IATA Unveils Tepid 2017 Profit Forecast On Rising Oil Prices

The International Air Transport Association (IATA) has provided a lackluster view for carriers with respect to the profitability level for 2017. The research firm predicts global net profit for the industry of $29.8 billion. This is much lower than the 2016 profitability forecast of $35.6 billion. The gloomy projection may be attributed to the anticipation of rising oil prices.

In fact, IATA has not only issued a disappointing 2017 outlook, but the forecast for 2016 profitability has been trimmed as well. The organization now expects the industry to end the current year with global net profit of $35.6 billion as against $39.4 billion predicted in June.

2017 Forecast

The bulk of the global profits ($18.1 billion) is expected from the North American region. However, the estimated figure is lower than $20.3 billion expected in 2016. The North American region, which boasts carriers like Delta Air Lines, Inc. (NYSE:DAL) , United Continental Holdings (NYSE:UAL) , American Airlines Group (NASDAQ:AAL) , Southwest Airlines (NYSE:LUV) , Alaska Air Group (NYSE:ALK) and Hawaiian Holdings (NASDAQ:HA) , is likely to witness an average profit of $19.58 per passenger and net margin of 8.5% in 2017.

Traffic is expected to grow at 2.5%, a tad below the projected capacity expansion of 2.6%. We note that Hawaiian Holdings sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The other regions, such as Europe, the Asia Pacific, Latin America and the Middle East are expected to generate post-tax net profit of $5.6 billion, $6.3 billion, $0.2 billion and $0.3 billion, respectively. The expected 2017 profitability of each region is lower than the 2016 estimate. African carriers too are expected to continue their dismal performance in 2017 due to losses of approximately $0.8 billion.

Global net profit margin is expected to shrink to 4.1% in 2017 from the 2016 estimate of 5.1%. The top line is projected to come in at $736 billion next year, with cargo revenues projected to increase slightly to $49.4 billion. Cargo demand is expected to grow to 3.5%, with cargo industry volumes touching record highs of 55.7 million tons (53.9 million tons expected in 2016).

According to the forecast, air travel growth of 5.1% is expected in 2017 compared with 5.9% growth this year. Capacity is projected to rise by 5.6% in 2017 as against 6.2% increase projected in 2016. According to the forecast, load factor (percentage of seats filled by passengers) for 2017 is expected to decline 40 basis points to 79.8% as capacity expansion is likely to outweigh traffic growth. According to the report, yields are expected to stabilize for both cargo and passenger operations.

The research firm has also predicted that airline companies will retain $7.54 per passenger in 2017. The firm projects that jet fuel prices are likely to escalate around 24.6% to $64.9 per barrel next year.

We note that there is an inverse relation between crude prices and the value of aviation stocks. Naturally, rise in oil prices is unfavorable for carriers as it will result in significantly higher operating expenses. This is because fuel costs represent a significant chunk of the total expenses for airline companies.

The recent decision of the Organization of Petroleum Exporting Countries (or OPEC) to cut oil production has prompted a surge in oil prices. The move aims to trim output to 32.5 million barrels per day. Oil prices are likely to continue their upward march in 2017, contributing to the tepid view for airlines.

Zacks' Best Investment Ideas for Long-Term Profit

Today you can gain access to long-term trades with double and triple-digit profit potential rarely available to the public. Starting now, you can look inside our stocks under $10, home run and value stock portfolios, plus more. Want a peek at this private information? Click here >>