2016 International Air Travel Soared to 3.7 Billion Passengers, a New Record

April 5, 2017

2016 International Air Travel Soared to 3.7 Billion Passengers, a New Record

For the 12-month period ended December 31, 2016, the U.S. Global Jets ETF (JETS) gained 12.48 percent, underperforming its benchmark, the U.S. Global Jets Index, which gained 15.67 percent. No material changes took place to the index methodology during this period.

In the first quarter, the global air passenger market expanded 7 percent year-over-year, the strongest start to a year since 2012. This came despite a subdued economic backdrop, especially in China. For the entire year of 2016, a record 3.7 billion passengers flew on scheduled flights around the world, according to the International Civil Aviation Organization (ICAO). This was in line with the findings of the International Air Transport Association (IATA), which reported that air passenger growth, as measured by revenue passenger kilometers (RPKs), was up an impressive 8.8 percent year-over-year, well above the 10-year average of 5.5 percent.

“Stronger demand for air travel reflects—and is supporting—a pick-up in the global economic cycle,” said IATA CEO Alexandre de Juniac. “As the stimulus effect of lower oil prices recedes in the rear view mirror, the strength of the economic cycle will play a key role in the pace of demand growth in 2017.”

Load factor, which measures the use of aircraft capacity, remained fairly steady throughout the year. It climbed to an all-time September high in most major markets, the exception being Australia. Globally, the industry hit 81.1 percent capacity.

Low crude oil prices continued to be a significant profit driver for airlines in 2016. Jet kerosene averaged $1.25 a gallon during the year, an 18 percent discount from fuel costs in 2015. Fuel accounted for a little under 20 percent of airlines’ total expenses in 2016, down from 27.5 percent in 2015. These savings could be growing long in the tooth, however, with the IATA writing that “we are perhaps coming toward the end of the biggest stimulus to traffic from lower oil prices.”

More Americans than ever before are now capable of traveling by air, a 2016 Ipsos Public Affairs/Airlines for America (A4A) survey found. Eighty-one percent of respondents said they’ve flown at least once in their lives, while 45 percent said they flew at some point in the last three years, up from 39 percent in 1997. These findings are likely a function of a record stretch of monthly jobs growth in the U.S. (81 straight months as of December 2016, for a total of 15.6 million jobs), low unemployment (4.7 percent in December) and steady to declining airfares. Big-data travel firm Hopper estimated that summer fares in 2016 were the cheapest since 2009, which likely helped boost demand domestically. Average domestic airfare in the third quarter, the most recent period for which data is available, fell to $344, down 8.8 percent from the same period in 2015, according to the U.S. Transportation Department.

Airfare is expected to creep back up in 2017, however, on rising fuel and labor costs, not to mention maintenance expenses for aging fleets. New labor contracts in 2016 contributed to second-quarter costs rising 5.4 percent over the same period in 2015. Southwest Airlines “faces larger labor hurdles than any other U.S. operator,” with “$550 million of incremental wage pressure in 2017,” writes JPMorgan.

The Industry Attracted New and Returning Investors—Including Warren Buffett

New and returning investors took notice of the industry in 2016. After years of deriding the airline industry, billionaire investor Warren Buffett confirmed in November that his holding company, Berkshire Hathaway, invested nearly $1.3 billion in four big-name domestic carriers: American, Delta, United and Southwest. The stake is a dramatic reversal for the 86-year-old Buffett, who previously called the industry a capital “death trap” and once joked that investors would have been served well had Orville Wright’s plane been shot down at Kitty Hawk.

Indeed, domestic airlines are committed to fixing their balance sheets, retaining and attracting new investors and improving conditions for both workers and passengers. According to A4A, carriers returned $11.4 billion to shareholders in the first nine months of 2016—$10.5 billion in stock buybacks and $912 million in dividends. Cash flow generated since the industry consolidated in 2009-2010 has allowed carriers to retire a combined $60 billion in debt, which today accounts for just 32 percent of operating revenue, down from 45 percent in 2010.

Huge Deals: Alaska, Virgin America and American

Industry consolidation continued in 2016. Early in the second quarter, Alaska Airlines announced it would be acquiring Virgin America in a $2.6 billion deal that will turn Alaska into the firth-largest U.S. airline by traffic. The deal, which was cleared by the Justice Department in December, is expected to help Alaska become the number one player on the West Coast. Annual revenue could grow 23 percent because of the deal, according to the Wall Street Journal.

Meanwhile, American Airlines unveiled plans to renew its credit card deals with Citigroup and Barclays, a move that’s estimated to add $1.55 billion to the carrier’s pretax income over the next three years—$200 million in 2016, $550 million in 2017 and $800 million in 2018, according to Bloomberg. The agreement will allow Citi to offer its credit cards to new customers on American Airlines’ website and mobile apps, through direct mail and in Admirals Club lounges, while Barclaycard will be permitted to reach customers in airports and during American flights.

Headwinds: Falling Revenues and President Trump

Headwinds during the year included heightened global terrorist concerns and geopolitical instability in some parts of the world. March’s Brussels Airport terrorist bombing and the United Kingdom’s Brexit referendum in June were particularly disruptive. In the U.S., the strong dollar continued to be a challenge.

In its 2016-2017 economic analysis, consultancy group Oliver Wyman warned that “a patch of turbulence ahead could threaten [the industry’s] bottom-line gains,” citing a steady slide in quarterly revenues over the past 18 months. In the quarter ended December 31, for example, Delta Air Line’s pre-tax income was down 37.8 percent from the same period in 2015, from $1.5 billion to $952 million. For the entire year, United Airlines’ net income was down 69 percent, from $7.3 billion in 2015 to $2.2 billion in 2016. According to Oliver Wyman, one of the key culprits is excess capacity, which has grown at a faster rate than the economy.

Although carriers rallied following the November election of Donald J. Trump, there’s concern that his isolationist and protectionist rhetoric, particularly his tough stance on immigration from Mexico—currently the number two market for travel and tourism to the U.S.—and Arabic-speaking countries, could hurt the domestic travel industry.

At the same time, many industry leaders are hopeful that Trump, a former airline owner and executive, will prove to be a powerful ally in several key issues. U.S. carriers have long been pushing Congress to reform air traffic control so that the steering wheel is in the hands not of the Federal Aviation Administration (FAA) but a private, not-for-profit entity, similar to Canada. The industry would also like to see open talks with several state-owned Middle Eastern carriers, whose governments provide tens of billions of dollars in “unfair” subsidies every year.

“The Gulf carrier subsidies threaten the jobs of 300,000 U.S. aviation workers and the American aviation industry as a whole,” Jill Zuckman, chief spokesperson for Partnership for Open & Fair Skies, an airline lobby group, alleged, “and we are optimistic that the Trump administration will stand up to the United Arab Emirates and Qatar, enforce our trade agreements and fight for American jobs.”

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The Status of Air Travel in the United States survey was conducted December 14-22, 2015 as an online survey of 3,019 members of the American general public, age 18+ by Ipsos Public Affairs on behalf of Airlines for America. This study references similar research conducted by Gallup on behalf of then-Air Transport Association of America (now A4A) in 1998 for trending purposes.

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