Airline operating margins to reach 50-year high due to low oil price: CAPA

We’re sorry, this feature is currently unavailable. We’re working to restore it. Please try again later.

Advertisement

This was published 8 years ago

Airline operating margins to reach 50-year high due to low oil price: CAPA

By Jamie Freed
Updated

The low oil price is poised to propel airline operating margins to the highest level since the mid-1960s this year, although margins will decline slightly next year as the oil price rises and fleets grow more rapidly than usual, according to a leading aviation analysis group.

CAPA Centre for Aviation's World Airline Profit Outlook 2016 found operating margins for global airlines, which were just 5.5 per cent in 2014, rose to 7.2 per cent last year and should reach 8.2 per cent this year, before declining to 7.5 per cent next year. The 2015 figure was better than any year in the last five decades, with 2016 set to top it.

Qantas is poised to report a record underlying pretax profit of $1.65 billion this financial year.

Qantas is poised to report a record underlying pretax profit of $1.65 billion this financial year.Credit: Nic Walker

"Beyond [2017], a challenge for the industry will be to try to sustain margins in a similar range rather than allow a margin peak to be followed by a rapid downturn, as has invariably happened in the past," CAPA said.

Qantas is expected to post a record $1.65 billion underlying pretax operating profit for the financial year ended June 30, including an operating margin of 11.3 per cent, up from 6.9 per cent last year. But its operating margin is expected to fall slightly to 11 per cent in 2016-17.

Rival Virgin Australia is forecast to post a $142.8 million underlying pretax operating profit this year, having posted a loss last year. The carrier is expected to report an operating margin of 5.3 per cent this year, rising to 6.5 per cent in 2016-17.

Cheaper fuel

CAPA said the lower oil price was playing a major role in boosting airline profitability, with fuel expected to consume 19 per cent of industry revenue this year, down from 30 per cent in 2014 and 25 per cent in 2015.

However, Emirates president Sir Tim Clark said last week the lower oil price was not entirely positive for the airline industry.​

"The plunge in fuel prices has been a double-edged sword: on the one hand lowering operating costs, but on the other impacting global business confidence and market volatility," he told Arabian Business.

Advertisement

"For many businesses, it is tempting to enjoy the benefits of cheaper fuel and take the foot off efficiency initiatives. At Emirates, we continue to invest in new fuel-efficient aircraft and technologies, because we know that is key to long-term sustainable growth."

When the oil price was high, many airlines placed large orders for next-generation, fuel-efficient aircraft such as the Boeing 787 and 737MAX and the Airbus A350, A320neo and A330neo to replace older planes. CAPA said fleet growth had been below the long-term average since 2002, as airlines retired aircraft at a faster than normal rate.

However, the fleet growth rate is expected to rise to 4.9 per cent next year, above the historic average 4.4 per cent rate for the first time since 2001. The percentage of retirements among new deliveries is also falling, possibly because the lower fuel price makes it economic to keep older aircraft longer.

Pressure on yields

"[This is] sounding alarm bells for some long-term industry observers," CAPA said. "An increase in the rate of supply growth can lead to extra downward pressure on airline yields."

Yields are a measure of the fares charged by airlines, which so far have in many cases not fallen despite the savings from the lower oil price. But yields do tend to fall as new capacity enters the market, and international capacity in particular to and from Australia has grown in recent months.

Credit Suisse analyst Paul Butler said he believed international capacity could rise by 7 to 8 per cent over the next year – possibly in excess of demand – in a move that could place pressure on airfares.

In the domestic market, Qantas and Virgin have been keeping capacity relatively flat, which has led to a continued rise in fares despite the lower fuel price.

Most Viewed in Business

Loading