Airline industry profits will reach $39.4 billion (£27.3 billion) in 2016, according to a report from the International Air Transport Association, and a big reason for that is the persistently low price of oil.
The aviation trade body says it’s the fifth consecutive year aggregate net profits have increased and adds that growth in demand for air travel remains “robust,” despite projections being more than 1% down from 2015.
But one major problem for airlines could be the possible rise of oil prices.
The cost of the commodity fell to multi-year lows in early 2016, and while it has recovered since then, cheaper fuel has been great for the aviation industry’s bottom line.
Fuel is “expected to represent 19.7% of the industry’s expenses,” according to the IATA’s report, “down from a recent high of 33.1% in 2012-2013.”
However this projection is based on Brent oil averaging $45 a barrel for the rest of the year — but oil has already breached the $50 mark on Thursday.
Tony Tyler, IATA’s Director General and CEO, suggested that the industry was aware the good times may not last as far is oil was concerned: “Lower oil prices are certainly helping — though tempered by hedging and exchange rates. In fact, we are probably nearing the peak of the positive stimulus from lower prices,” he said.
The report also noted that fluctuating oil had already had an impact on Middle Eastern airlines:
Local markets have been weakened by the impact of falling commodity revenues. Economic changes in the region’s oil economies are manifesting themselves in a spate of increases of charges and taxes which could dampen the region’s cost competitiveness.
Some Latin American economies like Brazil haven’t enjoyed low oil prices though, as depreciating economies have resulted in exchange rates that negate any purchasing power. African airlines are also struggling, with losses of $500 million expected thanks to intense competition and “infrastructure deficiencies.”
American and European airlines were in good shape though, with expected profits of $22.9 billion (£15.9 billion) and $7.5 billion (£5.2 billion) respectively.