On the eve of Donald Trump’s inauguration and as Britain confirms its ‘hard Brexit’ strategy, the global airline industry body IATA released the results of its global Airline Business Confidence Survey – January 2017.
The results are mixed, showing that while the outlook for passenger and cargo demand remains very positive for the 12 months ahead, the picture in relation to yield is static to negative. Overall the outlook is positive though, in line with overall business confidence here in Australia which, according to the NAB Business Confidence Index (NAB Index), rose from Oct-2016 to Nov-2016. Similarly, in New Zealand, ANZ’s Business Outlook Survey shows a rise in business confidence from Nov-2016- Dec-2016 of 1 percent.
The IATA Survey, conducted quarterly, surveys airline CFOs and heads of cargo in relation to their outlook for the year ahead in respect of (i) Profitability; (ii) Demand; (iii) Costs; (iv) Yield; and (v) Employment.
Global outlook is stronger than Australia’s but New Zealand’s outlook remains positive
IATA says profitability in the industry was unchanged year-on-year Q4 to Q4 2015. The results were balanced, with 39.0% reporting an increase in profits with the same percentage reporting a decrease – reflecting an operating environment that has remained challenging since mid-2016. The last 6 months have seen a shock result in both Britain’s EU membership referendum and the US election in Nov-2016. Fuel prices, a significant cost input, have been trending higher, with negative impacts on yields.
Still, the Survey showed a positive outlook for 2017, with 42.0% of respondents expecting profits to increase – the first time since the Apr – 2016 survey. However this figure falls short of the 60-70.0% levels that were the norm just few years ago as momentum in the profitability cycle slows.
In Australia, the outlook for profitability is less positive, with the NAB Index showing a fall of 2 points (from 7 to 5) as fears underlying momentum in certain sectors is falling fuels concerns amongst some economists:
“We are becoming increasingly concerned about the underlying momentum in the economy as evidence mounts that the non-mining economy is losing steam,”
NAB chief economist, Alan Oster
In New Zealand, however, profits are expected to continue rising with ANZ reporting an increase of 2.5 points from Nov-2016 – Dec-2016 and a year-on-year to Dec-2016 increase of 10 points in the ANZ Financial Outlook (Profit) Index.
Strong passenger demand continues for aviation globally
Global demand in the aviation industry overall remains solid. Half of the Survey respondents reported a year on year increase in passenger traffic during Q4 2016. Still, continued instability and disruption in certain markets, such as Europe, is likely to impact demand, at least in the short term. Nevertheless, 74.0% of respondents expect passenger volumes to rise over the next 12 months, the highest since October 2013. The figures for cargo were also relatively positive, with 52.0% of respondents reporting an increase in volumes in Q4 2016, despite the backdrop of global trade remaining weak.
In Australia, demand has also remained buoyant with Bureau of Infrastructure, Transport and Regional Economics (BITRE) statistics showing an 8.0% increase in year-on-year airline passenger traffic from Oct-2015 to Oct-2016.
With fuel prices rising, the cost outlook is cautious
Globally, the airline industry has been feeling the impact of rising fuel costs that followed OPEC production cuts in 2016. The price of oil has steadily increased over the course of the last 12 months and is currently twice the 12 year lows reached in Jan-2016.
Fuel is one of the largest input costs for the airline industry, accounting for approximately a third of total costs, and 31.0% of respondents reported an annual increase in input costs for Q4 2016 – the highest proportion since July-2014.
Despite hedging strategies softening the blow for some airlines, this rise, together with signs of increasing upward pressure on labour costs, led to 34.0% of respondents stating they expect an increase in input costs over the next 12 months. Nevertheless, the sentiment was by no means universal with 40.0% stating they expect no change and 26.0% stating they expect a decrease, reflecting the general uncertainty in what lies ahead as the US and non-OPEC countries are expected to bring production back to the market.
Yields suffer as capacity growth pressures prices. Employment to remain static
As airlines increase the available number of seats in the market, two thirds of the Survey’s respondents reported a fall in yields in Q4 2016. Despite 23.0% expecting it to rise again in 2017, the overall sentiment among respondents was that yield is likely to remain unchanged or continue to fall in the year ahead.
For cargo, the outlook is even more gloomy: 90.0% of the Survey’s respondents expect yields to remain unchanged or fall over the year ahead.
Despite employment activity increasing for the eighth consecutive quarter in Q4 2016, airline employment figures are expected to stagnate; 50.0% of respondents report they expect to keep employment levels unchanged over the next 12 months. As yields fall and costs are expected to rise, this comes as no surprise.
Outlook: airlines need to be lean and mean in 2017
Anticipating rising costs and declining yields, the airline industry is likely to maintain a lean and mean approach to going business despite an expected increase in demand.
In Australia and New Zealand the growing presence of Chinese carriers, flying new technology and determined to gain market share, is leading to lower prices and tighter yields for the local industry.
Nevertheless, as Qantas launches new services using advanced, cost effective, technology and Virgin Australia enters new partnerships and Air New Zealand continues to grow its network particularly towards the Americas – business confidence in the local aviation industry, as with Australia and New Zealand at large, is expected to remain positive in this region for the year ahead.