Global airline share prices made strong gains in May, rising 7.8 per cent in the month, to be more than 20 per cent higher over the past year.

Airline shares have now outperformed the global equity index in year-on-year terms, for the first time in around 18 months.
 
Airline shares increased in all three regions this month, but the gain was driven by a strong surge in the European index which rose 14.3 per cent.

North American shares also performed strongly, gaining more than 8% in May, to be almost 40 per cent higher over the past year.

Asia-Pacific airline shares gained 3.3 per cent, to be up a more modest 4.4 per cent on their level of a year ago.

Financial results

Airline financial results from Q1 2017 highlight the extent that profit margins were squeezed by higher costs and weak yields at the start of this year.

The earnings before interest and taxes (EBIT) margin in the sample of 49 airlines in Q1 2017 is an even 4.0 per cent, less than half the 8.3 per cent outcome for the same period in 2016.

The EBIT margin is lower across all regions compared with results from a year ago.

Net post tax profits are also lower, at $1.2 billion in aggregate, down from $3.2 billion.

Free cash flow dips in Q1 2017, despite a lower capex spend

The initial data available for Q1 2017 points to industry-wide free cash flow (FCF) easing to 2.4 per cent of revenue, from 3.2 per cent in Q1 2016.

The first quarter is a seasonally soft period for net cash flow, and the fall in FCF comes despite a lower capex spend, at 13.4 per cent of revenue vs 17.1 per cent a year ago.

Bearing in mind the relatively small sample sizes at the regional level at this early stage, free cash flow was negative in both North America and the Asia-Pacific in Q1 but actually increased solidly, to a robust 8.8 per cent of revenue, in Europe.

Fuel costs

The sharp fall in oil prices during the second half of April extended into March, with further declines over the first week or so of the month. Oil prices reached their lowest level in around five months.

Notwithstanding some subsequent recovery – following agreement by the major oil producers to extend production cuts for a further six months – oil prices for the month overall were almost 4 per cent lower than those of April. The picture is a similar one for jet fuel prices, although the monthly decline is larger at 5.6 per cent.

Futures markets largely shrugged off the spot volatility, continuing to expect only a modest increase in oil prices from current levels over the medium-term.


Yields and premium revenues

The downward trend in passenger yields appears to have turned in recent months. However, yields are still 3-5 per cent lower compared to their year-ago levels in both the headline (US$) measure and when measured in constant exchange rate terms.

This shift in trend is consistent with the increases observed in some key input costs, notably fuel prices and – in a growing number of countries – labour costs.

Some of the segment level data available for April suggests that passenger yields have been narrowing and, in some cases, have actually risen (in US$-terms at least) over the past 12 months.

Premium O-D international journeys accounted for 5.5 per cent of the global total over the first three months of 2017, down slightly from 5.6 per cent in Q1 2016.

Annual growth in premium passenger traffic has been stronger than its economy counterpart in most of the main premium markets so far this year, particularly for travel Within Asia and across the Pacific.

Overall, premium airfares have generally held up better than those in the economy cabin. In only two of the main premium markets (Europe-Asia and North and Mid Pacific) are premium fares underperforming economy. Premium traffic accounted for 27.2 per cent of total passenger revenues in Q1 2017, up from 26.4 per cent a year ago.

Demand

Global passenger volumes grew by 10.7 per cent in year-on-year terms in April – the fastest pace in six years.

In seasonally-adjusted terms, RPKs have risen at an annualized pace of nearly 10 per cent over the past six months or so, driven by a broad-based pick-up in global economic conditions and lower airfares.

Global freight volumes grew by 8.5 per cent year-on-year in April, easing somewhat from the 13.4 per cent pace recorded in March. That said, in seasonally adjusted terms the upwards trend in FTKs has slowed over recent months, despite underlying conditions remaining broadly favourable.

Capacity

Industry-wide available seat kilometres (ASKs) increased by 6.9 per cent year-on-year in April in seasonally-adjusted terms. Notwithstanding this robust performance, industry supply continues to lag the pace of growth in demand.

Meanwhile, available freight tonne kilometres (AFTKs) grew by a more modest 4.0 per cent year-on year (seasonally-adjusted) in April. After lagging demand in H2 2016, capacity has now broadly trended in line with demand since around the end of last year.

The number of available seats in the global airline fleet increased by 0.7 per cent month-on-month in April, and by 6.4 per cent compared with the level of a year ago.

A total of 111 new aircraft were delivered in April, down somewhat from 125 in April 2016. However, the key difference on this occasion relates to storage activity. A (net) 39 aircraft were taken out of storage this month and placed into service, against 61 being taken out of service and placed into storage a year ago.

The seasonally-adjusted passenger load factor posted a new all-time record high in April, as the pace of capacity growth over recent months has been unable to keep pace with the environment of ongoing strong demand.

The industry-wide freight load factor (again, in seasonally-adjusted terms) ticked down slightly in April. However, the bigger picture is that it is not far from its highest level since early 2015 and remains more than two percentage points higher than its level of a year ago. - TradeArabia News Service