Good Times to Continue for Airlines? IATA Says So

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Stocks in the airline space have hit a purple patch in spite of a few adverse factors. The decline in oil prices since mid-2014 has been a major boon for the stocks in this space. Meanwhile, the release of the profit forecast for 2016 by the International Air Transport Association (IATA) unveils a bright picture, again, thanks to cheap oil.

Soft oil prices have resulted in massive savings for carriers, courtesy a sharp reduction in their operating expenses as fuel costs represent a significant chunk of airline costs. Despite the recent rally, oil prices are still hovering around the $50 a barrel mark, a long way off the highs of mid-2014 when the commodity had traded in excess of $100 a barrel. Naturally, this has aided the bottom line of carriers significantly resulting in impressive performances with respect to earnings per share.

Profitability Forecast

At its Annual General Meeting in Dublin, the IATA increased its projection for 2016 global net profit for the industry to $39.4 billion from the earlier $36.3 billion. The comparable 2015 figure was $35.3 billion. In the event of the forecast coming true, 2016 would be the fifth successive year of profit improvement for the airline industry.

The bulk of the global profits ($22.9 billion) is expected to come from the North American region. The other regions, namely, Asia-Pacific, Europe, Latin America, Middle East and Africa are expected to generate post-tax net profit of $7.8 billion, $7.5 billion, $0.1 billion and $1.6 billion, respectively. African carriers are expected to continue their dismal performance in 2016, suffering losses to the tune of $0.5 billion.

Global net profit margin is expected to expand to 5.6% in 2016 from 4.9% a year ago. The top line is however projected to shrink 1.3% to $709 billion with passenger revenues dropping 1.3% to $511 billion and cargo revenues recorded a decline. Cargo demand is expected to grow only 2.1%, below the 2015 growth levels.

According to the forecast, 2016 is expected to see air travel growth of 6.2% compared with 7.4% growth witnessed last year. Capacity is projected to increase by 6.8% in 2016 as opposed to the 6.7% increase seen in 2015. According to the forecast, load factor (% of seats filled by passengers) for 2016 is expected to decline 40 basis points to 80% due to capacity expansion outweighing traffic growth. Yield is projected to decline 7% and unit costs are expected to reduce by 7.7%.

The research firm has also predicted that airline companies will earn $10.42 per passenger in 2016. The firm holds that oil prices will continue to fall in 2016 with the average price in the year hovering around $45 per barrel, down 16.5%. Fuel expenses are expected to decline considerably to $127 billion in 2016.

Although it is a fact that most carriers hedge at least some of their fuel costs, the majority of them should still continue to benefit considerably from the plunge in oil prices. Notably, carriers use a combination of calls, swaps and collars at varying WTI crude-equivalent price levels to hedge fuel costs.

IATA Forecast Follows Bullish A4A View

The rosy picture painted by the IATA for North American carriers, which include the likes of United Continental Holdings Inc. UAL , Delta Air Lines DAL , Southwest Airlines Co. LUV , JetBlue Airways Corp. JBLU , American Airlines Group AAL and Alaska Air Group Inc. ALK , comes close on the heels of the forecast provided by Airlines for America ('A4A'). According to the projection, the three month period between June and August will be the busiest one for U.S. carriers in terms of air travel.

Headwinds Remain

Despite the benefits driven mainly by low oil prices, carriers are not bereft of headwinds. Issues like capacity woes, declining passenger revenue per available seat mile (PRASM), multiple probes and labor strife continue to hurt stocks in the space. These headwinds resulted in the NYSE ARCA Airline index losing 3.67% so far in 2016.

It is no secret that pricing and capacity worries have plagued airline stocks for quite some time. That capacity woes will continue to hurt carriers in 2016 was revealed by the IATA which expects capacity growth (6.8%) to outpace traffic expansion (6.2%). According to the report, capacity expansion has outpaced traffic growth for carriers in all regions except Latin America which includes the likes of GOL Linhas GOL .

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AMER AIRLINES (AAL): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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