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CAPA airline profit outlook. Margins high, but below peak, as traffic growth slows & oil price rises

World economic growth was above its long term trend in 2017 for the first time since 2010, and is expected to remain so in 2018. This is good news for air travel demand, although rising oil prices may dampen traffic growth, relative to the past couple of years.

The latest six monthly update of the CAPA world airline industry operating margin model increases its estimate for 2017 and its forecast for 2018, while also adding a 2019 forecast. Although 2016 may have been a cyclical margin peak, the industry is enjoying a more sustained period comfortably in excess of previous high margins.

The most fundamental reason for improved airline industry profitability relative to previous cycles is better capacity utilisation. If maintained, capacity discipline should also help to smooth out the cyclical volatility in airline margins. Nevertheless, it was the fall in oil prices from mid-2014 that gave the extra push to take margins to new levels.

Oil prices affect costs, and fares, and decisions about aircraft retirements and new orders. The price of crude, together with world economic growth and geopolitical events, is a key risk to the industry's new levels of profitability.

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