Global Airline Profits Rising On Low Fuel Prices In 2016

Amidst lower fuel prices in 2016, profits of the global airline industry will remain strong, supporting a positive outlook on the industry for the next 12 to 18 months, according to a new report by credit ratings agency Moody’s.

Moody’s expects the airline industry’s operating margin to top 10 per cent this year.

According to the report, “Global Airline Industry: Margins to Rise on Lower Fuel Prices, Steady Demand Growth; Yields to Remain Flat”, US carriers will continue to maintain the highest operating margins, owing partly to a mature domestic market and their modest exposure to weaker foreign currencies.

“Growing passenger demand, especially in the Middle East, Asia and Latin America, will help boost margins for the overall airline industry”, Jonathan Root, a Moody’s Vice President – Senior Credit Officer said.

“Demand is rising due to modest but steady global economic growth, higher disposable incomes amid lower petroleum prices, attractive fares, and the growth of air travel in the developing world.”

“However, capacity additions exceeding demand growth, the strong US dollar and lower fuel surcharges will constrain yield growth”, the agency added.

Moody’s says it does not expect fuel price drops to lead to a more meaningful expansion of industry operating margins; higher labour costs, continuing revenue pressures, fuel hedging, and a potentially stronger US dollar will alleviate the benefits of the price decline.

“Hedging fuel price risk, extensively with collars and call spreads that leave airlines exposed to potential declines in prices, limits the benefits from cheaper fuel prices”, Root said