Fares & Yields

Bad and worse – IATA’s two-case scenario for 2012

IATA has unusually provided two forecast scenarios for 2012 – a ‘central forecast’ and ‘banking crisis’ forecast – or perhaps more accurately, the ‘bad’ and ‘worse’ forecasts. Both show that global airline profitability is expected to be sharply lower than previously forecast. IATA is downgrading its ‘best case’ 2012 profit by 29% from USD4.9 billion, as forecast in Sep-2011, to USD3.5 billion for a net profit margin of just 0.6%, down from the previous forecast of 1.2%. The USD1.4 billion downgrade, which highlights the continued profitability challenge facing the world’s airline industry, will see global airlines report at best a 49% year-on-year reduction in net profitability from forecast profit levels of USD6.9 billion in 2011.

The reduction reflects the risk of recession in Europe and slower global economic growth, with IATA warning the industry could face a loss of USD8.3 billion if the euro zone crisis becomes a full-blown banking crisis. This ‘banking crisis’ forecast foresees every region having a net loss in 2012 while the ‘central forecast’ sees only Europe and Africa reporting net losses in the year. Meanwhile, the profitability forecast for 2011 remains unchanged, at USD6.9 billion for a weak net margin of 1.2%.

Airlines and airports feeling impact of global economic weakness with continued freight pressures

Airlines and airports are feeling the impact of the current global economic weakness and declining consumer spending in Europe, which is having a noticeable impact on air cargo volumes. Cargo traffic, which generated USD66 billion in revenue in 2010, has declined every month since May-2011, according to IATA upon the release of its Oct-2011 traffic results, with a 4.7% year-on-year reduction in cargo demand in Oct-2011 amid reduced manufacturing confidence and businesses switching to slower modes of transport.

“Cargo is the story of the month. Since mid-year the market has shrunk by almost 5% and this is far greater than the 1% fall in world trade. Air freight is among the first sectors to suffer when businesses confidence declines,” IATA director general and CEO Tony Tyler said. Meanwhile, Boeing CEO Jim McNerney separately stated the company has seen a softening of freight demand in recent months, describing the freight market as a “watch item”.

Woes continue for Kingfisher Airlines amid steep losses and unviable debt burden

The woes continue for Kingfisher Airlines, which this week reported a steep loss in the fiscal second quarter, with the carrier forced to dismiss speculation of a potential collapse of the carrier. “To suggest an immediate grounding of the airline is neither fair nor reasonable,” chairman Vijay Mallya said, adding: “To write the epitaph of Kingfisher Airlines is constantly neither fair nor accurate. We shall survive and flourish and prove you all wrong”.  

The problems at Kingfisher Airlines, an airline which has never reported an annual profit, are reflective of the difficulties facing the entire Indian airline industry, with most carriers struggling to operate profitably despite India’s rapid economic growth and a close to 20% annual increase in air travel. “It is a very competitive environment, it is a high-tax environment and it’s a hostile environment as far as investment is concerned. The fact of the matter is that the entire industry is in serious trouble,” Dr Mallya said.

Singapore Airlines struggles to defend yields as fuel costs blow out and 'protracted' downturn looms

Singapore Airlines (SIA) faces a bleak outlook for its fiscal second half as fuel prices remain high and yields are at risk of dropping further due to the challenging economic conditions Europe. SIA mainline yields dropped 1% in the quarter ending 30-Sep-2011 (2QFY2011/12) despite the increase in fuel prices, suggesting passenger yields have peaked in the current cycle some 9% below pre-GFC levels in 2QFY2008/09.

In speaking to analysts during the group's 2QFY2011/12 earnings briefing, SIA CEO Goh Choon Phong warned the market conditions currently facing the carrier are in some respects more challenging than FY2008/09. “I think we are looking at a much more protracted type of economic issues now in Europe where we actually do not see any finality at least in how it’s going to go. So it is a protracted situation ... we might have to bear with it for perhaps a longer time than the last one,” Mr Goh said.

Republic Airways profitable but down 57.5%

While its peers posted losses, Republic Airways Holdings managed a USD9 million profit on a 7.9% increase in operating revenues to USD767.9 million during the third quarter, despite struggles with its branded division, Frontier, which posted a USD4 million GAAP loss.

Frontier was the company’s answer to revenue diversification in the changing regional airline space even as peers SkyWest and Pinnacle sought increased diversification from adding new major-carrier partners to their capacity purchase portfolios. While Frontier has been troubled since its 2009 acquisition and integration with Midwest Airlines, CEO Bryan Bedford painted a promising future for the division.

