10 June 2016
In his final Annual General Meeting speech as chief of the International Air Transport Association (IATA), Tony Tyler concluded that the airline industry is a “force for good.”
However, he also noted that, on average, airlines will make only USD10.42 for each passenger carried. He continued: “In Dublin (where the event was held) that’s enough to buy four double espressos at Starbucks.”
Aviation bosses are fond of making comparisons with Starbucks. This year, airlines will make just USD5.60 for every USD100 in sales, compared to over USD11 at Starbucks. What does it tell us? That it’s incredibly tough to make decent money in the airline industry.
Never mind that IATA expects a collective net profit of almost USD40 billion for 2016 (from a revenue of about USD717 billion); Asia Pacific carriers are expected to post a USD7.8 billion profit this year, up from USD7.2 billion in 2015. More importantly, there will be more (over)-capacity, forecast to grow 9.1% this year, ahead of demand that’s going to grow around 8.5%.
According to IATA’s latest Airlines Financial Monitor global airline share prices fell by 3% in May, and almost 11% lower since the beginning of 2016. And that’s despite an environment of low jet fuel prices. Interestingly, according to this article in The Street – the 10 best airline stock this year, with the exception of top-ranked Ryanair, are all in North America.
Why are Asian airline shares lagging? One of the reasons is there’s just too much competition, very intense competition at that, too. And there’s just not enough appetite among investors for airline stock.
Just look at some of the examples: When Garuda Indonesia listed in January 2011, its IPO price was IDR750 and the stock has languished mostly below IDR500 for a while now despite briefly touching IDR770 in mid-2012.
Then there was Bangkok Airways. It went to market in November 2014 at THB25 and on the first day of trading closed at THB22. The stock is currently hovering around the same level as its IPO price.
Even Cebu Pacific, in our view one of the better managed LCCs in the region, saw its stock faltered for much of the past 2-3 years, following an October 2010 IPO listing at PHP125 (Cebu shares now are just valued at PHP100 apiece).
So it is perhaps unwise for VietJet, the rapidly growing LCC from Vietnam, to go to market this year if airline IPOs in the past 6-7 years in Asia are anything to go by…
Starbucks, meanwhile, is looking quite good at around USD55-56. The coffee company is partnering with Anheuser-Busch to make, bottle and distribute ready-to-drink teas (yes, teas!). In early May, Goldman Sachs raised its target price to USD72/share (from USD66/share). It’s a safe bet Starbucks will continue to make more profit than airlines.
Airbus Innovation Days
At an event in Hamburg end-May, aircraft manufacturer Airbus hosted over 100 guests from across the globe, providing an update on its planes and its financial health.
Airbus Chief Operating Officer (Customers) John Leahy in his usual, candid manner suggested a new name for Boeing’s potential new, stretched version of the B737 MAX – “we call it the Mad Max”. He also described Bombardier’s CSeries aircraft as a “cute little thing”.
Airbus is ahead of Boeing in the commercial aircraft market, with 53% market share. Not surprisingly, Airbus leads in the narrowbody segment, with the A320 family of aircraft having a backlog of 5,478 airplanes. That’s equal to 8 years of production at a rate of 60 aircraft each month.
In the widebody segment, Airbus reckons (and we concur) that the A350-1000 will lead the way in the coming years, ahead of Boeing’s 777X programme. Airbus claims the A350-1000 has a -23% cost per seat with a range of 450nm.
The case for the A380 remains as before, doubtful, in our view. This despite, as Airbus stressed, “an A380 takes off or lands every 3 minutes”. Emirates is by far the biggest operator of the A380 (142 in total, over 70 in operation) although its boss Tim Clark doesn’t expect Airbus to upgrade the superjumbo. His main concern, he said, “is that they stop producing the plane”.
That might not happen anytime soon but it could.
Singapore Airlines (SIA) was launch customer of the A380 and took delivery of the first plane in October 2007. SIA is reportedly unlikely to extend its lease on five A380s from lessor Doric.
It’s clear Airbus is building the A380s at a loss; output in 2017 could be as low as 20 planes. We’ve always been skeptical of the aircraft since its launch and have maintained that while it is technologically and aesthetically attractive to passengers, the A380 is a niche product and won’t make money for Airbus. See here.
The A380 is now entering an interesting phase – the second hand market. British Airways is reportedly looking for used A380s while Malaysia Airlines (MAB) is now having second thoughts about flogging the big bird. MAB appears to have shelved plans to sell the A380s and instead use them for charter services.
That said, we know of a couple of leasing companies who feel they can make the A380s work in the secondary market. This might include placing the aircraft with existing A380 operators or the possibility of new operators such as Iran Air. The A380 seems to still have some life in it yet. But only just.