Air Transport – 2026 outlook

THE International Air Transport Association’s (IATA) 2026 forecast projects continued growth for the airline industry, with record revenues around $1.053 trillion and a net profit of $41 billion (record high 3.9 per cent margin) despite ongoing supply chain issues – driven by strong passenger demand and record high load factors (83.8 per cent).

Passenger traffic is expected to rise to 5.2 billion, with the Asia-Pacific region leading the growth. A slower growth rate is forecasted for air cargo but it remains resilient due to e-commerce and time-sensitive needs. Industry challenges include delayed new aircraft deliveries flight crew shortages and airport infrastructure.

Total industry revenue is forecasted at US$1.053 trillion (4.5 per cent increase).

“That’s extremely welcome news considering the headwinds that the industry faces – rising costs from bottlenecks in the aerospace supply chain, geopolitical conflict, sluggish global trade, and growing regulatory burdens among them. Airlines have successfully built shock-absorbing resilience into their businesses that is delivering stable profitability,” said Willie Walsh, IATA Director General.

Profit per passenger carried is forecasted at approximately US$7.90 and industry operating profit, at US$72.8 billion.

Passengers carried is expected to increase to 5.2 billion (up 4.4 per cent) with traffic growth (RPK) at 4.9 per cent year-over-year, led by Asia-Pacific (7.3 per cent) and load factors are projected at 83.8 per cent.

Air Cargo Volumes is expected to increase to 71.6 million tonnes (up 2.4 per cent).

The industry continues to be challenged by supply chain issues such as a massive backlog of approximately 17,000 aircraft which has delayed delay fleet renewal, pushing the average aircraft age to over 15 years.

Labour costs are expected to be the largest single expense component at 28 per cent, driven by pilot shortages and wage inflation.

The future looks promising for aircraft manufacturers. Aircraft sales forecasts by Boeing, Airbus and Embraer point to sustained growth through the next decade, driven by recovering passenger traffic, emerging market demand, and fleet replacement needs, with both commercial and business jet sectors expecting increased deliveries and revenue.

However, supply chain issues continue to influence production, especially for newer models like the 737 Max, while fractional ownership and used aircraft markets also show strong demand.

All eyes on CAL

Locally, all eyes would be focused on state-owned Caribbean Airlines Ltd (CAL) to assess the impact of the airline’s new corporate governance structure. CAL has since terminated operations in its loss-making San Juan, Puerto Rico and British Virgin Islands routes.

CAL must better utilise the Return on Invested Capital (ROIC) metric to measure how effectively it can generate profits from all of its capital investments which will guide strategic decisions like fleet investment and operational efficiency, with the goal of exceeding their Weighted Average Cost of Capital (WACC) to create true shareholder value, improving asset utilisation, and managing high capital intensity.

By focusing on ROIC, airlines analyse capital allocation, improve profit margins (eg, ancillary revenue), and boost asset turnover (optimal fleet utilisation) to become more profitable and sustainable, moving beyond traditional metrics like EBITDA.

The airline industry is highly capital-intensive due to the significant investment required for aircraft and other support equipment.

ROIC is a particularly well-suited metric for this industry as it accounts for both operating revenues and the capital needed to generate them and most importantly, whether it is creating or destroying economic value.

A company creates value when its ROIC is greater than its WACC. Historically, many airlines have struggled to consistently achieve an ROIC above their cost of capital, indicating challenges in maintaining efficient capital allocation.

The average airline ROIC is approximately six per cent. The key uses of ROIC by airlines are with respect to:

* Capital Allocation: Decide where to invest capital (new planes, technology, routes) by comparing expected ROIC to the cost of that capital (WACC).

* Value Creation: Determine if the business generates returns above its cost of capital, signaling value creation for shareholders.

* Operational Efficiency: Improve ROIC by increasing profit margins (eg, ancillary fees) and asset turnover (eg, higher aircraft utilisation).

* Performance Benchmarking: Compare performance against competitors and the broader aviation value chain (lessors, MROs, airports).

* Financial Health Assessment: Understand profitability beyond simple net income, as it incorporates both operating performance and the capital base.

CAL can improve its ROIC by:

* Increasing Profitability: Develop new revenue streams (ancillary services) and reduce costs by eliminating wastages.

* Boosting Asset Turnover: Maximise usage of expensive assets like aircraft, potentially through better route planning or fleet utilization. CAL’s fleet utilization for both the ATR 72 and Boeing 737 MAX fleets are too low. Aircraft parked up on the ground do not earn revenue.

* Effectively Manage Capital Structure: Optimise the mix of debt and equity to reduce the WACC.

* Sharpening Capital Discipline: Make smarter investment decisions, ensuring new routes are operated on the basis oof robust market research and analysis.

ROIC is important for airlines because the airline makes massive capital investments in aircraft, making ROIC a crucial measure of how the aircraft generates fair returns.

The airline industry is high volatile both in revenue and expenditure making ROIC a vital indicator of long-term financial stability and sustainability.

Airlines struggle to create value due to intense competition, high fixed costs (labour, capital), volatile fuel prices, and significant external pressures (geopolitics, economy).

This means they often fail to earn their target WACC despite revenue recovery, leading to thin margins and destruction of shareholder value over cycles, with success depending on strong balance sheets, operational excellence, and strategic capital allocation.

Shareholder will increasingly use ROIC to gauge value creation, pushing airlines to focus on these metrics for better value adding performance.

Assess fleet of MAX 8 aircraft

CAL must also conduct a critical assessment of its fleet size to determine whether it has excess capacity. In February 2019, CAL signed dry leases with Air Lease Corporation for the delivery of four boeing 737 MAX 8 aircraft with a 12-year lease term.

Three Boeing 737 MAX deliveries are outstanding and there are serious doubts about CAL’s need for this additional capacity.

CAL has to develop strategies to deal with the additional competition from St Marteen-based Winair and Turks and Caicos-based InterCaribbean Airways on the intra-regional routes, both of which will soon commence operations into Trinidad and Tobago.

In a nutshell, the primary objective of any airline is to convert capital (aircraft and support systems), labour (employees) and fuel into profits. This objective can only be achieved through effective corporate governance.