ALC prices new $600m unsecured notes issuance; IATA revises profitability outlook for 2017 up

Eleanor Steed
By Eleanor Steed June 6, 2017 11:00

ALC prices new $600m unsecured notes issuance; IATA revises profitability outlook for 2017 up

Air Lease Corporation (ALC) has priced its $600 million unsecured senior notes due 2022 at 2.625%. The notes were offered to the public at a price of 99.553% to par. The sale of the Notes is expected to close on June 12, 2017.

The Notes will mature on July 1, 2022 and will bear interest at a rate of 2.625% per annum, payable semi-annually in arrears on January 1 and July 1 of each year, commencing on January 1, 2018.

ALC intends to use the net proceeds of the offering for general corporate purposes, which may include, among other things, the purchase of commercial aircraft and the repayment of existing indebtedness.

Citigroup Global Markets, Goldman Sachs, JPMorgan and SunTrust Robinson Humphrey are acting as joint book-running managers for the offering.

Meanwhile, the International Air Transport Association (IATA) has revised its 2017 industry profitability outlook upwards. Airlines are now expected to report a $31.4 billion profit (up from the previously forecast $29.8 billion) on revenues of $743 billion (up from the previously forecast $736 billion).

“This will be another solid year of performance for the airline industry. Demand for both the cargo and passenger business is stronger than expected. While revenues are increasing, earnings are being squeezed by rising fuel, labor and maintenance expenses. Airlines are still well in the black and delivering earnings above their cost of capital. But, compared to last year, there is a dip in profitability,” said Alexandre de Juniac, IATA’s Director General and CEO.

In 2017 airlines are expected to retain a net profit of $7.69 per passenger. That is down from $9.13 in 2016 and $10.08 in 2015. The average net profit margin stands at 4.2% (down from 4.9% in 2016).

“Airlines are defining a new epoch in industry profitability. For a third year in a row we expect returns that are above the cost of capital. But, with earnings of $7.69 per passenger, there is not much buffer. That’s why airlines must remain vigilant against any cost increases, including from taxes, labor and infrastructure,” said de Juniac.

While overall industry performance is strong, major regional variations remain. About half the industry profits are being generated in North America ($15.4 billion). Carriers in Europe and Asia-Pacific will each add a $7.4 billion profit to the industry total. Latin America and Middle East carriers are expected to earn $800 million and $400 million respectively. Airlines in Africa are expected to post a $100 million loss.

The demand environment has been much stronger than anticipated. Expectations for GDP growth in 2017 stand at 2.9%. If realized this will be the strongest global economic performance since 2011.

Passenger demand is expected to grow by 7.4% over the course of 2017. That is the same growth rate as 2016 and 2.3 percentage points higher than previously forecast.

This surge in expected demand takes traffic growth ahead of planned capacity growth. As a result, the average passenger load factor is expected to reach 80.6% (slightly ahead of the 80.3% achieved in 2016), helping to boost unit revenues.

Cargo demand is expected to grow by 7.5% in 2017. That is more than double the 3.6% growth realized in 2016 and 4.0 percentage points above the previous forecast for this year. Total cargo carried is expected to reach 58.2 million tonnes. This is higher than previously forecast (by 2.5 million tonnes) and 3.9 million tonnes over 2016 levels.

Cost increases for fuel, labor and maintenance accelerated in the first quarter. Overall industry expenses are expected to rise to $687 billion, a $44 billion increase on 2016. Industry revenues are expected to increase to $743 billion, $38 billion more than 2016.

Cheaper fuel was responsible for most of the 8% fall in airlines’ unit costs in 2016, but that impact is coming to an end due to the influence of fuel hedges and rising spot prices. IATA says that some regions will still see some modest benefits from hedges but this will be insufficient to offset the rise of other operating costs. The total industry fuel bill is predicted to be $129 billion, slightly below the 2016 level of $133 billion, and accounting for 18.8% of the industry’s total costs. The forecast anticipates an average oil price of $54.0/barrel for Brent Crude (up from $44.6/barrel in 2016 but close to current levels) reflecting a broad balance between OPEC supply cuts and new supply from US shale oil producers. That will lead to jet kerosene prices averaging $64.0/barrel this year.

Aside from the effect of fuel prices and hedging, the main driver of increased costs this year is coming from labor and industry suppliers which are exerting pressure for an increased share of the airline industry’s improved financial performance. Last year productivity gains offset wage increases, but this year we expect unit labor costs to rise by almost 3%, continuing what has already been evident in the first quarter.

Yields are still expected to be down on 2016 levels, but there are signs of stabilization in the first half of the year with a slight improvement anticipated towards year-end, driven by better capacity utilization and the imperative to respond to the rise of unit costs.

North American carriers are expected to post a $15.4 billion net profit (down slightly from the $16.5 billion in 2016), which is equal to $16.32/passenger. Passenger demand is expected to grow by 4.0%, slightly behind expected capacity growth of 4.4%.

Asia-Pacific airlines are expected to post a $7.4 billion net profit (down from $8.1 billion in 2016) which is equal to $4.96/passenger. Passenger demand is expected to grow by 10.4%, slightly ahead of expected capacity growth of 8.8%.

European airlines are expected to post a $7.4 billion profit (down from $8.6 billion in 2016) which is equal to $6.94/passenger. Passenger demand is expected to grow by 7.0%, slightly ahead of expected capacity growth of 6.9%. Terror incidents in 2016 have dented European demand. Performance over the first months of the year pointed towards the recovery of lost ground. However, recent terrorist attacks demonstrate that the threat continues to hang over the continent with potential negative impacts on demand.

Latin American airlines are expected to post a $0.8 billion profit (up from $0.6 billion in 2016) which is equal to $2.87/passenger. Passenger demand is expected to grow by 7.5%, well-ahead of expected capacity growth of 6.7%.

Middle East airlines are expected to post a $0.4 billion profit (down from $1.1 billion in 2016) which is equal to $1.78/passenger. Passenger demand is expected to grow by 7.0%, slightly ahead expected capacity growth of 6.9%.

Trading conditions for the Middle Eastern carriers have sharply declined over the last six months. Profitability and load factors are down significantly, as traffic and some business models have come under pressure. There is growing evidence that the ban on large electronic devices in the cabin and the uncertainty created around possible US travel bans is taking a toll on some key routes. Meanwhile the region is struggling with increased infrastructure taxes/charges and air traffic congestion.

African airlines are expected to post a $0.1 billion loss (in line with the $0.1 billion loss in 2016) which is equal to a loss of $1.50/passenger. Passenger demand is expected to grow by 7.5%, slightly behind expected capacity growth of 7.9%.

African carriers remain in the red; but without a deterioration on 2016 performance.

Eleanor Steed
By Eleanor Steed June 6, 2017 11:00