Positive Aviation Outlook for 2015

04 Jan Positive Aviation Outlook for 2015


Oil Prices Benefiting Air Traveler

The International Air Transport Association (IATA) announced an outlook for improved industry profitability in its Economic Performance of the Air Transport Industry report. Airlines are expected to post a collective global net profit in 2014 of some $19.9 billion (up from the $18.0 billion projected in June). This looks set to rise to $25.0 billion in 2015.
Lower oil prices and stronger worldwide GDP growth are the main drivers behind the improved profitability.
Consumers will benefit substantially from the stronger industry performance as lower industry costs and efficiencies are passed through. The airline industry is highly competitive. After adjusting for inflation, average return airfares (excluding taxes and surcharges) are expected to fall by some 5.1% on 2014 levels and cargo rates are expected to fall by a slightly bigger 5.8%.
The expected $25 billion net post-tax profit represents a 3.2% margin. On a per passenger basis, airlines will make a net profit of $7.08 in 2015. That is up on the $6.02 earned in 2014 and more than double the $3.38 earnings per passenger achieved in 2013.

The return on invested capital (ROIC) is expected to grow to 7.0%. This is a substantial improvement on the 6.1% ROIC expected to be achieved in 2014.This is still 0.8 percentage points below the 7.8% weighted average cost of capital (WACC), so there is still some ground to cover before achieving sustainable margins.

“The industry outlook is improving. The global economy continues to recover and the fall in oil prices should strengthen the upturn next year. While we see airlines making $25 billion in 2015, it is important to remember that this is still just a 3.2% net profit margin. The industry story is largely positive, but there are a number of risks in today’s global environment—political unrest, conflicts, and some weak regional economies- among them. And a 3.2% net profit margin does not leave much room for a deterioration in the external environment before profits are hit,” said Tony Tyler, IATA’s Director General and CEO.
“Stronger industry performance is good news for all. It’s a highly competitive industry and consumers—travelers as well as shippers—will see lower costs in 2015 as the impact of lower oil prices kick in. Airline investors will see ROIC move closer to the WACC. And a healthy air transport sector will help governments in their overall objective to stimulate the economic growth needed to put the impact of the global financial crisis behind them at last,” said Tyler.

2015 Forecast Drivers

Oil Prices: Oil prices have fallen substantially in recent months and this is expected to continue into 2015 with the full-year average price expected to be $85/barrel (Brent). If that assumption is correct, it would be the first time that the average oil price has fallen below $100/barrel since 2010 (when oil averaged $79.4/barrel).
The door is still open to an Opec oil production cull. UAE’s Mazrouei said the organisation would have to reassess the situation at the end of the first quarter of 2015, when there may be cause for it to call an emergency meeting.
Suhail Al-Mazrouei
Saudi energy minister Suhail Al-Mazrouei(Reuters)
Still, prices are expected to continue on their downward trend. A slight bounce in the oil price to $62 a barrel on 22 December was dismissed by a Morgan Stanley research note.
“Any oil relief rally is likely to be limited and short-lived, barring a major outage. We see too many headwinds that must be addressed,” it said.
Al-Mazrouei had said $40 could be the bottoming-out of the oil price. His Saudi counterpart, Ali al-Naimi, predicts prices will pick up again shortly. Ole Hanson, an oil market analyst for Saxon Bank, sees support for Brent crude at $52 a barrel, not far from its current level.
National Australia Bank thinks Brent crude will average at $68 a barrel in 2015. A survey by Reuters of 30 analysts put the average at $74 a barrel before climbing to just over $80 in 2016.
“Oil prices will be lower, making shale oil production less attractive for investments, which are necessary to keep shale oil production growing,” Commerzbank’s Carsten Fritsch told Reuters.
Meanwhile, the US EIA slashed its forecast by $15 a barrel. It now sees an average of $68 for Brent crude oil. Morgan Stanley predicts $70, while ABN AMRO has it at $85.
Whatever happens, oil prices are likely to remain below their highs of recent years. This gives some respite to hard-pressed consumers and firms, who bear the brunt of oil price-driven inflation, and leave them with more money to spend in the economy or on jobs and growth.
Fuel Prices: Jet fuel prices are expected to average at $99.9/barrel in 2015 for a total fuel spend of $192 billion which represents 26% of total industry costs. It is important to note that the impact of lower fuel prices will be realized with a time lag, due to forward fuel-buying practices. Improving fuel efficiency continues to be a priority for airlines. Fuel efficiency is estimated to have improved by 1.8% in 2014 and a further improvement is expected in 2015. Fuel efficiency improvements could be accelerated by reducing the 5% of wasted fuel burn as a result of airspace and airport inefficiencies.
Economic Growth: Global GDP is expected to grow by 3.2% in 2015, up from 2.6% in 2014. This will be the first time that global GDP has broken over 3.0% since 2010 (when global GDP grew by 4.1% in a post-recession bounce back), this time boosted by the fall in oil prices.
Passenger Trends: Passenger traffic is expected to grow by 7.0% in 2015 which is well-above the 5.5% growth trend of the past two decades. Capacity growth is expected to outstrip this slightly at 7.3%, pushing the passenger load factor to 79.6% (slightly down on the 79.9% expected for 2014). The fall in the price of fuel is expected to lead to cheaper airfares for consumers. After adjusting for inflation, average return air fares (excluding surcharges and taxes) are expected to fall by 5.1% to $458 in 2015. Total passenger numbers are expected to grow to 3.5 billion and passenger revenues are expected to grow to $623 billion.
Cargo Trends: Cargo volumes are expected to grow by 4.5% in 2015 (slightly ahead of the 4.3% growth expected for 2014). The air cargo business has faced weak markets and increasing competition since 2011. There has been an uptick in demand recently but cargo remains a tough business. The real cost of transporting goods in 2015 is expected to fall by 5.8%. In total, some 53.5 million tonnes of air cargo is expected to be flown in 2015. Total cargo revenues are expected to rise to $63 billion, but that is still some 5% lower than in 2010.

