Chief executive Alan Joyce says Qantas gives itself time for the market to correct. Credit:Bloomberg "Labour costs are probably the biggest cost now for many airlines after fuel prices have fallen," IATA chief economist Brian Pearce said. Industry profits are expected to rise to $US39.4 billion this year, after having more than doubled to $US35.3 billion last year, despite predictions the average fare price will fall by 7 per cent as airlines add capacity. Margins rising "The fact we have had more than a year of above-trend growth must be partly because of the sharp plunge in oil prices," Association of Asia Pacific Airlines director general Andrew Herdman says.

"That means that fares have been falling as the benefits have been passed on to customers, but airline margins have improved." IATA forecasts global airlines will report $US39.4 billion of net profit this year. Credit:Robert Rough Operating profit margins for global airlines are expected to grow to 8.8 per cent this year, up from 3.5 per cent in 2013, but the outlook differs by region. IATA forecasts North American margins will rise to 15.4 per cent, while in Asia-Pacific they will average 8.4 per cent and in Africa will be negative 1.1 per cent. IATA has not released a 2017 forecast but aviation consultancy CAPA Centre for Aviation believes margins could peak this year. "In a cyclical industry, the good times do not last forever," CAPA says in a report.

"Margins will not continue to climb indefinitely, even if they can now reach higher peaks than previously. History suggests that peak margins are followed by a downturn and it will be a significant test for the airline industry's capacity and cost discipline to maintain margins in the region of 7 per cent or more." Achilles heel In a cyclical industry, the good times do not last forever. CAPA Centre for Aviation There was something of a consensus among the chief executives at the IATA annual meeting in Dublin last week that the oil price remains low in relative terms. Just how much the fuel price would have to creep back up to return to what is deemed "high" is less clear. "The industry can and will adapt to any fuel price," Dunkerley says. "What has proven in the past to be the Achilles heel of the industry is when we have dramatic and unexpected changes, either in demand or in fuel prices. So it really isn't just the level of fuel. It is more demand and how predictable is it and how does it roll out compared to today's projections."

During the global financial crisis the fuel price fell dramatically, but so too did air travel demand, particularly in the premium cabins that airlines rely on for an outsized proportion of revenue. The current fuel price drop for the most part hasn't harmed demand, although there are some exceptions. United Airlines' Houston hub, which is heavily reliant on the oil industry for traffic, has taken a hit. Gulf carriers such as Emirates have also experienced a decline in demand from lucrative business travel as a result of cost-cutting by oil and gas producers around the world. Qantas has hedged Qantas chief executive Alan Joyce says his airline's hedging program should be sufficient to mitigate against any sharp increases in the fuel price. As of February, Qantas had already hedged 77 per cent of its fuel for the 2017 financial year, protecting it against any spikes. "What determines our ability to cope with a low or medium or high oil price is supply and demand," he says. "When you have a functional market where everybody is acting commercially, you can cope with a high oil price. You can cope with the benefit of low oil prices as well. So what we do is we give ourselves time for the market to correct. We are very well hedged."

IATA's Pearce says the period of high fuel prices had forced airlines to improve their profitability through cost-cutting measures and investment in aircraft with a lower fuel burn in a way that had set it up well for the current period. "It should give confidence if we are entering a period where fuel prices are rising or the economy is slowing there is some scope there for airlines to report an improved financial performance," he says. On average, airlines reported a 9.9 per cent return on invested capital [ROIC] last year, beating their weighted average cost of capital for the first time in decades. The average ROIC is expected to rise to 10.4 per cent this year. Short haul to growth Herdman says during the period of high fuel prices, growth in the Asia-Pacific region had been concentrated on shorter routes.

"The lower fuel prices have made the growth a bit more balanced with long-haul routes, both leisure and business both benefiting," he says. "Obviously, long-haul leisure traffic is quite sensitive to fuel prices. It is a big component of the overall cost mix." Delta Air Lines chief executive Ed Bastian said there was no doubt capacity had grown over the past few years, much of it driven by low fuel prices. Some investors, particularly in North America, have expressed concern about falling airfares. However, Bastian says it would be short-sighted to focus exclusively on average fare prices. "Demand is very strong," he says. "Fuel is stable in that $US50 [a barrel] range. It is a good place for us, and presumably the industry, to be. We are making record margins." The lower fuel price hasn't stopped airlines from taking delivery of new aircraft, and there are incentives other than the oil price to keep modernising the fleet. Newer aircraft emit less carbon, less noise and are more cost competitive in a market where full-service carriers are competing increasingly against low-cost counterparts for traffic.

Challenge for manufacturers Airbus chief operating officer Tom Williams, however, says the fall in the oil price has made it more challenging to sell A320s with a more fuel-efficient new engine option than when the price was higher. "We were lucky to build a stronger order book at a time when fuel was running against the airlines' favour," he says. Swiss chief executive Thomas Kluhr, whose airline will be the first in the world to take delivery of the next-generation Bombardier CSeries aircraft, has expressed no regrets about the cost of building a more modern fleet. "With the CSeries we will be able to reduce our operating costs significantly," he says. "I think we will see the impact on our P&L [profit and loss statement] very quickly. The CSeries will lower carbon-specific emissions by up to 20 per cent and noise emissions by up to 50 per cent."

*The reporter travelled to Europe as a guest of Airbus, IATA and Star Alliance