IATA – for airlines, the best is behind us, and costs are rising. But fares remain low

IATA's Apr-2017 survey of airline business confidence appears to confirm that the best is behind us - at least for airline profitability. According to IATA, the survey responses are consistent with the fact that "the industry profit cycle peaked in the first half of last year."

Although airline leaders expected profitability to rise over the coming 12 months, fewer of them did than when asked in Jan-2017.

Demand however remains strong, with three quarters of responses predicting increased volumes - but costs are rising and there is only a weak turnaround from the decline in average yields.

According to IATA, "41% of respondents reported an annual increase in operating costs in Q1 2017 - the highest proportion in four years - reflecting a combination of higher fuel prices and rising labour cost pressures."

Most respondents remained very positive about demand prospects for the year ahead, with more than three-quarters expecting increased passenger volumes. Freight, once a forward looking indicator, is also attracting increasingly positive outlooks from cargo carriers.

But much of the passenger demand is being stimulated by lower fares. A stronger outlook for the global economy could also be contributing. Earlier in Apr-2017, the IMF issued a relatively rosy outlook for the coming year, The fund forecast a growth rate in 2017 of 3.5%, compared with 3.1%in 2016. Airline passenger growth bears a close correlation to GDP growth.

Recent and expected changes in passenger traffic volumes

Demand is believed to improve/increase over the next 12 months and majority believe there has been an improvement in the last three months.

How do you expect profitability to change over the next 12 months?

For airlines the bad news was that just under half the respondents reported that they expect input costs to increase over the coming 12 months, resulting in a sharp decrease in expected profitability in the last quarter.