4 billion lower than in 2016 at $129 billion.