The International Air Transport Association (IATA) has reported an improvement in airlines’ financial well-being.
Worldwide airline share prices rose 14% in November, supported by continued decline in the price of crude oil and jet fuel, as crude oil prices are down 36% since the mid-year peak, reflecting appreciation of the US dollar as well as continued growth in supply, particularly in the US.
Air freight volumes continue to expand and the trend in air travel growth remains positive, supported by improving economic conditions in the US and strong trade growth in Asia Pacific.
Passenger load factors weakened slightly in October, but air freight load factors continue to show steady improvement on the back of growth in demand.
Financial indicators
Worldwide airline shares were up 14% in November compared to October. Airline shares outperformed the broader market by a significant rate, with the FTSE Global All Cap gaining just 1% in November compared to October. Growth in airline share prices had weakened in Q3 due to a combination of economic slowdown in key regions like the Eurozone and concerns over the spread of the Ebola virus. The rise in airline share prices over the past two months reflects continued decline in crude oil and jet fuel prices.
Airlines earn a majority of revenues in Q2 and Q3, so the expectation is for solid results at this time of year. Initial Q3 results are positive so far. The sample of 47 airlines shows that the industry improved financial performance on the year ago period at the operating level. The improvement was driven by the performance of North American airlines. By contrast, a combination of weakness in cargo revenues as well as rising cost pressures for Chinese carriers due to a depreciating local currency weighed on regional financial performance in Asia Pacific.
Fuel costs
Crude oil prices continue to fall and are now down 36% compared to the most recent peak in June 2014. Jet fuel prices are now at $92/bbl, a level not seen since September 2010.
The declines in crude oil prices over recent weeks come from a combination of factors. The strengthening of the US dollar against other major currencies has been one reason; the price of crude oil typically moves inversely to the US dollar. Moreover, concerns over several geopolitical threats to crude oil supplies have been more than offset by increases in supply in other regions, including the US.
Yields
The trend in US passenger yields improved in the second quarter and although there has been no further increase over recent months, levels in October are still almost 2% higher compared to a year ago. Underlying demand drivers remain positive and this trend is likely to continue.
By contrast, the weak trend in global fares in USD is largely continuing. The trend in global fares reflects weakness in Asia as well as exchange rate distortions. The fare data excludes fuel surcharges and ancillary revenues, which provide some offset to the decline in core fare yields.
Demand
Air freight volumes increased in October compared to September. Gains in world trade and business activity paused in Q1, but the latest data show improvement in some regions. Recent air freight improvements have been driven by Asia Pacific and North America, where trade volumes have been expanding solidly after a period of weakness earlier in the year.
Capacity
Air freight capacity increased in October compared to September. The increase in AFTK is consistent with renewed signs of improvement in the demand environment for air freight markets.
Cargo load factors improved slightly in October, both compared to the previous month and on a year ago. The growth in air freight demand over recent months has supported some improvement in loads, but continued expansion in capacity through the passenger business has kept load factors low at 45%.
