Decline in Brent Crude Oil Prices Boosts Airline Sector Profits, IATA Report Indicates
According to IATA's semi-annual report on the airline industry, the global airline sector is poised for significant financial improvements due to a 20% drop in Brent crude oil prices over the past year. This price decline is attributed to the strengthening of the U.S. as a leading oil producer and changes in energy product demand, particularly in China, which have contributed to a market surplus. Despite global GDP remaining stable at 3.2%, the drop in oil prices is not linked to a weakening economic cycle.
For airlines, fuel costs, which account for 30% of total expenses, are expected to decrease if jet fuel prices fall alongside crude oil prices. This reduction in costs comes at a timely moment, as airlines are projected to achieve a net profit of $31.5 billion and a net profit margin of 3.3% in 2024, despite higher operating costs and wage increases. The continued low oil prices are expected to encourage further monetary policy easing, potentially weakening the U.S. dollar against most currencies, which could increase household spending power and support global growth.
The air cargo market has significantly boosted airline traffic in 2024 due to increasing demand driven by robust cross-border e-commerce and constraints in ocean shipping capacity. Global air cargo revenues have stopped declining and are currently approximately 30% above pre-pandemic levels. Cargo revenues are expected to maintain stability in 2025.
The sector is anticipated to surpass a crucial milestone in 2025, with revenues exceeding $1 trillion and a projected net profit of $36.6 billion, marking a record level with a net profit margin of 3.6%. However, ongoing supply chain issues are expected to affect the sector's potential growth.
The decline in oil prices presents a unique opportunity for countries to reform fossil fuel subsidies and invest in renewable energy production. The report suggests that global fossil fuel subsidies, which reached $7 trillion in 2022, over a one-year period could cover all capital investments needed for the airline industry's energy transition by 2050.
Despite capacity constraints, the airline sector experienced robust passenger traffic in 2024, breaking new records. While all regions surpassed pre-pandemic levels, passenger traffic growth is expected to continue at a slower pace. The sector's profitability in 2024 has been upwardly revised compared to the previous year, which was the fourth-best year in the last thirty years. The projected operating margin for 2024 is set at 6.4%, significantly above the 20-year median.
In conclusion, the low oil prices are expected to alleviate some financial pressures on airlines and potentially enable decarbonization investments. The sector's financial performance remains strong, with both passenger and cargo traffic contributing positively to the outlook.