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Moody's changes global airline outlook industry to positive on fuel savings

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Capital Market
Last Updated : Jan 20 2015 | 9:15 AM IST
Moody's Investors Service has changed its outlook on the global airline industry to positive from stable as the sharp drop in fuel costs will bolster financial performance.

Moody's projects adjusted operating profit margins for the industry of 12%-14% in 2015 and 11.5%-13.5% in 2016, significantly above our estimate of 8.5%-9.5% for 2014. "US carriers will continue to garner the largest increases, leading to stronger performance relative to airlines based in increasingly competitive developing markets, and in Europe," says Moody's Vice President -- Senior Credit Officer Jonathan Root.

Passenger demand will also increase due to steady economic growth, higher disposable incomes and rising air travel in developing economies. Passenger demand, which is measured as revenue passenger kilometres (RPKs), is estimated at 5%-6% in 2015 and 2016.

Yields are forecast at flat to 2% in 2015 and 1%-3% in 2016, however. Despite the slower yield growth, Moody's says its profit margin and RPK forecasts support a positive outlook.

With the average price of jet fuel declining $1 per gallon or more in 2015, Moody's says aggregate fuel costs for rated US airlines will decline as much as $15 billion, including the impact of hedging.

Airlines outside the US will also benefit from declining fuel costs in 2015, but face larger hurdles for similar profitable gains.

The US airlines' savings are unlikely to be passed on to customers as record-high load factors and sustained demand lessens the incentive to do so. Moody's says the windfall will be used for debt reduction, aircraft purchases and shareholder returns.

Longer-haul flights will see fares decline, particularly in Asia, where fuel charges are more prevalent and regulated by some governments.

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Capacity growth will continue to remain balanced to passenger demand in the US, Australia and Europe as the airlines seek to earn acceptable financial returns.

In Asia, capacity growth will outstrip demand growth; however operators are not likely to add extra capacity in 2015, even with the lower fuel prices.

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First Published: Jan 20 2015 | 1:37 AM IST

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