Industry review and outlook: DVB Bert van Leeuwen Extracted from Airfinance Annual • 2016/2017 Industry review and outlook: DVB Industry review and outlook Bert van Leeuwen, managing director, aviation research, DVB, says that, although the industry is still enjoying growth, there is concern about how, and when, the boom will end. he golden age of commercial revision of the 2017 global growth their customers. According to the Taviation continued during the projection. The IMF also noted some International Air Transport Association first half of 2016. While geopolitical pick-up in Chinese infrastructure (IATA), the trade association and economic events caused investments and higher oil prices. representing some 265 airlines or significant uncertainty in many On 23 June, after the UK voted in 83% of total air traffic, average return parts of the world, passenger traffic favour of leaving the European Union, fares (before surcharges and taxes) continued on its growth path. Despite things changed and an important in constant (2015) US dollars will drop slowly increasing fuel prices, airline downside risk for the world economy from $407 in 2015 to $366 in 2016. profitability on an aggregated level is materialised. Also the financial While average fares have been still at very comfortable levels. markets were caught by surprise. falling for decades, it has been the After an almost unprecedented Because of the expectation that the lower fuel price that enabled airlines period of relative prosperity in the uncertainty resulting from Brexit to lower ticket prices by such a huge industry, questions are being asked will take its toll on confidence, in amount. The projected total spend about the longevity of this boom, general, and in financial conditions, in of air transport in 2016 is anticipated especially by those observers that particular, the IMF adjusted its World to be about $740 billion, 1.3% lower had seen how the almost 10-year long Economic Outlook (WEO) in July compared with the $750 billion from boom in the shipping industry ended. downward by 0.1 percentage point 2015. In real volume terms, both the In the early months of 2016, some compared with its April forecast. The revenue passenger kilometres (RPK), aviation industry leaders, mainly from European economies are expected to as well as the number of passenger the original equipment manufacturers be impacted most, with only modest departures, are projected to increase. (OEMs), as well as North American effects on the US and China. In its The RPK volume will rise from 6.679 airlines, dismissed concerns that the July WEO, the IMF projected a 3.1% billion in 2015 to an estimated 7.093 aviation business cycle was on the increase in the world output for 2016, billion this year, a 6.2% increase. The cusp of a downturn. increasing to 3.4% for 2017. number of passenger departures Airbus’s chief operating officer Another interesting and highly will increase by about 6% to 3.783 customers, John Leahy, was quoted relevant change in the IMF billion. The airline industry is offering as saying “aircraft manufacturing is projections is the assumed oil price. its customers an increasing range no longer a cyclical business”, and For 2016, the average projected oil of direct connections. Over the past American Airlines chief executive price was increased from $34.75 a 20 years, connectivity has doubled officer Doug Parker as “… it is highly barrel (bbl) to $42.90/bbl and for the and today the world’s airlines offer unlikely you are going to see losses year 2017 from $40.99 to $50/bbl. connections between more than again in this business”, later explained In its July report, the IMF concluded 18,000 unique city-pairs. by the airline that he “was not trying that from a macroeconomic The impact of terrorist actions on to say that no one will ever lose perspective, Brexit substantially global travel and tourism in 2015 money again in the airline business” increased economic, political and 2016 seems to be relatively but rather that “down-cycles won’t and institutional uncertainty, with modest, compared with the impact of look like they did in the past”. projected negative consequences, similar kinds of atrocities in the past. At the opposite end of the especially in European economies. Despite the apparently increasing spectrum, reputable analysts Given those economic frequency and high-profile nature of could be found, including Avitas’s uncertainties, plus the high level of these atrocities, it seems the impact Adam Pilarski, who questioned the terrorist activities and political unrest on travel and tourism is mainly felt assumption that “we are entering the (such as in Turkey), it is almost a locally. The World Travel & Tourism magical world of no aviation cycles”. miracle that passenger traffic has Council (WTTC) expects that for 2016, More on this later. continued its solid