Airline CEOs: Deploy oxygen masks, for the aviation industry is passing through strong turbulence. On the one hand, airlines are contending with an apparent surge in high-profile aviation disasters. On the other, the unexpected collapse in the oil price in mid-2014 has given a welcome boost to carriers across the globe. But what is the net effect?
The low oil price has undoubtedly eased pressure on the bottom line across the industry. Air France-KLM returned to profitability in 2015 for the first time since 2008. Net profits at Lufthansa rocketed to €1.7 billion from a disappointing €55 million in 2014 as its fuel costs sank 14.3%. And American Airlines recorded net income of $7.6 billion, versus $2.9 billion in 2014. All three attribute a large part of this to the low oil price, down 47% on average in 2015 from 2014, significantly reducing operating costs. The International Air Transport Association (IATA) expects net profit for the global airline industry to jump to $39.4 billion in 2016.
However, despite a positive 2015, the suddenness and unexpectedness of the oil price collapse has led some analysts to sound a note of caution and view the current beneficial effects as a false friend: A rise in prices would put the industry under pressure once again. But there remains cause for optimism.
According to Warwick Knowles, Dun & Bradstreet’s oil analyst, while airlines can expect the Brent spot price to rise into 2020, the rise will be slow and will remain well short of recent highs — good news for airline bosses. Further, the low oil price is not the only factor behind the increase in profits. Load factors — industry jargon for seat occupation levels — are up and joint ventures are increasing efficiency.
While air travel continues to be by far the safest form of travel by any measure, air disasters exert a strong hold over the public imagination, inflating risk perception. A recent spate of disasters caused a jump in fatalities globally in 2014 and 2015, following an all-time low of 265 deaths in 2013. In 2014 there were 1,088 deaths, and 898 in 2015.
Further, of the combined fatalities across the two years, for the first time attacks were the biggest cause of death. Throw in a social-media-driven intensification of news reporting and the increase in terror attacks more widely (e.g., the Bataclan attack in Paris or the Brussels airport attack), and it would be easy to conclude that airlines and passenger numbers are going to suffer. Indeed, tourist arrivals to badly affected Malaysia dropped 6% in 2015 following twin high-profile disasters, while easyJet reported 1.8% year-on-year lower capacity in December 2015 after the Bataclan attack.
Such a conclusion, however, would be misguided. In fact, air passenger numbers are up. According to the IATA, global international passenger traffic rose 6.5% in 2015, and traffic in Europe climbed 5.0%. As well as passengers, sales are up also: Air France-KLM sales grew 4% to €26 billion, Lufthansa’s traffic revenue grew by around €1 billion, and Delta Air Lines saw 4% growth in its domestic service. And while easyJet saw a dip in passenger numbers the month after the Paris attack in November, Ryanair responded to it by cutting fares and was rewarded by a 25% year-on-year leap in passengers in December.
All in all, airlines have more reasons for optimism than pessimism. An expanding global market and the prospect of low oil prices for the next few years at least mean that, despite heightened terror risks, the airline industry can look ahead with confidence.
London-based Malcolm Gledhill is Dun & Bradstreet’s expert on the European marketplace and has a background in macroeconomics. Malcolm joined Dun & Bradstreet’s Macro Market Insight team in 2014 before moving to the Company team in 2016, and has a BA from the University of Southampton.