Happy Holidays: Average airfares to drop 5% to Dh1,680

Falling oil prices and cut-throat competition to bring cheer to frequent flyers: Iata

Are you a frequent flyer or have a busy air travelling schedule in 2015? Here is good news for you.

The International Air Transport Association (Iata), the global body of airlines, has forecast that the average return airfares are expected to drop by 5.1 per cent in 2015, thanks to sustained decline in oil prices and cut-throat competition.

“The airline industry is highly competitive. Consumers will benefit substantially from the stronger industry performance as lower industry costs and efficiencies are passed through. The fall in the price of fuel is expected to lead to cheaper airfares for consumers. After adjusting for inflation, average return airfares (excluding taxes and surcharges) are expected to fall by some 5.1 per cent to $458 (Dh1,680) in 2015 and cargo rates are expected to fall by a slightly bigger 5.8 per cent,” the global aviation said.

Tony Tyler, Iata’s Director-General and CEO, said: “Stronger industry performance is good news for all. It’s a highly competitive industry and consumers — travellers as well as shippers — will see lower costs in 2015 as the impact of lower oil prices kick in.”

Most sell side oil analysts have projected that the Brent will trade around $60 per barrel for 2015.

Iata said Middle East airlines’ post-tax profits are expected to grow by nearly 45 per cent to $1.6 billion (Dh5.87bn) in 2015 up from $1.1bn (Dh4bn) in 2014.

The global aviation body said Middle East airlines have one of the lowest breakeven load factors (58.6 per cent).

Average yields are low but unit costs are even lower, partly driven by the strength of capacity growth. Passenger capacity is expected to expand by 15.6 per cent in 2015 (up from 11.4 per cent in 2014). Post-tax net profits are expected to grow to $1.6 bn in 2015 (up from $1.1bn in 2014). This represents a profit of $7.98 per passenger and a net profit margin of 2.5 per cent.

Globally, airlines are expected to post a collective global net profit in 2014 of some $19.9bn, up from the $18 billion projected in June. This looks set to rise to $25bn in 2015, Iata said.

Lower oil prices and stronger worldwide GDP growth are the main drivers behind the improved profitability.

The expected $25bn net post-tax profit represents a 3.2 per cent margin. On a per passenger basis, airlines will make a net profit of $7.08 in 2015. That is up on the $6.02 earned in 2014 and more than double the $3.38 earnings per passenger achieved in 2013.

“The industry outlook is improving. The global economy continues to recover and the fall in oil prices should strengthen the upturn next year. While we see airlines making $25 billion in 2015, it is important to remember that this is still just a 3.2 per cent net profit margin. The industry story is largely positive, but there are a number of risks in today’s global environment—political unrest, conflicts, and some weak regional economies- among them. And a 3.2 per cent net profit margin does not leave much room for a deterioration in the external environment before profits are hit,” said Tony Tyler, Iata’s Director General and CEO.

2015 forecast drivers

Oil Prices: Oil prices have fallen substantially in recent months and this is expected to continue into 2015 with the full-year average price expected to be $85/barrel (Brent). If that assumption is correct, it would be the first time that the average oil price has fallen below $100/barrel since 2010 (when oil averaged $79.4/barrel).

Fuel Prices: Jet fuel prices are expected to average at $99.9/barrel in 2015 for a total fuel spend of $192 billion which represents 26 per cent of total industry costs. It is important to note that the impact of lower fuel prices will be realized with a time lag, due to forward fuel-buying practices. Improving fuel efficiency continues to be a priority for airlines. Fuel efficiency is estimated to have improved by 1.8 per cent in 2014 and a further improvement is expected in 2015. Fuel efficiency improvements could be accelerated by reducing the 5 per cent of wasted fuel burn as a result of airspace and airport inefficiencies.

Economic Growth: Global GDP is expected to grow by 3.2 per cent in 2015, up from 2.6 per cent in 2014. This will be the first time that global GDP has broken over 3.0 per cent since 2010 (when global GDP grew by 4.1 per cent in a post-recession bounce back), this time boosted by the fall in oil prices.

Passenger Trends: Passenger traffic is expected to grow by 7.0 per cent in 2015 which is well-above the 5.5 per cent growth trend of the past two decades. Capacity growth is expected to outstrip this slightly at 7.3 per cent, pushing the passenger load factor to 79.6 per cent (slightly down on the 79.9 per cent expected for 2014). Total passenger numbers are expected to grow to 3.5 billion and passenger revenues are expected to grow to $623 billion.

Cargo Trends: Cargo volumes are expected to grow by 4.5 per cent in 2015 (slightly ahead of the 4.3 per cent growth expected for 2014). The air cargo business has faced weak markets and increasing competition since 2011. There has been an uptick in demand recently but cargo remains a tough business. The real cost of transporting goods in 2015 is expected to fall by 5.8 per cent. In total, some 53.5 million tonnes of air cargo is expected to be flown in 2015. Total cargo revenues are expected to rise to $63 billion, but that is still some 5 per cent lower than in 2010.

Regional Trends

All regions are expected to report improved net profitability in 2015 over 2014. However, there are stark differences in profitability among the regions. Current and forward-looking industry financial assessments should not be taken as reflecting the performance of individual airlines, which can differ significantly.

North America : The strongest financial performance by far is being delivered by airlines in North America. Net post-tax profits are the highest at $13.2 billion next year (up from $11.9 billion in 2014). That represents a net profit of $15.54 per enplaned passenger, which is a marked improvement from just three years earlier. Net profit margins forecast at 6 per cent exceed the peak of the late 1990s. This improvement has been driven by consolidation, helping to raise load factors (passenger + cargo) to 65 per cent this year, lower fuel prices and ancillaries, which together push breakeven load factors down below 60 per cent next year.

Europe: European airlines continue to struggle as evidenced by the highest breakeven load factors among all regions (64.7 per cent). European airlines compete vigorously in the continent’s open aviation area. But they are hampered by high regulatory costs, infrastructure inefficiency and onerous taxation. As a result, and despite the industry in the region achieving the second highest load factor, financial performance has been poor. Net profits of $4 billion next year (up from $2.7 billion in 2014) represent only $4.27 per passenger and a net profit margin of 1.8 per cent.

Asia-Pacific:   Airlines in the Asia-Pacific region are expected to achieve a net profit of $5.0 billion in 2015 (up from $3.5 billion in 2014) for a 2.2 per cent net profit margin. That translates into $4.30 per passenger. Some strengthening of cargo markets, particularly important in this manufacturing region, plus lower fuel costs, are expected to drive the moderate improvement on 2014.

Latin America: Latin American airlines have faced a mixed environment. Weak home markets have hampered performance, but a degree of consolidation and some long-haul success is expected to boost net profits to $1 billion in 2015 (up from $700 million in 2014). That would be a profit of $3.53 per passenger and a net profit margin of 2.6 per cent.

Africa: Africa is the weakest region, as in the past 2 years. Profits are barely positive ($200 million in 2015 which is an improvement on the break-even performance in 2014), and represent just $2.51 per passenger. Breakeven load factors are relatively low, as yields are a little higher than average while costs are lower. However, few airlines in the region are able to achieve adequate load factors, which are the lowest among the regions by almost five percentage points. Performance is improving, but slowly.

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