IATA forecasts record profit of $35.6B this year for the airline industry, a downward revision from a prior prediction of $39.4B.
A profit margin of 5.1% is anticipated for airlines in 2016.
Looking ahead, IATA warns on the impact of higher oil prices next year. Jet fuel prices are expected to increase to $64.90/bbl from $52.10/bbl this year. Traffic is seen slowing to 5.1% growth and load factor is seen slipping below 80%.
IATA says the strongest region next year will be North America with net post-tax profits of $18.1B.
Wolfe Research analyst Hunter Keay isn't worried that higher oil prices in the future will be a negative for airline companies.
He thinks the impact of capacity discipline is more important than the bottom line of a lower fuel spend. Keay's analysis is below.
"Multiples drive about 70 percent of the movement in stock prices. And multiples are dictated by the perception of pricing power, and pricing power is dictated by capacity control. Excess capacity drives pricing down... It’s not about profits, it’s about how they make the profits, about pricing power. Capacity discipline and fundamental behaviors are far more important than the amount of money they earn."
Oil prices are up 0.7% on the day, but have dropped sharply over the last month.
Don't count out airline stocks as growth stocks just yet. A forecast from the IATA calls for a doubling of the number of global passengers to 7.2B by 2035.
The CAGR (compound average growth rate) on the outlook works out to 3.7%, with steady growth across regions (China +4.7% CAGR, North America +2.8%, Europe +2.5%, Latin America +3.8%, Middle East +4.8%, Africa +5.1%).
Airline stocks begin the week with a sharp downward movement.
The terror attack in Orlando is the main driver of the selling pressure on the sector, although a bombing in the Shanghai airport yesterday is also impacting Chinese airlines China Eastern Air (CEA -2.1%) and China Southern Airlines (ZNH -5.3%).
Decliners include Hawaiian Holdings (HA -3.1%), American Airlines Group (AAL -2.9%), Spirit Airlines (SAVE -3.8%), Delta Air Lines (DAL -2.7%), JetBlue (JBLU -2.1%), Southwest Airlines (LUV -2.5%), SkyWest (SKYW -1.8%), United Continental (UAL -2.6%), Alaska Air Group (ALK -2.3%), and Allegiant Travel (ALGT -1.5%).
The U.S. Global Jets ETF (NYSEARCA:JETS) is down 2.72% on the day.
Global demand for air travel may be "shifting down a gear," according to global aviation group IATA, which signaled a cautious outlook for passenger traffic after growth in April rose just 4.6% on year - the lowest pace since January 2015.
While some of the slowdown could be attributed to the Brussels terror attacks, there are still signs that underlying traffic growth could be decelerating, Director General Tony Tyler said. "The stimulus from lower oil prices appears to be tapering off. And the global economic situation is subdued."
Aer Lingus (OTC:AIRXY) said it's using Dublin as a gateway to connect the U.S. and Europe.
Ryanair's (NASDAQ:RYAAY) aggressive pricing is identified as a major factor in Europe that's unlikely to reverse anytime soon.
A major theme has been industry consolidation with several execs pointing to more M&A opportunities in Europe and Asia. Foreign ownership of U.S. airlines is seen as opening up in the future, with today's joint ventures called a "precursor" to that evolution.
The net profit forecast for 2015 is revised upward to $33B from $29.3B. A net profit margin of 4.6% is expected.
The outlook for 2016 from IATA is for total profits of $36.3B and a net profit margin of 5.1%.
2016 profit forecast by region: North America $19.2B, Europe $8.5B, Asia-Pacific $6.6B, Middle East $1.4B, Latin America $400M, Africa -$100M.
Strong passenger demand and lower oil prices are two drivers of the profit growth, although profit is impacted significantly in many markets due to the high level of the U.S. dollar, notes the industry-watching group.