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For Immediate Release
Chicago, IL – December 14, 2012 – Today, Zacks Equity Research discusses the U.S. Airlines, including Delta Air Lines Inc. (DAL - Analyst Report), United Continental Holdings Inc. (UAL - Analyst Report), US Airways Group Inc. and The Boeing Co. (BA - Analyst Report).
A synopsis of today’s Industry Outlook is presented below. The full article can be read at
In the base-case scenario, there are several factors that will drive overall airline profits in 2013:
Passenger & Cargo: While the economic slowdown in several European countries and in the U.S. will keep travel growth at check, markets in Asia, Latin America and the Middle East would continue to boost growth in 2013. IATA projects global airline passenger growth of 4.5%, while cargo business will see an expansion of 2.4%.
Coming to demand-supply balances, demand (measured in traffic) will outpace capacity (combined passenger and cargo) as the year advances. Capacity is expected to show an increase of 3.8% while air travel demand is expected to see a 3.9% pickup.
Fuel Price Rise: Airline profit outlook depends on fuel prices, the major variable component in the industry.
Lower fuel price no doubt cuts the airlines' operating expenses, but it also indicates a slowing economy and the consequent fall in global air travel demand. With pricing decrease or increase (as it did by 15% in the third quarter of 2012), the profitability level of the carriers will fluctuate.
The Association projects fuel to account for 32% of the overall operating costs in 2013, which is at a similar level with the oil price spike in 2008.
High crude oil prices, largely a function of geopolitical forces, are beyond the control of the airlines. However, IATA expects crude oil price to hover around $105 per barrel in 2013 using Brent crude oil as a basis. We expect crude oil and jet fuel prices to go up further because of the economic-political tensions in many parts across the globe, but forecasting this key variable with any level of accuracy has always been extremely challenging.
Getting Rid of Unprofitable Jets: Most of the air carriers at large are scrapping or cutting flights in many small airports that are unprofitable in order to reduce their fuel cost burden. North American carriers lead the way in capacity discipline.
Over the last two years, Delta Air Lines Inc. (DAL - Analyst Report), United Continental Holdings Inc. (UAL - Analyst Report), US Airways Group Inc. and American Airlines – a subsidiary of AMR Corp. - slashed their capacity by about 16.6%, 16.3%, 14.3% and 8.4%, respectively as per the Centre for Aviation (CAPA).
Recently, Delta Air Lines entered into an agreement with Canadian firm Bombardier Aerospace to purchase 40 new CRJ900 two-class regional jets. These and superior two-class 76-seat aircraft will replace Delta’s old and depleted 60 single-class 50-seat domestic airplanes.
The other international airlines that reduced their capacities over the past two years are Air Canada, Air France, Qantas Airways, Korean Airlines and All Nippon Airways.
Rightsizing: Passengers are demanding comfortable and quality services with proper security. Hence, airlines are focusing on fleet rightsizing by bringing in new and advanced aircrafts that gel in a fuel-expensive environment.
Though initially expensive, the new aircrafts are more fuel efficient than the existing ones and have helped in lowering operating and maintenance costs. Over the next 2 decades (2011-2030), global airlines are expected to invest $3.5 trillion to buy 27,800 new airplanes, having seating capacity of more than 100. New airlines business, advanced technology and dynamic growth of air travel in emerging markets throughout the world are boosting the demand for these airplanes.
About one-thirds of the global demand is expected to come from Asia, which currently account for 28% of global air passengers. The demand in Europe and the U.S. is expected to fall to 23% and 20% by 2030, respectively, from the current 27% that each enjoy.
Airbus, the world's leading aircraft manufacturer, is expected to deliver the largest number of aircraft to the airline companies, followed by The Boeing Co. (BA - Analyst Report). The progress thus attained would help the companies regain their lost profits.
Hedging Strategies: Hedging strategies are used by airline companies to cope with the rising fuel prices. The carriers use a combination of calls, swaps and collars at varying WTI crude-equivalent price levels to hedge.
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