Cheaper Airfares?

Will airfares go up – or down – in 2015? Is there a “best” day to find low fares? And when should you take that trip to Europe?

Those are some of the airline-related travel questions for 2015 tackled in a graph and chart-filled report put together by online travel agency Expedia and the Airlines Reporting Corporation (ARC).

Here are some of the highlights and key predictions for 2015 from the generally upbeat study that might help out with your travel planning and budgeting next year.

The study says airfares will be going down. While a healthier economy will create increased demand in 2015, there will also be increased capacity. The drop in fuel prices should help push air-ticket prices to most North American and European destinations slightly lower.
A healthier economy will create increased demand in 2015, there will also be increased capacity. The drop in fuel prices should help push air-ticket prices to most North American and European destinations slightly lower.

If you’re shopping at least three weeks in advance of your trip, Expedia’s study settles on Tuesday, by a slim margin, as the best day of the week to find low fares. Although the study agrees with the advice George Hobica of Airfarewatchdog.com recently shared, that because airfares and seat inventory can – and do – change minute-by-minute and day-by-day, a good strategy is to settle on a travel window and check fares several times a day.
And to get some of the best deals, says the study, buy tickets for domestic travel at least two months in advance and six months in advance for international travel.
Expedia’s analysis calls out a few domestic markets where the fare gap is quite a bit lower than the regional average. Last year in Orlando, for example, the fare gap averaged 15% for purchases more than 21 days in advance and 30% for purchases made 7-21 days early. In Atlanta, the fare gap averaged 25% for purchases more than 21 days in advance.

The study offers a few ideas as to why prices between premium and economy tickets may be narrowing, including the fact that prices of economy fares increase faster than prices of seats in the (already pricey) premium cabins, but notes that “Perhaps airlines are lowering the fare gap between economy and premium cabin seating as part of a marketing move to entice more ‘average travelers’ to experience premium service. In today’s age of social media, where many air passengers Facebook or Tweet from 35,000 feet, the strategy might help raise awareness about high-end options on flights.”

