Airline profits have been further squeezed during Q3 2018 and their outlook is very uncertain for the next months, IATA’s December financial monitor as well as UK consultants IBA January survey show. Both were released late last week. For 2019 IBA is pessimistic on the industry if the US dollar remains as strong as it is.
IATA noticed EBIT margins of 97 airlines dipped by 3.5% to 10.7%, a larger decline than seen during Q2. European airlines had the widest margin (17.4%). Free cash flow at 64 airlines sampled dropped by 0.9% in Q3 and was negative in Europe, Latin-America, the Middle-East and Africa.
Yields have seen a further decline, but whereas premium traffic seems to recover Economy Class yield has dropped further. IATA says the reason for this divergence is that Economy Class demand is more price sensitive than premium traffic. Outside the US yields remain too low for sustainable profitability, says IBA. Within Europe, some airlines are unable to compete with legacy carrier groups and low-cost carriers.
Load factors dropped in November to 80% flat. While IBA still sees an upward trend, growth is slowing. IBA’s COO Stuart Hatcher said growth is best in North America, while the Middle-East has been dragging down numbers. For 2019 he expects a slowdown in India and China after tremendous growth in traffic in recent years.
IBA notes that in 2018 27 airlines ceased operations compared to 15 the previous year, although some are still trying to continue. Most airlines that left business were relatively small, their fleets with less than 10 aircraft. The UK consultant agency sees that lease defaults to lessors have increased significantly, with some airlines behind paying schedule for six months or more. Yet, lessors seem to take a wait-and-see approach and are not attempting to repossess their aircraft, as did happen in 2008-2010, says Hatcher.
For 2019, all depends on the US dollar: a strong currency will kill the market as airline costs will rise, says Hatcher. A lower oil price could prevent this from happening, but drop by 10% seems unrealistic and oil is expected to trade at $70-80 a barrel.
IBA also surveyed trends within the aircraft markets and noted a few interesting things within the widebody fleet. Over 20 Boeing 787s are still parked as they wait for modified Rolls-Royce Trent 1000 engines, but there are quite a few others models that have been parked as well: 71 747-400s, 48 767-300ERs, 91 777s, 46 Airbus A330s, 67 A340s and two A380s. Some of them could be scrapped or be reconfigured to freighters, but overall the outlook for new widebody orders is most uncertain, with nothing on the horizon for the 777-8 and -9. The 787 and A350 have a firm position.
This year IBA expects a peak this year in widebody end of lease contracts, with some 200 lease ends and 80 contract extensions that include a few 777-300ERs. Retirement age of wide bodies and narrow bodies has risen to close to 25 years.