OREANDA-NEWS. Fitch Ratings says in a new report that EMEA airlines will continue to take a divergent path in 2016 as the gap widens between airlines that focus on business enhancement and those that focus on their viability.

We believe large network carriers that tackled the legacy issues ahead of their peers (eg British Airways) and the airlines with clear cost advantage (eg low cost carriers (LCCs), Turkish Airlines) will continue to outperform their rivals in 2016. Airlines that struggle with operational transformation (eg Air France-KLM, Alitalia), smaller flag carriers and charter airlines will be challenged to compete in an environment with strong peers.

Strong geographic diversification or focus on regions with firm growth will also be a key factor contributing to sustainability of performance in 2016 due to emerging market vulnerabilities.

The 2016 sector outlook for EMEA airlines remains stable due to expected steady growth, although to varying degrees, in air travel demand, including business travel, supported by a forecast pick-up in economic recovery. The stable outlook is also underpinned by disciplined capacity growth by European legacy air carriers. The operating environment will remain challenging due to fierce competition and continuous significant capacity expansion by Gulf airlines, LCCs and Turkish Airlines.

Fitch Ratings expect low fuel prices to remain a key driver for profitability in 2016. Most of EMEA airlines will fully benefit from a drop in oil prices in 2016 due to the winding down of fuel hedges. We expect that low fuel costs, along with FX hedging, will more than offset potential adverse exchange rate movements. Stronger dollar puts pressure on European airlines' operating profits as a large share of their operating costs (over 40%) is USD-denominated.