CAPA airline profit outlook: margins slipping as cost reduction intensity dims. Discipline needed

The latest six monthly update of the CAPA world airline industry operating margin model increases its forecasts to 2018 relative to the Jan-2017 update. 2016 was probably a cyclical peak, but the current outlook is for a more sustained period comfortably in excess of previous peak margins of around 6% - whereas previous peaks were often followed by rapid downturns.

The most fundamental reason for improved airline industry profitability is better capacity utilisation. Load factor continues to drive upwards to new highs and both daily aircraft utilisation rates and the proportion of the world airline fleet in use have been improving for almost a decade. In addition, lower oil prices have boosted traffic growth and airline industry margins since 2013.

However, the airline industry cannot afford to be complacent. The International Monetary Fund, in the Jul-2017 update of its World Economic Outlook, noted that its GDP growth forecasts were still below pre-crisis averages and that medium term risks are "skewed to the downside". CAPA forecasts margins to ease back in 2017 and 2018 due to increases in oil prices and in the rate of fleet growth, although both factors are moderating relative to the Jan-2017 update.