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 are making strong gains on a flurry of positive news.
The investment in LATAM Airlines (LFL +23.9%) by Qatar Airways is having a ripple effect across other global carriers. Copa Holdings (CPA +7.9%), Avianca Holdings (AVH +8.1%), and Go Linhas (GOL +7.8%) are all solidly higher.
In the U.S., a stronger-than-anticipated report from United Continental (UAL +7.7%) on its key Q2 revenue metric is the highlight along with a sweeping upgrade from Deutsche Bank.
The investment firm raises United, American Airlines Group (AAL +8.6%), and Delta Air Lines (DAL +4.7%) to Buy from Hold.
"We are of the view that all known negatives (Brexit, tepid global economic growth, over-supplied markets, etc.) are more than fully discounted in the share prices which are, on average, trading at 6.4x our 2016 EPS estimates and 6.8x our 2017 EPS estimates," reads the note from DB.
Alaska Air Group (ALK +4.3%), JetBlue Airways (JBLU +4%), Southwest Airlines (LUV +3.4%), and Spirit Airlines (SAVE +3.3%) are all higher as well.
The U.S. Global Jets ETF (NYSEARCA:JETS) is up 3.86% on the day.
Qatar Airways announces that it will take a 10% stake in LATAM Airlines (NYSE:LFL) with an investment of $618M. Latam will increase its capital by issuing new stock at $10 a share which will clear a path for Qatar Airways to sweep in.
Qatar Airways is the state-owned carrier of the nation of Qatar.
The deal was announced at the Farnborough Air Show.
LATAM Airlines ADRs are inactive in the premarket session in the U.S.
In the rush to safety and away from cyclical stocks like airlines, Ryanar (RYAAY -5.1%), and the U.S. legacy carriers - American Airlines (AAL -10%), Delta (DAL -7.4%), and United (UAL -8.3%) - are most exposed to the Brexit, says Raymond James' Savanthi Syth.
The Latin American airlines are also negatively exposed to the stronger U.S. dollar - Copa (CPA -4%), Gol (GOL +6%), and Latam (LFL -6.1%).
For now, Allegiant (ALGT -1.5%), Spirit (SAVE -3.9%), and SkyWest (SKYW -5.1%) are best to hide out in, along with Alaska Air (ALK -4.3%) and Virgin America (VA -0.4%) to some extent.
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."