Wednesday, August 16, 2017

Global airline share prices see first fall since March

Global airline share prices fell by 3.2 per cent in July – the first monthly fall since March. Having risen by nearly 15 per cent over the previous three months, and having outperformed the global equity index over the past year, the monthly decline in airline shares is likely to reflect a degree of profit taking by investors.

According to the Airlines Financial Monitor report released by the International Air Transport Association (Iata), the European and Asia Pacific share price indices both registered modest declines in July (<1 per cent), but the biggest fall was seen in the North America index (-7.6 per cent). The latter has now risen by less than 2 per cent since the start of 2017, although given that mid-2016 marked the peak of investor concerns about pressure on unit revenues, the index still stands nearly 36 per cent higher than a year ago.

The initial airline financial results from Q2 2017 have been robust, and provide the clearest sign that the squeeze on airline profit margins – from weak yields and higher costs – peaked in the first quarter.

Indeed, whereas the industry-wide EBIT margin fell in year-on-year terms in Q1 2017, our small sample of 24 airlines indicates that the margin increased to 13.2 per cent in Q2 2017, up from 12.7 per cent in Q2 2016.

Indeed, whereas the industry-wide EBIT margin fell in year-on-year terms in Q1 2017, our small sample of 24 airlines indicates that the margin increased to 13.2 per cent in Q2 2017, up from 12.7 per cent in Q2 2016.

The latest data from our sample of 19 airlines show that industry-wide free cash flow (FCF) fell to 3.6 per cent of revenues in Q2 2017, down from 7.7 per cent in the same period of 2016.

The fall in FCF was driven by a modest decline in net cash flow from operations, to 17.3 per cent of revenues in the quarter from nearly 21 per cent a year ago.

Capital expenditure in our sample actually increased in year-on-year terms in Q2, to a robust 13.6 per cent of revenues, driven by higher capex in Asia Pacific.

Fuel costs

Brent oil prices rose back above $50/bbl during July and ended the month nearly 10 per cent higher than they were at the end of June.

The price of oil has been on a downward trend since the start of 2017, mainly reflecting the resilience of US shale production. However, the increase in July came alongside declines in US oil inventories as well as signs that OPEC and other large oil producers will continue, and possibly
extend, their efforts to constrict oil supply. The recent weakness of the US dollar may also be starting to translate into upward pressure on prices.

The futures market remains consistent with just a modest increase in prices over the medium-term.

Yields and premium revenues

Having shown signs of bottoming out in late-2016, the latest monthly data indicate that passenger yields have started to trend upwards modestly. When measured in constant exchange rate terms, passenger yields in May were broadly unchanged from their year-ago level – the strongest year-on-year growth rate in more than four years.

The turnaround in the long-standing downward yield trend reflects a combination of factors, including a pick-up in global economic activity, as well as upward pressure on some key input costs, including labour, in a number of countries.

All told, signs that passenger yields are improving are helping to underpin investors’ confidence about airline financial performance over the year ahead.

There has been a wide spread in premium performance by market in 2017 so far. Premium demand growth has been stronger than economy in a number of markets, particularly across the Pacific and Within Asia. This ties in with the recent improvement in global trade conditions, which tends to correlate well with premium travel demand. On the other hand, premium demand, has been relatively weaker in other cases, notably between Europe and the Middle East.

There has also been a spread in airfare performance too: premium airfares have held up better than those in the economy cabin in a number of cases – notably the North Atlantic – but have lagged in others (eg, Europe-Asia).


Global passenger volumes grew by 7.9 per cent year-on-year in H1 2017 – the fastest growth seen in the first half of a year since 2005.

The strong start to the year for passenger demand has been driven by a brighter global economic backdrop and stimulus from lower airfares. That said, the seasonally-adjusted (SA) trend has moderated over recent months, in line with a softening in the exceptionally supportive demand conditions.

Meanwhile, global freight volumes grew by 10.4 per cent year-on-year in H1 2017 – the fastest pace for the period since 2010. However, industry drivers indicate that the best of the cyclical growth upturn may have passed.


Industry-wide available seat kilometres (ASKs) increased by 6.1% year-on-year in H1. In SA terms, ASKs and RPKs have trended upwards at broadly similar annualized growth rates over the past three months or so.

Available freight tonne kilometres (AFTKs) grew by 3.6 per cent in H1 2017 compared to the same period a year ago. The SA trend has strengthened: AFTKs have been trending upwards at an annualised rate of around 9 per cent over the past three months. However, this has still lagged behind the strong upward trend in FTKs over the same period.

The number of available seats in the global airline fleet increased by 0.9 per cent month-on-month in June. All told, the number of seats in service in June was 6.0 per cent higher than the same month a year ago.

A total of 154 new aircraft were delivered in June, down from 161 in June 2016. Twenty-five fewer aircraft were delivered in the first half of 2017 compared to the same period in 2016 (751 versus 776).

Storage activity made the biggest net change to the fleet size for at least three years in June. A total of 142 aircraft re-entered service from storage – broadly unchanged from the case in June 2016. However, just 78 aircraft were taken from service and put into storage, compared to 166 in June 2016.

The seasonally-adjusted passenger load factor remained relatively stable close to an all-time SA record high throughout H1 2017. All regions except the Middle East registered year-on-year increases in passenger loads during the period. Sustained high achieved load factors are continuing to support airline financial performance.

The industry-wide freight load factor continued to recover in SA terms during the first half of the year. Despite falling slightly in June, the load factor is currently around four percentage points higher than its low-point in early-2016. - TradeArabia News Service

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