Airlines' Overcapacity Fears Dampen Joy from Low Oil Prices
Snapshot
The airline business confidence index is a monthly indicator released by the International Air Transport Association (or IATA). According to IATA, “airline business confidence gives a forward-looking view of industry prospects.” This is done by surveying airline CFOs and cargo heads on five factors: profitability, demand growth, input costs, yield environment, and employment. In this article, we will analyze the October 2015 release.
Profitability
Profit growth in the recent quarter was driven by growth in passenger volumes and falling input costs. However, the profit expectations for the year ahead have slowed down after a strong run during the first half of the year, yet the outlook remains positive. The prime reason behind this might be that the key profit drivers might have peaked earlier in the year.
Demand growth
As we discussed previously in the series, passenger air travel demand grew by about 7% despite weakness in some emerging economies. Analysts expect that the growth will continue in the year ahead, but the pace is expected to slow down majorly due to the growing concerns over weakness in the global business environment and emerging market economies. According to the survey, the number of airlines expecting demand to grow with the same strength has fallen considerably.
Input costs
Most airlines have benefited by lower input costs for the earlier part of this year due to lower crude oil and jet fuel prices. Airlines have welcomed the rapid drop in crude oil prices due to the strengthening of the US dollar and oversupply concerns. Low oil prices will likely continue in the near future, and thus airlines have maintained their expectations of lower cost pressures in coming months.
Yield
Passenger yields followed the 2015 declining trend in October. However, most airlines do not expect yields to fall further in the year.
To summarize the report, airline companies are expecting better cash flows and lower input costs due to lower oil prices. Demand and capacity growth are expected to slow down but remain positive.
Investors can gain exposure to airlines by investing in the SPDR S&P Transportation ETF (XTN), which invests 3.1% in Southwest (LUV), 2.7% in Delta (DAL), 2.6% in American Airlines (AAL), 2.6% in United Continental (UAL), 2.6% in Alaska Airlines (ALK), 2.5% in JetBlue (JBLU), and 2.1% in Spirit (SAVE).
Browse this series on Market Realist: