Commercial aerospace industry profits fall slightly on increasing costs

The commercial aviation industry has enjoyed a number of years of relatively high profitability, leading to higher market capitalisations. For this year, airlines are forecasted to book profits of around $55 billion, while the commercial aerospace industry is expected to record profits of $31 billion. The most recent year's drop in profitability is a reflection of a rise in fuel prices and increase increase in non-fuel costs, while in aerospace, it reflects a huge drop in aircraft OEM profits, mainly driven by a one off charge.

The commercial aviation industry has seen ups and downs in recent decades, as new business models arose, commodity prices shifted drastically and passenger numbers boomed. Since 2014 the commercial airline industry saw the protracted period of low profitability come to an end for many reasons, largely due to a significant drop in the price of fuel. For OEMs, a boom in orders ensued as airlines sought to capitalise on their available capital to buy next generation aircraft.

In a new report from AlixPartners, the consulting firm considers, among others, the changes in the profitability landscape for the commercial airline industry. The report, titled ‘2017 AlixPartners Aerospace & Defense study’, considers a range of factors related to the commercial and military aviation industries. 

Airline profits

Commercial airlines are project to see their profitability decline in 2017, with EBIT performance falling from 8.8% last year to 7.5% this year. The performance is considerably up on the 2.6% recorded in 2012. The regional view highlights some differences, with North American airlines generating particularly considerable EBIT margins, while the Asia-Pacific area is projected to be up 3% from 2012 at 8%.

Listed airline stock prices have, meanwhile, skyrocketed in North America, up from a market capitalisation of $25 billion in 2012 to $133 billion in 2017. Asian airlines increased more modestly, up from $61 billion to $94 billion.

The airline profits hit recent heights in 2016, as a long period of cost reduction and cutting to deal with high fuel costs was met with considerably lower fuel prices. Profit hit $61.2 billion in 2015 on revenue of $720 billion, before falling to $62 billion on revenue of $705 billion the following year. The financial crisis, when profitability sunk below the line and revenue dropped under $500 billion, is now behind the industry.

The latest year has seen revenues increase to $743 billion, while profit fell by 10% to $55.7 billion. The lower profitability is a reflection of increases in fuel prices and increased non-fuel costs. Yields are expected to remain relatively suppressed.

While the industry has exited a protracted period of low EBIT margins, starting midway through 2014 as the oil price fell from around $114 a barrel to recent lows, not every airline benefitted. Some, for instance Kenya Airways, hedged high fuel prices, which correspondingly saw them locked into higher costs. 

The lower costs from fuel prices have been fully absorbed into profit according to the firm; meanwhile, non-fuel costs have begun to tick-up, with cost inflation running at around 2.5%. Capacity continues to rise, meanwhile, up 7.5% last year and projected for 7% this year, while revenue passenger kilometre has stayed stable at 7.4%.

The research notes that various airlines across Europe have managed to boost their available seat kilometres while generating considerable EBIT margins in 2016. In the network carrier segment, Russian carrier Aeroflot saw strong margins (12%) while boosting capacity by more than 10%. Lufthansa saw minor capacity increases to its modest EBIT margin, while struggling Alitalia saw both decreases in capacity as well as negative EBIT margins of -22%.

Low cost carrier Ryanair’s business model seems to have performed well in the most recent years, with 2016 EBIT margin running at almost 24%, while capacity was up 8%. Norwegian air has grown its capacity by more than 22%, although its margin remains relatively modest at around 6%.

Aerospace profits

According to a previous AlixPartners study, the global aviation industry had reached profits of $73 billion by 2014. However, the period since was tough, with aerospace businesses continuing to struggle following the financial crisis. The commercial aerospace businesses has enjoyed relatively stable EBIT margins, or around 10% over the period, spread across the various business segments.

Profits have increased considerably – at CAGR 17% from 2009 to 2014 – with aircraft OEMs the segment generating the most profitability growth, up from $0.8 billion in 2009 to $10.9 billion in 2014. Profitability has since declined to $30.9 billion, largely as aircraft OEM profits fell due to various one off charges and FX rate changes. 

In terms of the share of the profit pool, most sub aircraft suppliers (excluding engines) industries are expected to miss out, with the equipment OEMs generating the biggest share of the $6.8 billion pie. MRO is, meanwhile, expecting to generate around $2.6 billion, while lessors come out on top in terms of profit generation at $8.6 billion.

Related: The 10 most profitable airlines of the globe.