Global Airline Industry Expected to Post Record Profits on Lower Fuel Costs

According to one airlines trade group, the global airline industry appears to be thriving in a low-cost oil environment.

In a recent press release, the International Air Transport Association (IATA) says that airlines are expected to post a record $33 billion in net profits this year on fuel cost savings and stronger passenger flight demand.

In 2014, profits came in at $17.4 billion—about half of what 2015 expectations are.

What’s more, the IATA believes profits might be even larger in 2016.

World demand grew 6.7 percent from a year ago, the IATA says, and is estimated to rise a further 6.9 percent in 2016. And with the possibility of oil prices staying relatively low, the group forecasts that airlines will spend $135 billion on fuel in 2016, down nearly a quarter from $180 billion in 2015.

This, coupled with improved fuel efficiency, is expected to contribute toward the group’s estimated total net profits of $36.3 billion in 2016.

Below you can see that global airline stocks have risen dramatically in recent years, especially in response to flagging oil, one of their top expenses.

Not Your Father’s Airlines

In the past, airlines were notorious for their inefficiency and tendency to destroy capital. These claims were somewhat exaggerated, especially by legendary investor Warren Buffett, who has repeatedly decried the industry as a money-loser. What a lot of people might not realize is that Buffett didn’t do as badly as he claims.

Former US Airways CEO Ed Colodny explained in 2013 that, after Buffett’s shares didn’t appreciate, he wrote down his investment and got out when he could.

“I think at the end of the day, he got all his dividends paid and his principal back,” Colodny said.

In any case, airlines are now going into their third year of the present secular bull market. We believe this cycle is different, in that the U.S. airline industry could create $20 billion of free cash flow this year and next. Low fuel costs have been the cherry on top.

Many investors have taken note. Among the five most-search-for topics on ETFdb.com for the week ended December 11, 2015 were “crude oil” and “airlines,” suggesting that investors might be seeking ways to play low crude prices.

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Net profits are actual profits after working expenses not included in the calculation of gross profit have been paid. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base.

Brent crude is a major trading classification of sweet light crude oil that serves as a major benchmark price for purchases of oil worldwide. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content.

The NYSE Arca Airline Index (XAL) is an equal dollar weighted index designed to measure the performance of highly capitalized companies in the airline industry. The XAL Index tracks the price performance of major U.S. and overseas airlines. It is not possible to invest directly in an index.