Thank goodness for low fuel prices

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By TESTCustomwebLP TESTCustomwebLP September 8, 2015 19:33

Thank goodness for low fuel prices

The big shadow has always been increasing interest rates and 2015 will be remembered as the year that talk of interest rate rises moves enormous sums of cash around the globe. Against this setting if we look across the globe at the airline sector, it is reasonable to state that if oil prices were at $80 a barrel or higher, maybe what we might consider normal prices, then this together with the dreadful state of affairs in the FX market would indeed have already seen a great many airlines pushed deep into the red with at least seventeen airlines, from my count, in a position of requiring urgent cash inflows to stay afloat. And yet with oil prices hovering around the $40 a barrel mark, there are still a number of airlines (outside of Russia) in deep trouble, such is the effect of currency outflows, none more so than South African Airlines (SAA) at this time.

SAA has been surviving on government loans for some years now, but when the last loan was made earlier this year in June to the tune of R6.488 billion there was significant political pushback and a great deal of public dismay at just how much money was being given to SAA without root and branch reform taking place. The total in loan guarantees given over by the government to SAA over the last few years now stands at a hefty 14.4 billion rand.

But with the South African rand falling even further against the US dollar yesterday (down 0.5% at 13.9450 against the dollar), it is reasonable to assume that any benefit from the recent deals with Chinese airlines will have been erased by increases in dollar costs. Moreover the rand has been falling for a few weeks now as traders worry about the sheer lack of South African foreign currency reserves, which shows no sign of improving with many stating that the continued slowing of Chinese manufacturing output will have a further dramatic effect on the all-important South African mining sector. The South African central bank has admitted it does not have enough reserves to try and defend the rand, which has slid more than 12% this year against the dollar as investors expecting US interest rates to rise have dumped emerging markets.
So, as South African government bonds come under renewed pressure, climbing 7 basis points to 8.635 percent yesterday, we have to ask the valid question: Will the South African government be in a position to bail out the airline again in a few months with another loan guarantee or will they try to sell the airline, this time at any cost? It is clear the South African government no longer has the funds to waste on an ailing national carrier, so the question remains if they try even being so close to an election; or on the other hand, will they let the airline fail so close to an election? Time will tell, but time is running out for SAA.

As a footnote it is amazing that the People’s Bank of China managed to flitter away $93.9bn of capital reserves in August after its interventions in the currency market, so that August 2% currency devaluation cost China a full 2.6% of its foreign reserves.
Meanwhile another airline that would have been most likely tipped over the edge by FX rates were it not for low fuel prices is Kenyan Airways. This airline late last week received $240 million – the Kenyan government provided a $40 million loan to the airline and the African Export-Import Bank approved a $200 million bridging loan – to be used to purchase the two 787s sitting on the tarmac at the Boeing factory in the USA because of the loss of the US Ex-Im Bank from the market. This is old news but it is worth considering if this suggests that the two aircraft valued at some $450m at list prices were actually sold at $240m? Now we all know this would be around the right mark but watch closely to see how Kenyan Airlines value the aircraft on their books post-delivery.
Also of significant interest at this time is the announcement last week that the Indonesian government is abandoning the policy of forcing low-cost carriers to charge higher prices, a piece of legislation that was seen as a kneejerk reaction to the 2014 AirAsia crash.

This latest move will allow Lion Air, Citilink and AirAsia to lower ticket prices to mid-2014 levels and get people back in the air – An essential move for the fortunes of Lion Air especially. As the weak local currency and rapidly-slowing economy is hitting the airline sector hard in Indonesia; the slowing of passenger growth is indeed a concern.
But the Indonesian government remains committed to close oversight of the aviation sector and it continues to threaten suspension of more than 10 airlines whose loans are greater than the value of their assets. Last week the Transportation Ministry threatened to suspend eight airlines for not meeting a long-standing requirement to own least five aircraft. The ministry said flight permits for the airlines would be suspended for October if they aren’t in compliance by Oct. 1, from then on they will have one month to solve the issue or else face a permanent withdrawal of flight permits. This will affect AirAsia X and one wonders how that airline will find a permanent solution within the next 70 days. AirAsia X will have to re-register aircraft from one subsidiary to another in order to avoid service suspensions or an exit from the market.

The Indonesian rupiah is at a 17-year low against the US dollar, which indicates that now is the worst possible time to start an airline price war – but will Lion Air do it anyway? AirAsia Indonesia posted a 16% decline in its revenue and an 18% drop in passengers in the second quarter this year and the airline is currently reducing its fleet by four A320s. A price attack by Lion Air might well drive them out of the market completely if implemented now. If Lion Air can take the revenue hit then now might be a good time for an all-out price war for control of the skies of Indonesia.

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By TESTCustomwebLP TESTCustomwebLP September 8, 2015 19:33