Saturday 18 January 2020

Global airline shares rebound strongly in June

GENEVA, July 21, 2019

Global airline share prices recovered in June, increasing by 6 per cent following the sharp fall (down 10.0 per cent) in May.

Since the beginning of the year, the global airline share prices have risen by 2.3 per cent, lagging the wider global equity markets by some margin (up 14.7 per cent), according to the Airlines Financial Monitor report released by the International Air Transport Association (Iata).

In June, the North American airline index was the best performer among all regions. Strong passenger demand and higher profit expectations were the main catalysts behind this outperformance despite the ongoing concerns of the extension of the Max 737 groundings.

On the other hand, European airlines continued to underperform the global equity index despite robust traffic volumes. Similarly, downward pressure on passenger yields together with weaker cargo demand is impacting both profitability and the equity market
performance for Asia Pacific airlines.

Q2 2019 began with better than expected profit figures and raised the prospects for earnings outlook in North America. On the other hand, the final sample of 81 airlines for Q1 2019 confirms the industry-wide decline in profitability, with clear differences at regional level.

While profitability declined in Europe and Latin America with falling unit revenues and rising costs vs a year ago, North America (excluding the one-off gains in Q1 2018) and Asia-Pacific regions recorded an increase in profitability. The EBIT margin improved in Asia Pacific amidst growing revenues and relatively stable operating costs. In North America the EBIT margin remained almost unchanged (6.5 per cent) as the growth in revenues was in parallel to the rise in operating costs.

The final Q1 2019 data for the sample of 55 airlines showed improvement in industry-wide net cash flow and free cash flow (FCF) compared with a year ago.

Industry-wide free cash flow (FCF) improved from 4.5 per cent of revenues in Q1 2018 to 5.9 per cent in Q1 2019. This result was driven by the increase in net cash flow from operations, which more than offset a modest lift in capital expenditures.

The industry-wide outcome continued to hide differences in the performance at the regional level. The biggest turnaround in FCF was achieved in Asia Pacific with higher cash flow operations driven by improved profitability and lower investment. In North America, FCF generation increased with the support of solid profit and seasonal cash build-up despite higher capital spending.

Fuel costs

Following a temporary fall with the signs of slower economic growth at the beginning of June, Brent crude oil and jet fuel prices subsequently recovered amid concerns related to tighter oil supply conditions arising from elevated geopolitical risks.

At the time of writing this report, the price of Brent crude oil hovers around $65/bbl and the jet fuel
reached $80/bbl, 8 per cent higher compared to the prior month.

Even though oil prices fluctuate with supply risks, lower global economic growth is expected to put downward pressure on oil demand.

Yields and premium revenues

Global passenger yields (excluding surcharges and the revenue that airlines generate from ancillary services) rose in April for the first time in the last four months with the support of economy class yields.  As airlines were able to reflect some cost increases on the back of relatively stable passenger demand, economy class yields lifted month-on-month by 1.3 per cent, which is the highest monthly increase seen since February 2018.

On the other hand, the less price sensitive premium cabin yields fell by 1.7 per cent compared to the prior month.

Global average passenger yields in US dollars terms were still 4.3 per cent below their level compared to a year ago. As global economic growth prospects are being revised down, industry-wide passenger yields could be expected to remain under pressure.

Premium-class passengers accounted for 4.0 per cent of total international origin-destination traffic in the first four months of 2019, slightly below the 4.1 per cent result of a year ago. On the other hand, revenues from premium-class passengers improved by 0.3 percentage points to 27.4 per cent of total international passenger revenues.

Premium passenger traffic growth has outperformed its economy counterparts only in the North Atlantic and Asia-Southwest Pacific regions. Nevertheless, in the North Atlantic, which is the largest premium market in terms of revenue, premium class fare growth lagged its economy counterpart. Within Asia was the only one of the key regions where both premium class passenger and fare growth were below economy class.


In seasonally adjusted (SA) terms, growth in industrywide revenue passenger kilometres (RPKs) continued to steadily rise in May. However, the underlying trend rate of growth has eased since mid-2018. The latest SA data is consistent with an annualized RPK growth rate of 4.0-
5.0 per cent, compared with a pace of around 7.0 per cent in the early 2018.

The SA air freight tonne kilometres (FTKs) increased modestly for the third consecutive month in May, which might be considered as a tentative signal of turning from the low point of the cycle. However, the recovery remains fragile, partly due to the ongoing US-China trade dispute. Hence, it is early to conclude that the modest increases in the recent months represent a shift from the downward trend.


In seasonally adjusted terms, the level of available seat kilometres (ASKs) remained stable in May in response to softened RPK growth. In seasonally adjusted terms, annualised pace of passenger capacity growth over the past six months was down to almost zero for the first time since May 2010, compared to the 4-5 per cent range observed in the second half of 2018.

Airlines have also adapted to the period of weakness in freight demand through reducing capacity. In seasonally adjusted terms, the annualized pace of freight capacity growth over the past six months is down to 0.6 per cent, compared to 3.2 per cent over the second half of 2018.

The number of available seats in the global airline fleet continued to increase for the third consecutive month (0.9 per cent month on month) in June following the abrupt decrease stemming from 737 Max groundings in March 2019. Annual growth remains restrained at 3.2 per cent compared to 5.8 per cent in June 2018.

A total of 114 aircraft were delivered in the month compared to 181 delivered in the same period a year ago. 170 aircraft returned to the fleet from storage while 57 aircraft left the fleet. Hence, net storage activity made a positive contribution to fleet growth this month.

All in all, the number of aircraft delivered in the first half of 2019 was lower than that seen in the same period last year (634 vs 771). Note that on average 748 aircraft were delivered in the first half of the year between 2013-2018.

In seasonally adjusted terms, both passenger and freight load factors rose in May as airlines adjust their capacity in response to a slowing growth trend. The industry-wide seasonally adjusted passenger load factor rose to a record high at 82.7 per cent.

The freight load factor (FLF) for the industry posted a modest monthly increase in May following the
temporary decline in April. However, the seasonally adjusted FLF for the industry is currently 2.5 percentage points lower than the level of a year ago as the reduction in freight demand has been faster than the pace of capacity adjustment. - TradeArabia News Service


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