2016 to Focus on Safety, Profitability, New Roll-Out

IATA has forecast that airlines are expected to collectively generate $36.3 billion in profits and return their cost of capital in 2016 amid strong demand for passenger travel, lower fuel prices and operational improvements

Issue: 1 / 2016By R. ChandrakanthPhoto(s): By SP Guide Pubns, Wikipedia

On January 20, 2016, the media reported that a Sikh passenger and his three other Muslim friends were offloaded by the crew of an American Airlines flight from Toronto to New York because their appearance made the captain uneasy. The Sikh has filed a $9-million lawsuit against the airline. This appears to be more a case of racial discrimination than security concerns. After having gone through the security drill, subjecting them to such humiliation is a matter which needs understanding of the various community denominations that exist in different parts of the world.

And then we have the 2015 case of a Germanwings pilot who deliberately crashed the A320-200 flight 4U9525 near Barcelonnette, France, killing all six crew members and 144 passengers on board. Then there are the two 2014 disturbing incidents of Malaysian Airlines – first the MH370 which mysteriously disappeared with 12 crew members and 227 passengers and then MH17 which was shot down near the Ukraine-Russia border killing 283 passengers and 15 crew onboard.

These are four different scenarios and there are many more different ways security issues crop up, besides accidents that have happened due to technical snag or pilot error. The question here is how does one factor in security or safety of an airplane and its passengers in such inexplicable situations. These are totally extraneous scenarios which are beyond the standard operating procedures.

Safety Top Priority

Having said that, the need for security and safety of an airplane and its passengers is gaining top priority and the International Air Transport Association (IATA) has listed it so, considering that approximately 1,00,000 flights take to the sky and land everyday. IATA has said that safely connecting people and businesses continues to be its top priority and that it is continuously working with airlines and industry partners in raising standards and implementing best practices.

Airline safety will continue to be on top of 2016 agenda, going forward. IATA has a six-point safety strategy. It has been established in close cooperation with the member airlines and strategic partners through the IATA Safety Group and the Operations Committee. The six key points are: (1) reducing operational risk (loss of control in flight; controlled flight into terrain; runway safety; flight management system; cabin safety and fatigue); (2) enhancing quality and compliance with ICAO safety management system framework requirements; (3) improved aviation infrastructure (runway and ramp infrastructure, implementation of approaches with vertical guidance, air navigation harmonisation and standardisation); (4) support consistent implementation of safety management system; support effective recruitment and training; (5) identify and address emerging safety issues (safe integration of remotely piloted aircraft systems or UAVs, lithium batteries, GNSS signal interference, laser attacks, and (6) global aviation data management (GADM) programme which provides members with a wealth of information and acts as a gateway to the multiple sources and areas of aircraft operations.

IATA has said that safely connecting people and businesses continues to be its top priority and that it is continuously working with airlines and industry partners in raising sta ndards and implementing best practices.

Qantas Safest Airline

Airline safety depends on several connected and unconnected factors and an airline should be ever alert to ensure that its assets and passengers are well protected. AirlineRatings.com the world’s only safety and product rating website, has announced its top 20 safest airlines for 2016. Top of the list for the third year is Australia’s Qantas which has a fatality free record in the jet era. Making up the remainder of the top 20 in alphabetical order are: Air New Zealand, Alaska Airlines, All Nippon Airlines, American Airlines, Cathay Pacific Airways, Emirates, Etihad Airways, EVA Air, Finnair, Hawaiian Airlines, Japan Airlines, KLM, Lufthansa, Scandinavian Airline System, Singapore Airlines, Swiss, United Airlines, Virgin Atlantic and Virgin Australia. Going forward, safety will be a top priority and such ratings help the airline industry.

Fuel Prices and Profitability

IATA has in its 2016 forecast said that airlines round the world are expected to collectively generate $36.3 billion in profits and return their cost of capital in 2016 amid strong demand for passenger travel, lower fuel prices and operational improvements. This represented a net profit margin of 5.1 per cent and an increase from the $33.1 billion profit airlines are expected to post in 2015.

