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Monday, 03 June, 2019, 16 : 13 PM [IST]

Industry growth of RPKs weakest in Q1 since 2010: IATA

According to the International Air Transport Association (IATA), in Q1 there has been a further fall in the industry-wise airline profitability with the growth in RPKs being the weakest since 2010 at 3.1% driven by weak performance of European carriers. With further pressure on oil prices, the next few months will be even more challenging, states IATA in its Airlines Financial Monitor for March & April 2019. TravelBiz Monitor presents highlights of the report.

Key Points
  • Initial financial results for Q1 2019 indicate a further fall in aggregate profits for the airline industry compared to the same period of previous year. The outcome is mixed at the regional level, with broad stability in North and Latin America, improvement in Asia Pacific but a significant weakening in Europe, although the sample so far is small.
  • The global airline share index outperformed the wider equities market in April with better than expected earnings outcomes and earnings guidance in some regions.
  • Oil and jet fuel prices climbed again in April driven by the ending of US sanction waivers on Iranian oil imports. At the time of writing this note, the Brent crude oil price is hovering around USD 72 bbl (36% higher than the end of 2018) as a result of increased tensions in the Middle East.
  • Annual growth in industry-wide revenue passenger kilometres (RPKs) eased to 3.1%; the weakest annual outcome since early-2010. For freight, volumes were 0.1% higher than their level a year ago, following the sharp annual fall of 4.9% in February.

Financial indicators
Airline shares outperformed global equities in April for the first time this year
  • 3.9% in April, outperforming global equity index which went up by 3.2% in the same period. The global airline index has lagged the wider equity market since the beginning of this year (a 7.2% vs 15% increase in the first four months) as investors were concerned about Brexit uncertainty and the cost increases driven by higher oil prices and 737 Max groundings.
  • In April, airline shares rebounded after Brexit was delayed and some airlines announced better than expected Q1 earnings results. The increase in the global airline index was driven by a surge in North American (9.5%) and European (+5.0%) airlines. On the other hand, Asia Pacific airlines continued to lose value (-2.8%) stemming from the concerns regarding Jet Airways potential bankruptcy and US-China trade war.

Industry-wide decline in profitability in Q1 2019, driven by European airlines
  • Equity markets are forward looking. Looking back, the first quarter showed initial releases of airline financial results point to a moderate decline in airline profitability relative to the same period a year ago. The EBIT margin in our sample of 20 airlines has fallen to 3.6% from 4.1% a year ago.
  • The deterioration at an industry-wide profit level was driven mainly by Europe (the first quarter of the year is always a weak period for European airlines). On the other hand, North America and Asia-Pacific regions recorded increase in net post-tax profits. While North America recorded strongest EBIT margin among all regions, EBIT margin improved remarkably to 5.0% in Asia-Pacific region.

Industry-wide cash flows higher compared to a year ago
  • The initial Q1 2019 sample of 18 airlines indicates improvement (0.2 percentage points, from 4.5% to 4.7%) in industry-wide free cash flow compared to the same period a year ago.
  • While there was a modest decline in net cash flow from operations (from 17.8% to 16.0% of revenues), the slow-down in capex spending supported free cash flow.
  • At the regional level, capital spending fell in North America and Asia-Pacific, while carriers based in Europe and Latin America increased their capital spending compared to a year ago.
  • All in all, negative FCF outcomes in Latin America and Asia-Pacific were offset by positive outcomes in other regions.
Fuel costs
Oil and jet fuel prices trending higher for a fifth consecutive month
  • The average monthly price of Brent crude oil and jet fuel continued to trend upwards in April following the US decision to end sanction waivers on Iran oil imports. Oil prices remain under pressure as the fears of supply disruption augmented amid heightened tensions in the Middle East.
  • At the time of writing this report, the price of Brent crude oil hovers around USD72/bbl and the jet fuel price is around USD85/bbl – the highest level since November. For more data on oil price developments, check out our weekly Jet Fuel Price Monitor.
  • The futures market still indicates oil prices to remain relatively stable in the rest of the year, December 2019 future contracts hover around USD69-70/bbl.

Yields and premium revenues
Premium and economy cabin passenger yields continue to decline in early-2019
  • Downward pressure on global ‘base fare’ passenger yields (i.e. excluding surcharges and the revenue that airlines generate from ancillary services) persisted in February as airlines struggle to recover rising operating costs. In US$ terms, yields in February were 7.0% lower than the same month in 2018.
  • In February, both premium and economy cabin yields were under pressure. Premium cabin yields went down by 1.1% compared to the prior month even though typically airlines are able to pass through cost increases to this less price-sensitive class. Similarly, economy cabin yields declined by 1.2%.

Premium revenue share improved despite diminishing premium traffic share
  • Premium-class passengers constituted 4.1% of the total number of international origin-destination traffic in the first two months of 2019, down from 4.3% observed a year ago.
  • In terms of revenue, premium-class passengers accounted for 27.3% of total international passenger revenues in Jan-Feb 2019, which was slightly higher compared to the same period a year ago (27.1%).
  • Premium passenger traffic growth has outperformed its economy counterpart only in the Asia-Southwest Pacific and North-Mid Pacific regions. By contrast, premium class fare growth outpaced economy counterpart in all regions apart from North Atlantic.

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