growth path. Over the direct gross demestic product During the first months of 2016, the the first half of 2016, global revenue (GDP) contribution of the sector will global economy evolved in line with passenger kilometres increased by still grow by 3.1%. the International Monetary Fund’s 6%. According to WTTC, only three (IMF) expectations, and improvements The growth in air transport can countries have seen their outlook in a few large emerging markets partly be explained by the lower ticket deteriorate during the first months of suggested a potential modest upward prices, which the airlines are charging 2016. Despite the Olympic Games, 6 Airfinance Annual • 2016/2017 Industry review and outlook: DVB higher load factors and more income Airline industry – results per region from ancillary services. Traditionally, when airline profitability went up, the new order 30.00 [US$ bn] [US$ ] volume for commercial aircraft also 25.34 increased. This link has been broken 25 25.0025 22.90 in the past year. While the industry 20 20.0020 profit doubled between 2014 and 2015, the number of new aircraft 15 15.0015 orders dropped to 2,400 from about 3,600 (new orders for western-built 10 10.0010 jets, all commercial operations, 7.80 7.83 7.50 7.83 including type swaps). This trend 5.94 5 5.00 5 seems to have continued in the first 1.60 eight months of 2016, with about 1,100 0.10 0.38 0 0.00 0 orders versus almost 1,400 during the -0.50 same period in 2015. -5 Both the Boeing 737 and the -5.64 Airbus A320 booked decent order Africa Asia-Pacific Middle East Latin America North America Europe -10.00 volumes over this period. Airbus sold Projected 2016 net post-tax profit in US$ billion Projected 2016 net post-tax profit per passenger in US$ Source: IATA "Economic Performance of the Airline Industry, mid 2016" about 300 Neos and 130 Ceos but there was a significant number of type swaps included in this number. held in Rio, Brazil, turmoil and weak 5.9% to 9.3%, and for 2016 a further Boeing sold about 210 Maxs and 110 macroeconomics have caused increase to 9.8% is projected. NGs. Bombardier finally seemed to growth to deteriorate from -0.9% It should be noted that the main have hit the jackpot with 130 orders to -1.6%. Turkey will see the direct source of profitability is the North for the CSeries. Widebody aircraft contribution of travel and tourism to American market. It is interesting sales were particularly hit in 2016, the GDP deteriorate from an initially to compare the absolute post-tax with only 125 orders in the first eight anticipated -0.2% to -3.2%. Obviously, profit per region with the profit per months. in the case of Turkey, many factors passenger. By both criteria, North It has been suggested that the play a role: a spate of terrorist attacks, America stands out. Apart from the relatively low fuel price has taken the failed military coup, changes benefit of lower fuel costs, the North away a major incentive for airlines to in the internal political climate, the American result can be explained order fuel-efficient new-technology conflict with Russia and the war in by the increased market power of aircraft. It is difficult to find convincing nearby Syria. the major airlines after a wave of proof for this. Jet fuel (US Gulf Coast, The third country to suffer is France. consolidation. This has enabled FOB) reached a low in January While still in positive territory, the improved pricing power, as well as 2016 at just over $0.80 a gallon but growth in the contribution of travel and tourism to the French GDP will be reduced to 1.1% from 2.9% because of Crude oil and jet fuel price development the various terrorist acts in the country, including the atrocities in Nice in July. [ ] [US$ ] From a financial perspective, the 300 300 airlines are at a completely different level compared with years ago. While 250 250 during the first decade of this century (2000-09) significant losses were booked, this changed dramatically 200 200 after 2010 when, according to International Civil Aviation 150 150 Organisation figures, global airlines booked a net income of $17.3 billion. 100 100 In 2015, partly as a result of the low oil prices, net income doubled from 50 50 the previous year to $35.3 billion. For 2016, preliminary IATA figures indicate 0 0 a potential net post-tax profit of $39.4 Dec 13 Mar 14 Jun 14 Sep 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 billion. Between 2014 and 2015, the US Gulf Coast Jet Fuel Spot (US¢ per gallon) WTI Spot (US¢ per gallon) return on invested capital jumped US Gulf Coast Jet Fuel Spot (euro cent per gallon) WTI Spot (euro cent per gallon) Source: Energy Information Agency and European Central Bank from an already unusually positive 8 Airfinance Annual • 2016/2017 Industry review and outlook: DVB subsequently showed a steady climb the German export credit agency, lower pace compared with 2015.