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Airline profitability looks good despite slowing global economy

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Global airline profitability

According to the IATA (or International Air Transport Association), air passenger traffic is expected to grow at 7% in 2015, which exceeds the 5.5% trend of the past 20 years. Cargo traffic growth is also expected to increase from 4% to 4.5% in 2015. Aside from the rise in traffic, airlines should also benefit from cost efficiencies arising from lower crude oil prices. Crude oil prices fell below $50 per barrel as OPEC (or the Organization of Petroleum Exporting Countries) refused to cut production despite concerns of oversupply.

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In 2015, passenger and cargo yield should decrease by 2.5% and 3.3%, respectively. Yield has been decreasing since 2012. Moreover, due to the fall in crude prices, the percentage of fuel cost to total operating expense has decreased from 30% to 29% in 2014 and is expected to decrease further to 26% in 2015.

Profits for North American airlines

North American airlines have been most profitable, recording operating and net profit margins in 2014 of 7.6% and 11.9%, respectively—the highest among all other regions. Asia-Pacific has been the second most profitable region with an operating profit of 7.7%, followed by Latin America, the Middle East, Europe, and Africa.

Top airlines in North America such as Delta (DAL), United (UAL), American (AAL), Southwest (LUV), and JetBlue (JBLU) showed significant improvements in efficiency and profitability in 2014. The improved performance of these stocks results in higher returns to holders of ETFs such as the SPDR S&P Transportation Index (XTN) and the iShares Transportation Average ETF (IYT) that have major holdings in airline stocks.

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