Fewer airline chiefs upbeat about profit growth for the year

Fewer airline chiefs upbeat about profit growth for the year
PHOTO: The Straits Times

SOME 40 per cent of airline heads expect profits to grow in the coming year, but this figure is down from previous years, suggesting that momentum in the profitability cycle has weakened.

The norm a few years ago was 60 to 70 per cent, noted the International Air Transport Association (Iata) in the latest Airline Business Confidence Index.

On the other hand, profitability was unchanged in Q4 2016 from the corresponding quarter in 2015. Among the airline chief financial officers and heads of air cargo polled for the quarterly survey done this month, 39 per cent reported an increase in profits; another 39 per cent recorded a decrease, and 22 per cent, no change.

But where passenger traffic was concerned, half the respondents reported a year-on-year increase in Q4 2016. Iata said: "However, ongoing disruption and uncertainty in certain markets, particularly Turkey, was noted by a number of participants." Three-quarters of the respondents (74 per cent) - the highest proportion since October 2013 - said they expect passenger volumes to go up over the next 12 months due to a pickup in the economic cycle.

For air freight, 52 per cent reported an annual increase in cargo volumes in Q4 2016.

And while the outlook for global trade remains weak for now, the expectations are for a pickup in cargo volumes over the next 12 months.

The survey also showed that the operating environment has become tougher since mid-2016, plagued by double whammy of higher fuel prices and declining yields.

Iata said: "Oil prices increased over the course of 2016 and are currently around twice the 12-year low level reached in January 2016."

In its 2017 outlook released late last year, Iata had projected that jet fuel would rise from an average US$52 a barrel in 2016 to US$65 a barrel in 2017. Jet fuel, a substantial operating expense for airlines, accounts for slightly under a third of total industry costs.

However, the rise in fuel costs may also be affected by hedges that airlines have locked in, as well as currency translation effects. Oil prices are typically quoted in US dollars.

Meanwhile, nearly two-thirds of those polled reported lower passenger yields in Q4 2016 than in Q4 2015. Nearly a quarter (23 per cent) said they expect yields to pick up over the year ahead, but more than three-quarters expect yields to either stay flat or fall further.

On the cargo front, 18 per cent reported a year-on-year increase in freight yields in Q4 2016, the highest figure in two years. However, concerns about future capacity continue to weigh on expectations.

In particular, this is related to belly-hold capacity coming from new passenger planes. More than 90 per cent of respondents said they expect cargo yields to stay unchanged or fall further in the coming year, said Iata.

Finally, 38 per cent of survey respondents reported an increase in employment levels in Q4 2016 from the corresponding period in 2015. Half the respondents said that they expect employment levels to remain unchanged over the next 12 months.

This article was first published on Jan 21, 2017.
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