Airline share prices down a quarter this year as financial markets get more bearish
Airline share prices (measured by the Bloomberg global index) fell a further 9% in August, and then a further 5% in early September. Financial markets have cut their valuations of airlines by around one-quarter since the start of the year;
In fact airlines did relatively well in August, as jet fuel prices edged lower. The FTSE Global All-Cap index was down 14% in August. But it is 10% down on the year. Financial markets still expect airline financial performance to be hit more than most sectors in the expected weaker economic environment.
Q2 results confirm first year-on-year fall in airline profits in 8 quarters with 60% decline
The airline industry typically earns 80% of its profits in Q2 and Q3, with seasonal losses in Q1 and a weaker Q4. So far 2011 Q2 net profits have totalled US$1.8 billion, which is almost 60% down on last year. During the first half of the year the industry has broken even, compared with net profits of around $3 billion during the same period last year. The deterioration in profits is widespread but European airlines improved against a volcanic ash impacted Q2 last year.
Jet fuel prices trending downwards on weaker growth but still 50% up on last year
Since peaking in April jet kerosene prices have been trending downwards, as gloom increases about the economic outlook. However, prices have been very volatile swinging +/-10% around that downward trend. Moreover, the decline is slow and jet fuel prices remain around 50% higher than they were a year ago;
Japan’s nuclear outages and the 1.5mb/d absence of Libyan oil could add to the economic pressures pulling oil prices down. However, most forecasts and the futures market still see oil prices remaining above $100/b next year.
Air travel was trending up at a 5-6% pace in July but air freight markets have stagnated
Despite the economic gloom air travel continued to expand close to its trend growth rate in July. The 5.9% year-on-year growth rate gives a fairly good indication of what we estimate the trend to be. However, like the cartoon character still running over the edge of a cliff, the support for air travel from world trade, business and consumer confidence has slumped;
Air freight volumes continued to stagnate. Late last year this was a loss of share. More recently overall world trade has stopped expanding.
Passenger and freight capacity expand unabated, so far, despite demand uncertainties
Airlines have been announcing cutbacks to capacity plans, but so far there is little sign of a slowdown. That said, the expansion in passenger capacity has been close to the trend growth in demand, following the moderate rebound from the February/March demand shocks. The situation is less well matched on air freight markets, where demand has stopped growing.
Freight capacity was up almost 4% in July, over a year earlier, whereas demand was -0.4%.
In-service fleet expanding seat numbers at 6-7% pace as new capacity is delivered
The main reason why freight capacity is expanding despite stagnant markets is the belly capacity attached to passenger aircraft. There has been some minor slowdown in the pace of new aircraft delivered, with 86 in July compared with more than 100 in the previous four months. Flows from the stored fleet are still boosting capacity. Overall a little more than 0.5% were added to seats. At an annualized rate of 6-7% this will imply that airlines may have to start cutting utilization rates in order to keep available capacity in line with slowing demand, which would not be good for profitability.
Load factors are still high in passenger markets but slipping in freight
After the slump earlier this year, following several adverse shocks to demand, load factors on passenger markets have recovered to 2010 highs. This will have helped profitability in Q2 and early Q3 by raising unit revenues;
On freight markets the situation is different. By historic standards load factors are reasonable. However, compared to early 2010 they are down 4-5 percentage points. This will have weakened unit revenues and supply-demand conditions, making it more difficult to recover high jet fuel prices.
Passenger yields back to pre-recession levels in US but international fares softer
Yields are falling on many freight markets, despite still high fuel prices, but on air travel markets airlines are seeing further improvement. US airlines have seen earlier capacity cuts, and subsequently high load factors, allow them to reflect high fuel costs in improved yields. Outside the US the improvement has not been so strong. This is partly why average fares are rising at a slower pace, but an additional factor is lengthening average hauls – so fares understate yield gains.
Year on Year Comparison July 2011 vs. July 2010 YTD 2011 vs. YTD 2010
RPK ASK PLF FTK AFTK FLF RPK ASK PLF FTK AFTK FLF
Africa 4.3% 2.3% 72.7% 7.4% 3.8% 25.5% -0.2% 2.5% 66.4% -2.5% 2.0% 26.1%
Asia/Pacific 4.7% 4.2% 80.2% -3.6% 0.0% 58.1% 4.5% 4.9% 76.6% -3.5% 1.9% 58.0%
Europe 8.5% 8.1% 84.1% -0.7% 4.0% 46.8% 10.1% 10.7% 77.2% 4.0% 8.3% 49.3%
Latin America 12.1% 7.7% 79.6% 8.2% 2.4% 42.2% 14.4% 9.6% 75.5% 7.3% 2.3% 41.4%
Middle East 9.8% 8.7% 81.5% 8.4% 12.1% 43.6% 8.3% 9.0% 75.4% 9.5% 13.5% 44.1%
North America 2.8% 2.7% 86.9% 1.0% 4.5% 33.0% 3.5% 4.1% 81.8% 2.5% 6.1% 34.5%
Total Market 5.9% 5.4% 83.1% -0.4% 3.6% 45.0% 6.4% 6.8% 77.7% 1.0% 5.6% 46.2%