- Global: +2.9% capacity, +1.9% scheduled services year-on-year;
Global seat capacity up 2.9% in Jan-2012: OAG
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CAPA airline profit outlook. Record margins from capacity restraint, but upswings are not forever
This six-monthly update of the CAPA world airline operating margin model continues to expect industry margins in 2015 to 2017 above previous cyclical peaks, albeit falling slightly in 2017. This is in spite of unexceptional global GDP growth, which has not regained its long term trend rate since 2010.
The higher level of airline operating margin from a given GDP growth rate has been due to several factors. Lower oil prices have played their part, particularly since mid-2014, as does a higher level of global traffic growth than would previously have been expected from relatively sluggish GDP growth. In addition to these external issues, perhaps the most significant factor is a greater degree of capacity discipline. This is now most deeply rooted in the US, which is now by far the most profitable airline region, helping to drive the global result.
On a more cautionary note, the IMF has recently cut its global GDP forecasts, citing Brexit and other geopolitical risks. In addition, profit warnings in recent weeks from IAG, easyJet and Lufthansa are a reminder that cyclical upswings do not last forever. A test of the airline industry's improved profitability will be its resilience in a downturn.
US airlines cut capacity to trigger PRASM momentum from rising fuel prices
Delta Air Lines and jetBlue Airways are the latest US airlines to trim their capacity forecasts, after the US major global network airlines American and United made adjustments to their projections in early 2016. The latest cuts initiated by US airlines appear to be driven by a continuing depressed pricing environment and rising fuel prices, as oil touches USD50pb again.
By reducing capacity airlines hope to restore a supply-demand balance that allows for fare increases to shore up passenger unit revenues, which have been on the decline for more than a year. Overall airline valuations show that investors remain anxious over negative PRASM, and are essentially ignoring the record profits and margins recorded by US airlines.
Delta has previously missed two separate time periods in which it aimed to return to a flat PRASM performance and has pledged to reach that goal by YE2016. As targets have slipped, most US airline executive management teams continue to stress the importance of positive PRASM and the weight it carries with investors.