International Air Transport Association (IATA) Director General and CEO Tony Tyler looks on beneath a graphic at the IATA global media day on December 10, 2014 in Geneva. Image Credit: AFP

Geneva: A higher 2015 net profit forecast of $1.6 billion (Dh5.8 billion) for Middle East airlines will see their passenger capacity expand by 15.6 per cent next year (up from 11.4 per cent in 2014), according to a forecast by the International Air Transport Association (IATA).

The global aviation body revealed in its financial forecast on Wednesday in Geneva that the region’s carriers have one of the lowest break even load factors in the world — at 58.6 per cent.

Average yields are low but unit costs are even lower, partly driven by the strength of capacity growth, IATA said. Post-tax net profits for Middle East airlines are expected to grow to $1.6 billion in 2014 (up from $1.1 billion in 2014), representing a profit of $7.98 per passenger and a net profit margin of 2.5 per cent, as per IATA estimates. It said that lower oil prices and stronger worldwide GDP (gross domestic product) growth are the main drivers behind the improved profitability.

Asked what it means for the Middle East airlines, as the region’s economy is heavily dependent on oil, Brian Pearce, IATA’s Chief Economist said: “It means that the Middle East economies will have a lower oil revenues to fund their programmes but most of the region’s economies have got very substantial assets. So I don’t think there’s going to be any decline in spending. Clearly, there will be some moderate reduction in growth. But for the Gulf airlines, in particular — a large part of their business is taking long-haul travellers over their hubs. So prospects are positive next year for the Middle East airlines despite the fall in oil revenues for the economies.”

He added that the Middle East airlines should benefit from the lower oil prices. “Fall in prices, in revenues, will diminish some of the origin destination traffic to and from the Middle East. That will also restrict the profitability for the region’s carriers. But for a number of the large Gulf carriers, a lot of their business is actually serving long haul markets over the Middle East, and that won’t be affected,” Pearce explained.

While IATA forecasts an uptake in profit for the region’s carriers next year, it revised downwards its financial forecast for this year on Wednesday, to $1.1 billion, from the June prediction of $1.6 billion.

Explaining the reason behind, Pearce said it is owing to the falling oil revenues for the region. “So there are slightly weaker growth prospects there,” he said.

Adding to this, John Strickland, UK-based aviation analyst and Director of JLS Consulting, told Gulf News by email: “Middle East carriers are still growing rapidly adding aircraft and routes so increased profitability goes hand in hand with this given their success in adding traffic.”

Impact on hedging

With weakening oil prices, airlines are not expected to suddenly start hedging, according to Pearce. “Airlines have been burnt in the past from trying to guess movements in oil prices. They did lose a lot of money in hedging at the end of 2008. The industry has learnt a lot since. So while the airlines that have got significant hedges won’t so much be losing money, however, they won’t be seeing much benefit of lower spot jet fuel prices for some time, until those hedges run out,” he said. “Most airlines today try to manage their risk rather than trying to take a bet on future oil prices.”

Echoing similar view, Strickland said: “Reduced fuel prices are of course helpful but many airlines are locked into forward hedging contracts so may not see the benefits of this for some time.”

But while it’s expected to be good times for the aviation industry next year, with airlines making $25 billion, it is still just a “3.2 per cent” net profit margin, warned Tony Tyler, IATA’s Director General and CEO. “The industry story is largely positive, but there are a number of risks in today’s global environment — political unrest, conflicts, and some weak regional economies — among them. And a 3.2 per cent net profit margin does not leave much room for a deterioration in the external environment before profits are hit,” he pointed out.