The Industry Environment

Emerging economies driving the industry

During the year 2016, world economic growth was slightly lower that in 2015 due to slower growth in advanced economies, mainly the United States and, to a lesser extent, the United Kingdom and the euro zone as a result of the uncertainty generated by the Brexit, while emerging economies remain with growths similar to those of the previous year. On the other hand, the global airline industry benefited from the fall in the fuel prices, which in January 2016 reached their lowest levels since 2003, and whose average stood at US$ 53.1/barrel (Jet Fuel), a 16.8% lower than the average price for the year 2015.

In general, the year 2016 was a good year for the aeronautic industry, which is reflected in its 6.3% growth in passenger traffic during the period – surpassing the average growth of the last 10 years – while achieving historically high levels of occupancy factor, with 80.5% in 2016, which implied improvements in operational income and global industry profits, estimated at $35.6 billion (vs $35.3 billion in 2015).

At the domestic and regional level, we continue to see a trend toward low-cost models, where one can see a greater segmentation of passengers according to their travel needs. Additionally, the trend toward deepening alliances and cooperation agreements between airlines around the world continues; thus enhancing passenger connectivity.

With regard to the different geographical markets, the airlines of North America are those that had the best results in terms of profits, as a result of low fuel prices, added to a strong domestic demand and the operator’s capacity discipline; all of which drove their occupation factors to the highest levels in the industry; with 83.5%.

In Europe, the growth of the airline industry was hit by different terrorist attacks in the region. On the other hand, there was greater competitive pressure from regional and international airlines. Despite this, however, starting in the second half of the year, conditions improved along with better macroeconomic expectations and increases in consumer confidence levels; all of which led European airlines to secure profits similar to those of 2015.

The Asia-Pacific region was the second region with the highest growth in terms of passenger traffic (after the Middle East), driven primarily by a higher regional traffic. The Asian airlines obtained profits lower than those of the year 2015, mainly because of the weakness of the cargo business, which began to stabilize during the second half of the year.

In Latin America, during 2016, the largest economies of the region (Brazil and Argentina) showed contractions in their respective economies, which added to the weakness of other local markets and to the devaluation of the currencies of the region that impacted airline industry results during the year. On the other hand, starting on the second semester, a change of that trend began to be noticeable, with improvements in the results of the regional airlines, hand-in-hand with better macroeconomic perspectives and more appreciated currencies. Latin America was the most disciplined region in terms of capacity increase (+ 1.9% YoY), mainly due to adjustments made in Brazil’s domestic and international markets. As a consequence of this, the airline industry obtained profits of $0.3 billion, as compared to a loss of $1.7 billion in 2015.

As for the cargo business, traffic increased by 3.8%, higher than the 2.2% growth in 2015. From the second half of the year; however, the cargo business began to see an increase in demand, attributed mainly to the regions of Europe (+ 7.6%) and the Middle East (+ 6.9%) On the other hand, the cargo business in Latin America was the worst performer, showing a drop in traffic of 4.2% as a result of lower imports from Brazil.

Given the current structure of the industry and the prospects of higher fuel prices, the International Air transport Association (IATA) expects a decline in profits for the global airline industry during the year 2017, reaching US$ 28.9 billion and an operating margin of 6.6% (- 1.7 percentage points with respect to 2016). This drop would be explained by an increase in unit costs, in part by fuel prices higher than expected, and by demand growth that will fail to absorb the supply, pushing occupancy factors down. It is important to highlight that the drivers of global traffic growth in 2017 will continue to be the emerging economies, mainly those of the Asia-Pacific, Middle East and Latin American regions. This trend is likely to continue for the next 20 years, due to economic growth projections in these regions and the low penetration of air transport in their countries.