Moody’s: Global airline industry outlook remains stable; fuel costs and capacity to be key to upcoming earnings trend

Eleanor Steed
By Eleanor Steed January 23, 2017 12:52

Moody’s: Global airline industry outlook remains stable; fuel costs and capacity to be key to upcoming earnings trend

Moody’s Investors Service is maintaining its stable outlook on the global airline industry, reflecting the rating agency’s expectations of declining but still-strong operating margins relative to the sector’s historical levels.

Moody’s projects the aggregate operating margin of rated airlines to approach 9% in 2017 and about 8% in 2018, from a projected 10.8% in 2016. This trend reflects declines in operating profit of the rated airlines of about 11% in 2017 and about 12% in 2018, widening from a projected 1.2% contraction in 2016. These rates of change fall within Moody’s -20% to 20% range for a stable outlook.

“US carriers will still have the industry’s highest operating margins, despite being on track to drop by about 20% over the next 12 to 18 months due to modestly higher fuel and increases in labor costs under new union contracts agreed to in 2016 at major airlines,” says Moody’s Vice President — Senior Credit Officer Jonathan Root. “A mature domestic market, a more rational industry structure and modest exposure to weaker foreign currencies will help US carriers maintain that position.”

Legacy carriers in Europe and in increasingly competitive developing markets, on the other hand, face greater challenges to grow their operating margins.

“Low-cost, low-fare carriers will advance their expansion across Europe and in long-haul, sustaining pressure on legacy operators,” explains Root. “It will be much the same across Asia as well.” Passenger demand will continue to trend upwards, albeit slowly, supported by modest but steady global economic growth and increasing air travel in the developing world. Aggregate capacity growth, however, will outstrip growth in aggregate demand by about half a percentage point due to the still relatively low cost of fuel, availability of older aircraft coming off leases and growth of low-cost carriers.

Capacity growth across geographic regions will vary, with the US growing in the low single digits, Europe in the mid-single digits, and, according to IATA, developing markets like Asia and the Middle East growing about 7.5% and 10.0%, respectively. Unrated airlines will lead capacity growth in Latin America in 2017, while rated carriers, LATAM Airlines Group S.A. (B1 stable) and Gol Linhas Aereas Inteligentes S.A. (Caa3 negative), will slow capacity growth in 2017 as they continue to restructure operationally.

Eleanor Steed
By Eleanor Steed January 23, 2017 12:52