CAPA airline profit outlook. Margins high, but below peak, as traffic growth slows & oil price rises
World economic growth was above its long term trend in 2017 for the first time since 2010, and is expected to remain so in 2018. This is good news for air travel demand, although rising oil prices may dampen traffic growth, relative to the past couple of years.
The latest six monthly update of the CAPA world airline industry operating margin model increases its estimate for 2017 and its forecast for 2018, while also adding a 2019 forecast. Although 2016 may have been a cyclical margin peak, the industry is enjoying a more sustained period comfortably in excess of previous high margins.
The most fundamental reason for improved airline industry profitability relative to previous cycles is better capacity utilisation. If maintained, capacity discipline should also help to smooth out the cyclical volatility in airline margins. Nevertheless, it was the fall in oil prices from mid-2014 that gave the extra push to take margins to new levels.
Oil prices affect costs, and fares, and decisions about aircraft retirements and new orders. The price of crude, together with world economic growth and geopolitical events, is a key risk to the industry's new levels of profitability.
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Record global aircraft deliveries in 2017: Boeing ahead of Airbus again, but behind on order backlog
The world's fleet of commercial aircraft grew its numbers by 4% in 2017, to end the year at more than 31,000 for the first time. The number of aircraft on order was more than half of this number, and the order backlog was almost 10 years - the highest at any time in the jet age.
Both of the leading aircraft manufacturers delivered a record number of aircraft in 2017, while Boeing beat its rival Airbus for the sixth successive year. The nine-year winning streak enjoyed by Airbus, which ended in 2011, seems like a long time ago now (although Airbus is closing the gap).
However, although Boeing also received more orders than Airbus in 2017 and had more aircraft in service, the European producer has a larger backlog of outstanding firm orders. Airbus' order book superiority is based on higher numbers of narrowbody orders, whereas Boeing leads on widebody orders.
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US ULCCs improve on time performance as the Big 3 airlines maintain operational stability edge
There is no denying that operational performance is now a competitive force in the global airline industry, and airlines in the Americas consistently tout their progress in key metrics such as on time performance.
The three large US global airlines - American, Delta and United - maintained relatively stable, consistent on time performances during 2017, even as massive storms struck the US east coast in late 3Q2017, creating challenges for all US airlines attempting to preserve operational integrity.
One notable trend in on time performance results compiled by OAG is the improvement charted by the US ULCCs Frontier and Spirit, which have struggled with their operational performance in the recent past. The gains made by those airlines are important, as larger airlines continue to find ways to compete more effectively with ultra low cost airlines.
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HNA considers selling Hong Kong Airlines: investors may be shy
A few years ago any discussion of an airline being for sale was almost always inevitably linked to Etihad Airways and HNA evaluating a purchase. Etihad has halted expansion of its equity network, while HNA is going further and evaluating opportunities to sell assets. This includes Hong Kong Airlines, one of the flagship units in the group.
There is speculation that HNA has too much pride to sell Hong Kong Airlines, unless for an exceptional price. Then again, selling Hong Kong Airlines could be easier: unlike HNA's airlines in mainland China, Hong Kong Airlines has no government ownership, and the local market has a more open regulatory environment. But more pragmatically, HNA has non-aviation assets that are not core to its business, and could fetch a higher price.
Hong Kong Airlines is in the midst of a significant expansion period defined by A350 services to North America and soon A330s to continental Europe. This plan will be tested against the airline's lack of a strong connecting market.
Hong Kong Airlines has not yet captured significant corporate traffic, so its mostly leisure focus may be challenged by rising fuel prices. Although a sale appears difficult, independence would allow Hong Kong Airlines to grow strategically. The Hong Kong aviation hub is rapidly changing as Cathay Pacific restructures and seeks to regain the initiative.
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Singapore-Philippines aviation market: rapid growth, but Cebu Pacific and Scoot JV still unfinished
The Singapore-Philippines market has grown rapidly over the past decade, driven primarily by expansion from low cost airlines. Four of Asia's main LCC brands now compete in the Singapore-Philippines market and account for more than 50% of the capacity.
The two largest LCC players, Cebu Pacific and Tigerair (now Scoot), have been interline partners since early 2014. However, surprisingly, the two Value Alliance members have not yet implemented joint sales and a coordinated schedule, despite securing anti-trust immunity in 2015.
Cebu Pacific and Scoot are optimistic about growth prospects in the Singapore-Philippines market, but are expanding independently. The outlook for both airlines would be brighter, and the prospects for Singapore-Philippines growth bigger, if they fully exploited the partnership opportunities.
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US ULCCs Frontier and Spirit adopt different approaches to maximising their fleets
The US ULCCs Spirit and Frontier are adopting different fleet strategies during the next few years. Frontier's parent company Indigo recently finalised a massive Airbus order that includes 134 narrowbody jets for Frontier, which will result in significant growth for the ULCC once deliveries begin in 2021.
Spirit appears to be taking a more measured approach to its fleet during the next few years. The future shape of its fleet depends, in part, on the outcome of pilot negotiations and how work rules are structured in the new collective bargaining agreement. The airline's management recently decided that placing small batches of aircraft orders is perhaps more viable than a blockbuster deal.
Despite two different approaches to fleet management, ambitious growth by both Spirit and Frontier continues unabated; however, Spirit's annual capacity growth, while still robust, will fall to the mid-teens beginning in 2019.
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