Moody’s retains stable outlook for global airline industry

Mumbai: International ratings agency Moody’s today retained its stable outlook on the global airline industry, as it expects the declining but still-strong operating margins to continue, but warned that rising fuel cost poses headwinds. Moody’s projects the aggregate operating margin of rated airlines to approach 9 per cent in 2017 and about 8 per cent in 2018, from a projected 10.8 per cent in 2016. “This declining trend reflects declines in operating profit of airlines of about 11 per cent in 2017 and about 12 per cent in 2018, widening from a projected 1.2 per cent contraction in 2016,” Moody’s said in a note issued from its New York headquarters.

The report also warned that though the outlook remains stable, fuel costs and capacity addition and utilisation will be key to upcoming earnings trend. But the agency was quick to add that these changes come within its -20 per cent to +20 per cent range for a stable outlook. “American carriers will still have the industry’s highest operating margins, despite being on track to drop by about 20 per cent over the next 12-18 months due to modestly higher fuel and increases in labour costs under new union contracts agreed to in 2016 at major airlines,” says Jonathan Root, a vice president and a senior credit officer.

Legacy carriers in Europe and in increasingly competitive developing markets, on the other hand, face greater challenges to grow their operating margins. “Low-cost, low-fare carriers will advance their expansion across Europe and in long-haul, sustaining pressure on legacy operators,” Root said, adding it will be much the same across Asia as well. Passenger demand will continue to trend upwards, albeit slowly, supported by modest but steady global economic growth and increasing air travel in the developing world. But aggregate capacity growth will outstrip growth in aggregate demand by about half a percentage point due to the still relatively low cost of fuel, availability of older aircraft coming off leases and growth of low-cost carriers.

Capacity growth across geographic regions will vary, with the US growing in the low single-digits, Europe in the mid-single digits, and, according to Iata, developing markets like Asia and the Middle East growing about 7.5 per cent and 10 per cent, respectively. Unrated airlines will lead capacity growth in Latin America in 2017. Despite India being the fastest-growing civil aviation market, the report does not have a word on this, so is the case with China, which is the second largest market in the world after the US.