FX challenges ahead

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By TESTCustomwebLP TESTCustomwebLP April 30, 2015 20:10

FX challenges ahead

It is a big day with results in from IAG, Air France, Norwegian and Airbus but perhaps the big story of the day that has industrywide ramifications is the US Federal Reserve signalling last night that it will seemingly not be moved by weak economic data and will keep the markets on high alert for an imminent interest rate rise.

The official US growth figures released yesterday for the three months to March were it has to be said very poor, showing the US economy grew by just 0.2% on an annualised basis. Most forecasts expected the figure to come in at 1% at least, still well below the 2.2% from the quarter preceding this one.

The result was that the US Dollar shed 1% and 0.5% of its value against the Euro and Sterling respectively before the Fed announcement on interest rates led to a partial recovery.

The Fed is confident that the weak data is a blip caused by poor weather and strikes at West Coast ports.

So today fuel, aircraft, engines and parts for the same are slightly cheaper than they were 24 hours ago for those with the bulk of revenues in currencies other than US Dollars, but the writing remains on the wall. The US Federal Reserve is still more likely than not going to start the slow and gradual increase of interest rates following its next meeting in June 2015, that will see the US Dollar strengthen further, which could mean trouble ahead for many emerging currencies such as the Indian Rupee, South African Rand, Brazilian Real to name but a few, with some senior economists predicting that the Mexican Peso my come under pressure also.

We have already gone into detail on the effects of interest rate raises on the lessors, so today thoughts turn to airlines and especially those without FX hedges in place.

Summer 2015 could prove a time when the booming Mexican/US airline market comes under some pressure due to the US Dollar value and that could see a slight check on demand that may in turn start a price war for market share, this prediction is a highly likely outcome given the increases in capacity on US/Mexican routes with airlines locked on a course of capacity growth. Latin American aviation does indeed look to be significantly exposed to any significant increases in the value of the US Dollar more than most other regions. Also the Indian market will see fuel costs and the cost of aircraft and parts increase, this will come at a time when SpiceJet is flying passengers who have paid less to fly than they would have done to travel by rail – So can SpiceJet handle even a modest increase in fuel costs during that same period? More working capital will be required in 3Q 2015. Also many airlines already under pressure across the Southeast Asia region will feel a pinch if the Fed begins to increase rates this summer. Summer 2015 will be a very interesting time indeed for the airline sector and of course for those lessors without interest rate hedges in place.

In other interesting news you may have noticed that American Airlines grounded a number of aircraft yesterday because its flight package iPad app crashed – Are airlines becoming overexposed to these new technological faults? The app saves American some 400,000 gallons of fuel per annum, however.

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By TESTCustomwebLP TESTCustomwebLP April 30, 2015 20:10