Global airline profits will rise on lower fuel prices in 2016, Moody's says

Global airline industry profits will remain strong amid lower fuel prices in 2016, supporting a positive outlook on the industry for the next 12 to 18 months, according to Moody’s.

In a note to clients, the ratings agency opined that the airline industry's operating margin could top 10% this year. US carriers will continue to maintain the highest operating margins, owing partly to a mature domestic market and their modest exposure to weaker foreign currencies, Moody’s added.

"Growing passenger demand, especially in the Middle East, Asia and Latin America, will help boost margins for the overall airline industry. Demand is rising due to modest but steady global economic growth, higher disposable incomes amid lower petroleum prices, attractive fares, and the growth of air travel in the developing world," said Jonathan Root, Vice President and Senior Credit Officer at Moody's.

However, capacity additions exceeding demand growth, the strong dollar and lower fuel surcharges will constrain yield growth. Furthermore, Moody's does not expect fuel price drops to lead to a more meaningful expansion of industry operating margins. Higher labor costs, continuing revenue pressures, fuel hedging, and a potentially stronger US dollar will mitigate the benefits of the price decline.

"Hedging fuel price risk, extensively with collars and call spreads that leave airlines exposed to potential declines in prices, limits the benefits from cheaper fuel prices," Root concluded.