CIT: Global Aerospace Study finds fuel costs driving airline executives’ decisions

These are just a few of the key findings from an exclusive global aerospace study released today by CIT Group Inc. (NYSE: CIT), a global leader in transportation finance.

The research report, "2011 Global Aerospace Outlook - Challenges of an Ever-Changing Industry," prepared in association with Forbes Insights, gathered the views of more than 130 senior airline executives from around the world with fleets of 25 or more jet aircraft. The survey took place during November and December 2010.

"Faced with fierce competition and steep fuel prices, airline executives are taking a close look at how they operate," said C. Jeffrey Knittel, President of Transportation Finance at CIT. "In response, airlines are optimizing their fleets, looking for cost savings, exploring new forms of revenue growth, considering mergers and strategic alliances, and focusing on the business traveler."

According to the findings, airline executives said their leading challenge over the next two years is increased fuel costs owing to rising global fuel demand (53%), as well as increased competition from different (38%) and similar (27%) types of airlines. In fact, 82% of respondents said they were extremely concerned (51%) or very concerned (31%) about fuel supply and costs. However, even with growing demand for increased fuel efficiency, nearly two-thirds of airline executives (68%) said they will take time to see how the next-generation of more fuel-efficient aircraft performs rather than be one of the first to acquire the new models.

Additional Key Findings from the Report:

• Increased M&A activity: Growth in M&A and other forms of consolidation are being set in motion by a need to optimize costs and capacity. A significant majority (81%) of airline executives expect to see consolidation significantly increase (14%) or increase (67%) in the next five years. This will be driven by marketing synergies through more routes and a stronger brand (54%), the need to optimize labor efficiency and cost (43%) and opportunities to optimize fleet capacity (42%). Regional consolidation is expected to be most prevalent (30%), followed by alliance (25%), global (24%) and emerging markets (21%).
• Leasing remains the most important form of financing: According to respondents, leasing remains the most important form of fleet financing. Fifty-four percent (54%) of survey respondents indicated that more than half of their fleets are leased, and respondents expect this to remain fairly consistent over the next five years.
• Emerging markets promise the greatest opportunity for growth: Working through the Great Recession required some major carriers, particularly those in the U.S. and Europe, to trim their fleets, reduce their routes, and look for new areas of income. However, these actions weren't universal, as more than half (55%) of carriers in emerging markets-such as China, India, Russia and Latin America-increased their fleet size, their number of routes and their number of flights over the past two years.
• Regulatory uncertainty creates anxiety: Potential regulatory actions continue to weigh heavily on the industry. Sixty-two percent (62%) of respondents are extremely (21%) or very concerned (41%) about current or anticipated regulations to curb carbon emissions. As a result, 83% of respondents said their companies are likely to acquire or lease energy efficient aircraft in the next five years.
• Business travelers remain the main source for revenue growth: Going forward, airlines expect revenue growth to come from a range of sources. Over the next two years business travelers will be the most likely source (40%), followed by increased international traffic (38%), ancillary revenues (36%) and fare increases (32%). Nearly four in ten airlines now charge passengers for food (41%) and their first checked bag (38%) - though this trend is significantly more common among U.S. carriers (75%) than among European carriers (17%) and other regions (19%).