IATA Director General Tony Tyler said the airlines were expected to achieve a return on capital of 8.3 per cent in 2015 and 8.6 per cent in 2016. The cost of capital is about seven per cent. “The industry is surpassing an important benchmark. So we are finally — after years of destroying capital — delivering the minimal level of profitability that an investor would expect.

“With average per passenger profit of less than $10, I would say that the profitability is still better described as fragile rather than sustainable. And, as I well know from decades in the industry, we should enjoy the benign trading conditions while they last but not get used to them.”

Moody’s Investors Service has made similar predictions stating that 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. Moody’s said it expected the airline industry’s operating margins to top 10 per cent 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.” Vice President – Senior Credit Officer Jonathan Root said growing passenger demand, especially in the Middle East, Asia and Latin America would help boost margins for the overall airline industry.

Furthermore, Moody’s does not expect fuel price drops to lead to a more meaningful expansion of industry operating margins. “Higher labour costs, continuing revenue pressures, fuel hedging and a potentially stronger US dollar will mitigate the benefits of the price decline.

Airlines in India Bounce Back

In India, fuel accounts for nearly 40 per cent of the operating costs and the crash of oil prices has helped airlines get out of financial mess. National carrier Air India is likely to turn profitable for the first time in over four years, helped primarily by the fall in fuel prices and increased capacity from Dreamliner operations, among others. Air India is expected to post an operating profit of about Rs. 6 crore in the current fiscal year.

Moody’s does not expect fuel price drops to lead to a more meaningful expansion of industry operati ng margins. “Higher labour costs, continuing revenue pressures, fuel hedging and a potentially stronger US dollar will mitigate the benefits of the price decline”.

SpiceJet, India’s second largest, low-fare airline, has come out of the red. This is the third straight profitable quarter for SpiceJet, which saw a change of ownership after the airline landed in financial trouble. The fiscal second quarter is traditionally a lean period for airlines because of the monsoon. The third quarter is the strongest due of festivals and holidays. SpiceJet reported a net profit of Rs. 238.40 crore for Q3 FY16, an improvement of Rs. 513.42 crore over the net loss of Rs. 275.03 crore for the same quarter last year. This is the highest quarterly net profit the airline has reported in its history. SpiceJet has reported an operational revenue of Rs. 1,459.95 crore in the quarter demonstrating a growth of 11 per cent over same quarter last year.

New Aircraft Developments

The world’s biggest plane is set to take off early this year in its groundbreaking first test flight. The aircraft, named the Stratolaunch Carrier, is currently under construction at Mojave Air and Spaceport in California, and will eventually have a wingspan of 385 feet (117 metres).

The craft is the brainchild of Microsoft co-founder Paul Allen and Burt Rutan, founder of Scaled Composites—the same company blamed by Virgin for the SpaceShipTwo crash in October. The plane will climb to 30,000 feet and launch a rocket at high altitude, avoiding the huge fuel costs of launching from Earth.

C919 Maiden Sortie

Comac has set a 2016 timeline for its C919 narrowbody to take its first flight. Chairman Jin Zhuanglong said that following the roll-out, the C919 will start tests on its avionics, flight control and hydraulics systems. The first flight is expected in 2016, after making adjustments to the airborne system and completing the installation of flight test equipment.

Embraer E2 Roll Out

Embraer will roll out the first jet of the second generation of the E-Jets family of commercial aircraft, the E-Jets E2, on February 25, 2016. The ceremony will take place at Embraer headquarters, in São José dos Campos, and the model to be presented is the E190-E2, which has its first flight scheduled for the second half of 2016 and entry into service in 2018. The other two aircraft of the second-generation, the E195-E2 and E175-E2, are scheduled to enter service in 2019 and 2020, respectively.

The year looks promising for the airline industry. With airlines coming out of the red, they can now breathe easy and strategise for the future as fuel price volatility can never be predicted.