Sharp declines in profitability for EVA Air and China Airlines in 2011 but profits in 3Q

China Airlines and EVA Air, Taiwan’s largest and second largest air carriers by revenue and traffic respectively, have reported sharp declines in profitability in the nine months ended 30-Sep-2011 weighed down by the poor performance of the air cargo transportation sector. The third quarter, traditionally a stronger period for earnings for Taiwanese carriers, delivered profits for both carriers, with an operating profit of around USD34 million for China Airlines and of around USD82 million for EVA Air.

Net profits for China Airlines stood at around USD29 million in the third quarter, with a net profit result of around USD42 million for EVA Air, based on CAPA calculations. However, the weakness in the cargo transportation sector, driven by a slump in the electronics industry whose shipments rely on air cargo transportation services, has impacted the carriers. Continued pressure on the cargo segment is expected in the months ahead.  

Asian Airlines to sees only ‘modest revenue’ growth in 2011; margins pressured: AAPA

Economic weakness in Europe and the US is having a financial impact on Asia’s airlines, with margins pressured by the combination of high oil prices and slower demand. According to Association of Asia Pacific Airlines (AAPA), the situation is also impacting medium-term growth prospects, as indicators point to a continuation of present market weakness into 2012.

However, the region's carriers are better placed than most. Despite the expectation of more “modest revenue growth” and the “squeezing” on what is “already very thin margins”, Asia Pacific airlines are better placed than their European and US counterparts, as many of the region's economies are still experiencing solid growth, and long term prospects are “positive”, according to AAPA. The industry body added that the optimism regarding future growth opportunities underpins “ambitious fleet expansion plans, as well as the establishment of a number of new carriers of varying business models, including international partnerships and joint ventures.”

Qantas yields soar on Tiger's grounding

Domestic yields at the Qantas Group have soared in the first part of the financial year with the company recording a 9.4% yield increase year-on-year in Jul-2011, its second highest monthly growth in a decade. The period corresponds with the grounding of Tiger Airways Australia, which removed approximately 12,400 seats from the market daily and saw airfares significantly increase.

Yields – calculated across all of the Group's domestic operations – continued to show strong growth even after Tiger resumed services in Aug-2011, albeit with only 10% of its pre-grounding seats. Qantas domestic yields grew 5.8% year-on-year in Aug-2011, the 15th highest monthly growth in the 117 months Qantas has reported figures.

Bruce Buchanan, CEO of Qantas' Jetstar unit, has acknowledged the upward pressure. Domestic yields across all Australian mainline carriers can be expected to grow highly over the next few months as Qantas removes capacity due to union strikes, but will come at the expense of decreased revenue at Qantas. For Virgin Australia, yields will grow with revenue.

US airlines maintain capacity caution; positive influence on yields, load factors and profitability

US airlines, including Delta, United Continental and Southwest, plan to maintain their capacity discipline in 4Q2011 and FY2012, after seeing the benefits that tight supply can bring in terms of profitability, yields and load factors - especially amid a deteriorating economic environment.

Capacity growth among the major US airlines in Aug-2011, a peak summer travel month, was generally limited to single-digits – the exception being the smaller Spirit Airlines – with all of the major network carriers reducing capacity in the month.

Aviation's lost decade? 9/11 and beyond. Cause for optimism in the wake of 9/11 changes

The first decade of the 21st Century has been widely regarded as the US airline industry’s lost decade. The reasons behind this are easy to see in the wake of the statistics issued by both the US Air Transport Association (ATA) and the International Air Transport Association (IATA). US airlines were certainly the most profoundly affected of all, but not all of the subsequent malaise can be attributed to 9/11. Nor has all the news been bad. Despite a large industry deficit since 2001 and the loss of many jobs, today's US airline industry is in many ways better placed than it was before 2000.

Airline profitability falls by 60% in 2Q2011, as weak consumer confidence hits the sector

Deteriorating consumer confidence and weaker global economic growth prospects are placing further pressure on the world’s airlines and their investors. Airline share prices have taken a battering, falling by around a quarter this year on economic jitters and earnings expectations. Airline industry profits in 2Q2011 were down by around 60% on 2010 levels, according to industry grouping, IATA. High jet fuel prices continue to pressure the sector, while a moderation in travel volumes and falling freight demand are also of concern.

IATA, in its Jul/Aug-2011 Airlines Finance Monitor, stated airline share prices, measured using the Bloomberg global index, declined by 9% in Aug-2011 and a further 5% in early Sep-2011. The financial markets still expect airline financial performance to be hit more than most sectors.

China Eastern Airlines reports fall in operating profits, outlook cautious

China Eastern Airlines, China’s third largest carrier by market value, has reported a fall in operating profits as costs outpaced revenue growth. Chairman Liu Shaoyong also cautioned the carrier’s full year performance would reflect the uncertain global economic conditions. Concerns also centre around the widely expected interest rate rise in China, which would increase the company's financial burden, in addition to continued high fuel costs.