Saturday, October 21, 2017, 1:38 am

Airline share prices outperform equity market in H2 2016

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DUBAI: Global airline share prices increased by 2.3% in December, and outperformed the wider global equity market over H2 2016. This outperformance was led by North American shares, on renewed optimism that such airlines can stabilize unit revenues in 2017, IATA said.

European airline share prices rose by 3.3% in December, but the Asia Pacific index fell for the tenth time in 12 months (-3.3%).

Overall, global airline shares fell by 5.7% during the course of 2016, having lagged behind the wider global equity market during the first half of the year. But the recovery in airlines shares from their June low means that the margin of underperformance has narrowed markedly in recent months.

Momentum weakens

The latest round of results from Q3 2016 further showed that industry-wide financial performance remains robust by historical standards. However, there are ongoing signs that momentum for profitability has weakened.

The EBIT margin in our sample of 90 airlines slipped to 14.5% in Q3 2016, from 15.0% in the same period in 2015. Profit margins dropped in North America, reflecting volatile fuel and labor costs, but nonetheless remained solid. Meanwhile, margins rose modestly in Asia Pacific helped by a good quarter for air freight, and were unchanged at 17.5% in Europe, where Q3 is the seasonal peak for profits.

Free cash flow edges up

Net cash flow in our sample of 57 airlines eased to 10.6% of revenues in Q3 2016, from 11.5% in the same period last year. Net cash flow (ie, cash from operations) fell for the sample of carriers from North America, Asia Pacific and Europe, but rose in the case of those from Latin America.

Capital expenditure in IATA’s total sample fell as a share of revenues in Q3 2016 compared to the same quarter in 2015. Free cash flow in Q3 edged up to 1.2% of revenues from 0.8% a year ago. Free cash flow allows airlines to return cash to investors or to pay down debt.

Brent crude oil price has steadied

Oil prices rose sharply in early-December following the agreement by non-OPEC suppliers to join their OPEC counterparts in limiting supply. The price of Brent crude has been broadly stable around US$55/bbl since, nearly double the 12-year low reached in January 2016.

A rebalancing in the oil market is slowly taking place. But amid ongoing skepticism as to whether the full extent of OPEC’s supply cuts will be delivered, the futures market is still pricing in a very weak upward trend in oil prices over the coming years. Brent crude futures are currently below US$56/bbl until 2020.

Intense downward pressure

The downward trend in yields looks to have reasserted itself in recent months, with another fall in October (the latest data available). Given the change in trend in fuel prices seen over the course of 2016, it remains to be seen how long the downward trend will continue.

As was the case during late-2014, the rise in the US dollar since November will distort the US dollar-reported data in the coming months’ data; this underscores the importance of looking at trends in yields in constant exchange rate terms (the blue line on the chart). The intense downward pressure on underlying yields has eased from that seen earlier in the year, but the trend is still pointing down. Yields fell by 7.6% year-on-year in the January-October 2016 period.

 

The premium traffic segment remains an important buffer for airline financial performance

 

During most of 2016, premium fares held up better than their economy counterparts on most routes, and the premium segment continues to offer an important buffer for airline financial performance. Indeed, premium’s share of revenues rose slightly in annual terms during the January-October 2016 period on the markets across the North Atlantic and between  Europe and Asia.

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