While margins are being revised downwards, the current airline cycle is looking better than any other since the dawning of the jet age

In its latest six monthly update of its world airline industry operating margin model, CAPA – Centre for Aviation has lowered its forecasts for 2018 and 2019. This partly reflects a downward revision to the 2017 margin figure reported by airline body International Air Transport Association (IATA) but, more importantly, reflects an increase in the oil price outlook.


Summary:

  • In a mid-year update to its world airline industry operating margin model, CAPA – Centre for Aviation has lowered its forecasts for 2018 and 2019;
  • The latest model, an update to its Jan-2018 guidance, reiterates the previous conclusion that the world airline industry’s operating margin cycle peaked in 2016;
  • However, it confirms operating margins, even as they move into a downswing, “look set to remain above levels that were associated with peaks in previous cycles”;
  • The Oil price is key factor in its revision – the price of Brent crude oil averaged USD54.2 per barrel in 2017; CAPA now forecasts this to increase to USD72.6 in 2018, before easing back slightly to USD71.6 in 2019.

The latest model reiterates previous conclusions that the world airline industry’s operating margin cycle peaked in 2016. However, if downward revisions to forecasts and falling margins are the bad news, there is also some good news in the airline industry’s profit outlook, according to the trusted source of market intelligence for the aviation and travel industry.

The good news, according to CAPA, is that the current airline cycle is “looking better than any other since the dawning of the jet age”. Operating margins, even as they move into a downswing, “look set to remain above levels that were associated with peaks in previous cycles,” it says. Whereas historic cycles tended to peak at an operating margin of around 6% before fairly quickly falling, the current cycle “could record at least five consecutive years of margins at levels comfortably above previous cyclical peaks in 2015-2019,” it claims.

The main differences between CAPA’s Jul-2018 model and its previous Jan-2018 forecast are as follows:

READ THE FULL REPORTVisit the CAPA – Centre for Aviation website to see full details of its world airline industry operating margin model, including more insights, detailed analysis and exclusive data charts.

  • 2017 operating margin is lowered from 8.5% to 7.5%, in line with IATA‘s most recent figure published in Jun-2018. IATA gathers bottom-up data from airlines and so, this should more closely reflect the outcome. RPK growth rate for 2017 is raised from 7.7% to 8.1%, in line with IATA, but this is more than offset by higher cost figures.
  • CAPA forecast of 2018 margin is lowered from 8.0% to 7.1%, due to a higher Brent crude oil price forecast (raised from USD59.9 to USD72.6). RPK growth and fleet growth rates are unchanged.
  • CAPA forecast of 2019 margin is lowered from to 7.7% to 7.1%, due to a higher Brent crude oil price forecast (raised from USD61.3 to USD71.6), only partially offset by higher forecast GDP growth (raised from 3.2% to 3.3%) and higher RPK growth (raised from 6.4% to 6.6%).

The International Monetary Fund (IMF) Jul-2018 economic outlook maintains its forecast for 2018 world GDP growth of 3.3% (at constant prices and at market exchange rates), extending this same growth forecast to 2019 fractionally above its long term historic trend rate of 3.1% for the first time since 2010. After the world economy achieved growth of 3.2% in 2016, this would be the first time since 2004-2007 that world GDP has grown faster than its historic trend rate of 3.1% for three successive years.

Consequently, world demand growth, measured in revenue passenger kilometres (RPK), looks set to remain at, or above, its long term trend rate of 6.2% throughout the forecast period (and for five consecutive years, 2015-2019, if the forecast is borne out). CAPA forecasts RPK growth easing back from 8.1% in 2017 to 7.0% in 2018 and 6.6% in 2019, a declining rate each year as the stimulating impact of lower oil prices enjoyed in 2015-2017 dissipates.

CAPA also highlights that fleet growth took an unexpected dip in 2017, based on figures updated since the Jan-2018 model. Although data on deliveries were known earlier in the year, data on retirements have been revised upwards from 1.5% of the fleet to 3.2% in its analysis.

“CAPA’s forecasts predict that the current cycle will enjoy at least five consecutive years of margins at comfortably above previous cyclical peaks of 6% in the period 2015-2019. Profitability in the airline industry still appears to be cyclical, but it has gone some way towards showing that it can maintain a higher midpoint of the margin cycle.”
Peter Harbison, Executive Chairman, CAPA – Centre for Aviation

According to CAPA, this uptick in aircraft retirements was most likely stimulated by the rise in oil prices in 2017 (and the anticipation of further increases in 2018), and also reflects an increase in the number of old generation aircraft (737 Classics, 757s) reaching the end of their economic lives.

But close attention is obviously being paid to the price of fuel, a key cost factor in the aviation arena. The price of Brent crude oil averaged USD54.2 per barrel in 2017 and CAPA now forecasts this to increase to USD72.6 in 2018, before easing back slightly to USD71.6 in 2019 (based on the most recent monthly consensus poll published by Reuters on 29-Jun-2018). This is a significant increase on the forecasts used in the Jan-2018 model, which were USD59.9 per barrel in 2018 and USD61.3 in 2019, a 21.2% and 16.8% rise, respectively.