CAPA’s airline profit outlook – margins high, but below peak, as traffic growth slows and oil price rises

World economic growth was above its long term trend in 2017 for the first time since 2010, and is expected to remain so in 2018. This is good news for air travel demand, although rising oil prices may dampen traffic growth, relative to the past couple of years, notes CAPA – Centre for Aviation in a six monthly update of the its world airline industry operating margin model.

“The operating margin forecasts in this update confirm the unprecedented nature of current world airline industry profitability, in no small measure thanks to lower oil prices, and significantly assisted by better capacity discipline than in previous cycles. The model supports the view that the industry has almost certainly passed the sweet spot enjoyed in 2017,” it says.

The latest edition of the model from the market intelligence, research and data solutions specialist increases its margin estimate for 2017 and its forecast for 2018 versus the last report in Jul-2017, while also adding a 2019 outlook. “Although 2016 may have been a cyclical margin peak, the industry is enjoying a more sustained period comfortably in excess of previous high margins,” it says.

The most fundamental reason for improved airline industry profitability relative to previous cycles is better capacity utilisation, according to CAPA. If maintained, capacity discipline should also help to smooth out the cyclical volatility in airline margins. Nevertheless, it was the fall in oil prices from mid-2014 that gave the extra push to take margins to new levels, it adds.

“Oil prices affect costs, and fares, and decisions about aircraft retirements and new orders. The price of crude, together with world economic growth and geopolitical events, is a key risk to the industry’s new levels of profitability,” explains the CAPA report.

In fact, the CAPA world airline operating margin model continues to indicate that 2016’s operating margin was a cyclical peak at a new high level of 9.2%, but that the industry’s profitability is now following a modestly declining trend. However, with previous cyclical peaks almost never exceeding a margin of 6% (typically being followed by a rapid decline), CAPA’s forecasts the current cycle will enjoy at least five consecutive years of margins at comfortably more than 6% by 2019. “The world airline industry is in the middle of an unprecedented period of high margins,” it says.

Key observations of the updated report include RPK growth set to remain at, or above, its long term trend rate of 6.2% throughout the forecast period; fleet growth in the period 2016-2019 higher than in any year since 2001; and how increases in oil prices explain decline in airline margins in the CAPA model in 2017, 2018 and 2019, from the 2016 peak.

CAPA forecasts margins for 2017 increasing 0.6 percentage points since its last report from 7.9% to 8.5%, due to higher forecast RPK growth (raised from 7.3% to 7.7%, in line with IATA figures for 11M2017). This compares with 9.2% in 2016. Similarly, CAPA sees margins in 2018 higher than last predicted (increased from 7.5% to 8.0%), due to slightly higher RPK growth (raised from 6.9% to 7.0%). Forecasts for 2019, added for the first time, suggest lower RPK growth and an increase in oil prices relative to 2018 will only partially be mitigated by slightly slower fleet growth, leading to forecast operating margin easing back to 7.7% in 2019.

READ MORE – CAPA members can view this full world airline industry operating margin model premium analysis, which includes further detail on the methodology behind the forecast, more data related to its observations and further analysis highlighting industry trends.