16 March 2016
Global airline share prices were up 4.7% in February, according to the latest International Air Transport Association (IATA) financial indicators. Apart from Asia Pacific carriers, airlines in other regions all showed gains. Yet, Asia Pacific is acknowledged as the region with the most potential. Why are its airlines lagging then?
To paraphrase Bob Dylan, the answer, my friends, is blowing in the wind… While jet fuel prices have dropped to levels not seen in over a decade, currencies of many emerging markets – such as the Thai baht (THB) the Indonesian rupiah (IDR), the Vietnamese dong (VND) and even the Singapore dollar (SGD) – have been blown away, some depreciating over 20% against the USD, the very currency used to buy fuel and aircraft.
Compounding that, the airfreight sector is severely hurt; IATA reckons revenue for 2016 would be around USD50 billion. It was closer to USD70 billion not too long ago. And this is curtailing the income of carriers that traditionally depend on cargo, such as Korean Air and Thai Airways International.
Let’s take a look at some recent figures from the regional carriers.
Due to the fall in oil prices, many airlines have registered profits. Garuda Indonesia, for many years a struggling carrier with a dubious safety record, booked a USD78 million profit in 2015. In 2014 it lost USD370 million. Load factor rose to 77.3% (70.7% in 2014). However, load factor fell to 78% in January-February 2016, from 80% in the same period last year.
Likewise, Cathay Pacific reported profit of HKD6 billion for 2015. This compared to a profit of HKD315 billion in 2014. That’s up 90.5% year-on-year. Earnings per share were HKD152.5 cents compared to HKD80.1 cents in the previous year. The gains were largely due to low fuel prices. What it gained in lower fuel prices, it posted significant losses due to wrong bets on oil. Hedging loss widened to HKD8.47 billion from HKD911 million a year earlier.
The airline added: “The load factor increased by 2.4 percentage points, to 85.7%. Strong competition, a significant reduction in fuel surcharges, unfavourable foreign currency movements and the fact that a higher proportion of passengers were connecting through Hong Kong put downward pressure on yield, which decreased by 11.4% to HKD59.6 cents.” Moreover, while business class demand improved on regional routes, this was “not as strong as expected on some long-haul routes”. See CX 2015 earnings.
Meanwhile, Singapore Airlines (SIA) registered a 3Q (Oct-Dec 2015) net profit rise of 35% to SGD275 million compared to SGD202.6 million the same period a year ago. Passenger yield was slightly down at 11 Singapore cents, compared to 11.5 cents a year ago. Load factor grew to 80% from 78.3% and breakeven load factor (BELF) for 9MFY16 rose to 80.4% (from 80.2%).
The trend that we can see from both Cathay and SIA is that yields are being eroded. This is mainly due to intense competition from low-cost carriers that have resulted in a decline in airfares – in real terms by about 4% in 2015. So while we’re seeing higher traffic and more passengers, lower fares mean that a higher load factor – or percentage of occupied seats – is needed to break even for many airlines.
This yield erosion in part has contributed to the weak performances of many airlines’ share prices in Asia Pacific. In 2015, SIA’s stock price underperformed almost -10%, while Cathay was at -17% and Garuda at -54% according to a Bloomberg report. China’s sole discount carrier – Spring Air – was the best performer on the index.
Additionally, over capacity remains a serious concern, as is an oversupply of aircraft for some carriers whose financial profiles aren’t exactly strong. This is the risk many airlines face in 2016. Emerging market airlines will suffer when oil prices spike, and that’s a matter of when, not if.
The signs are ominous. Thai Airways is postponing deliveries of 14 twin aisle planes due to arrive this year until 2018. The carrier already has 24 widebody aircraft in storage, including 10 A340s, as it struggles to make money from its fleet of six Airbus A380s. Meanwhile, Garuda had earlier confirmed it would defer deliveries of several widebody aircraft this year.
For the savvy investor, this could well provide the impetus to take a closer look at some of the region’s airline stocks and maybe short them. Quite a number of those carriers are clearly over-valued and heavily exposed to the twin combo of oil and forex volatility. But beware, and tread carefully.
The airline industry is constantly fraught with challenges. Although many airlines are making (some) money, many still have large debts. And the more aircraft arriving in Asia Pacific, the more these debts pile up. Money is still cheap and airlines with poor credit can borrow easily for at least 50 basis points less than under normal conditions, especially from eager-to-lend Asian banks. Volatility is never far from any airline; the next crisis may just be lurking around the corner…