Improving profitability in a dynamic

financial environment
Strong demand, efficiency initiatives, and falling oil prices in the fourth quarter helped
airlines nearly double industry net profit to US$20 billion in 2014 over 2013, while
achieving the highest industry net margin in more than three decades. Airline financials
are expected to continue on this trend as airlines continue to focus on reducing costs
and boosting revenues. Over the past decade, the airline industry has achieved seven
percent compound annual revenue growth, which is more than double that of global
economic growth. On the cost side, the sharp decline in oil prices is a significant nearterm tailwind, with fuel averaging 25 percent of airline cost structures. In addition, lower
oil prices provide a stimulant to consumer incomes, and thus create an opportunity to
open additional routes and frequencies that might not have been profitable at higher oil
price levels.
In addition to dealing with more volatile oil prices, airlines are also accounting for a
recent significant strengthening of the US dollar due to the varying economic prospects
previously discussed. In some regions, this currency volatility will temper the near-term
benefit of lower fuel prices as fuel, airplane financing, and other costs are often paid in
US dollars. Depending on an airline's network structure, large movements in foreign
exchange rates can also affect international volumes and revenues owing to changes in
traveler purchasing power. Although increased financial market volatility will be a
headwind for some airlines, many have hedging tactics in place to smooth the effects,
and the overall airline profit outlook remains strong owing to solid demand fundamentals
and lower fuel prices.