Regional Trends

All regions are expected to report improved net profitability in 2015 over 2014. However, there are stark differences in profitability among the regions. Current and forward-looking industry financial assessments should not be taken as reflecting the performance of individual airlines, which can differ significantly.
North America: The strongest financial performance by far is being delivered by airlines in North America. Net post-tax profits are the highest at $13.2 billion next year (up from $11.9 billion in 2014). That represents a net profit of $15.54 per enplaned passenger, which is a marked improvement from just three years earlier. Net profit margins forecast at 6% exceed the peak of the late 1990s. This improvement has been driven by consolidation, helping to raise load factors (passenger + cargo) to 65% this year, lower fuel prices and ancillaries, which together push breakeven load factors down below 60% next year.
Europe: European airlines continue to struggle as evidenced by the highest breakeven load factors among all regions (64.7%). European airlines compete vigorously in the continent’s open aviation area. But they are hampered by high regulatory costs, infrastructure inefficiency and onerous taxation. As a result, and despite the industry in the region achieving the second highest load factor, financial performance has been poor. Net profits of $4 billion next year (up from $2.7 billion in 2014) represent only $4.27 per passenger and a net profit margin of 1.8%.
Asia-Pacific: Airlines in the Asia-Pacific region are expected to achieve a net profit of $5.0 billion in 2015 (up from $3.5 billion in 2014) for a 2.2% net profit margin. That translates into $4.30 per passenger. Some strengthening of cargo markets, particularly important in this manufacturing region, plus lower fuel costs, are expected to drive the moderate improvement on 2014.
Middle East: Middle East airlines have one of the lowest breakeven load factors (58.6%). Average yields are low but unit costs are even lower, partly driven by the strength of capacity growth. Passenger capacity is expected to expand by 15.6% in 2015 (up from 11.4% in 2014). Post-tax net profits are expected to grow to $1.6 billion in 2015 (up from $1.1 billion in 2014). This represents a profit of $7.98 per passenger and a net profit margin of 2.5%.
Latin America: Latin American airlines have faced a mixed environment. Weak home markets have hampered performance, but a degree of consolidation and some long-haul success is expected to boost net profits to $1 billion in 2015 (up from $700 million in 2014). That would be a profit of $3.53 per passenger and a net profit margin of 2.6%.
Africa: Africa is the weakest region, as in the past 2 years. Profits are barely positive ($200 million in 2015 which is an improvement on the break-even performance in 2014), and represent just $2.51 per passenger. Breakeven load factors are relatively low, as yields are a little higher than average while costs are lower. However, few airlines in the region are able to achieve adequate load factors, which are the lowest among the regions by almost five percentage points. Performance is improving, but slowly.

Private Jet Market

1.I am personally looking forward to seeing the Honda Jet finally certified. Timing couldn’t be better, with the full prices being so low more people will look at the smaller private jet. After delays to the 10+ year program, it will be fascinating to finally see how the revolutionary HondaJet performs in the VLJ market. The aircraft offers a spacious cabin for an aircraft of its size and claims to be 30% more fuel efficient than its rivals.
2.In The UK Market, FARNBOROUGH AIRPORT, playing on the strength of the recent merger between Hangar 8 & GAMA Aviation it will have a strong year. TAG Farnborough Airport is the one of Europe’s most efficient and contemporary business aviation airports. With the UK market performing more strongly than others in Europe, at Tyrus Wings we predict it will break its annual movements records and hit close to 25,000 private jet flights in 2015.
3. With two new mid-size jets coming onto the market, Cessna expects FAA certification of the $14.9 million Citation Latitude in mid 2015. And Embraer’s Legacy 500 will be entering the charter market, bridging the gap in their portfolio, between the Phenom 300 and Legacy 600. We’ll be watching carefully to see if these much-anticipated launches dent the popularity of the category leader, the Citation XLS/XLS+ – or other aircraft in the mid-size category, such as the popular Hawker 900.
4.. All eyes on Silicon Valley’s Private Jet Airport, Mineta San Jose Airport -destined to become the super-techno Biz Jet Aiport. Google are investing $82 million in building a new private jet terminal at Mineta San Jose Airport .This is due to be completed later in 2015 and we’ll see business aviation companies vying to set up their HQs there – as has happened elsewhere. The airport will become a key US centre for business aviation.
5. With low fuel prices driving aircraft operating costs down, the price of purchasing certain private jets will be lower too. At Tyrus Wings we predict the low end and midsize end of the private jet market to see prices go lower. However, we will see more movement on the larger end, in particular a race to buy Gulfstream G650s that has already started to happen and we could see pre-owned G650s sell for +$76M.
Overall lower oil prices will be encouraging more companies to do business internationally. Faster internet connectivity, more interaction with social media platforms will get goods flowing more from one country to the next. An increased number of people will adventure overseas on holidays to visit and explore new places. With the last 6-7 years having been poor for aviation, low oil prices will be giving this industry a big boost in 2015…
Fabrizio Poli
Aviation Analyst & Managing Partner
Tyrus Wings 


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Registered address:
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