Airlines Financial Monitor for 2016 by IATA

The latest financial results from Q3 2016 continue to indicate another solid quarter for industry profitability, although there are ongoing signs that momentum in the profitability cycle has weakened; according to a report from International Air Transport Association (IATA).

This is coming as global airline share prices jumped by 7.5 per cent in November – the biggest monthly increase since October 2015.

 This was led by carriers in North America, whose index surged by 16.4 per cent during the month, in part reflecting investor confidence that airlines will be able to halt the declines in unit revenues during 2017.

By contrast, the Asia Pacific share index fell for the fourth month in a row (-0.6 per cent) and European airline shares increased by a more modest 2.2 per cent.

Global airline shares have lagged behind the wider global equity market so far this year. But with share prices now up by more than 30 per cent since their June low, the margin of underperformance has narrowed in recent months.

The latest results from Q3 2016 show that industrywide financial performance remains robust by historical standards.

However, with operating conditions becoming more challenging, there are ongoing signs that momentum has weakened.

 The EBIT margin in our sample of 67 airlines edged down to 15.6 per cent in Q3 2016, from 15.7 per cent in the same period in 2015.

Profit margins dropped in North America, reflecting volatile fuel and labour costs, but remained solid nonetheless. Margins increased modestly in the other regions, with the pick-up in Asia Pacific helped by a good Q3 for air freight.

Net cash flow in our sample of 52 airlines eased to 10.5 per cent of revenues in Q3 2016, from 11.5 per cent in the same period last year.

 Net cash flow (ie, cash from operations) fell in N. America, Asia-Pac and Europe, but rose in our sample of Latin American carriers.

 Capital expenditure in our total sample eased slightly as a share of revenues in Q3 2016 compared to the same quarter in 2015.

As a result, free cash flow in Q3 edged up to 1.0 per cent of revenues from 0.7 per cent a year ago. Free cash flow allows airlines to return cash to investors or to repair their balance sheets by paying down debt.

Uncertainty surrounding the recent OPEC meeting has dominated crude oil markets in recent weeks. Brent crude oil prices fell below $44/bbl in early November, driven by a strengthening in the US dollar and uncertainty as to whether a plan for OPEC to limit supply would be agreed. But oil prices rebounded following the meeting, particularly following signs that non-OPEC suppliers will also act to limit supply.

At the time of writing, oil prices were at a 17-month high, 30 per cent above the low-point reached in mid-November.