Airline tickets, which have so far managed to resist deflationary pressures, may be moving towards a rather pronounced collapse.
Yesterday, we saw a JP Morgan economist speculate that the 34 per cent 12-month increase in air fares contained in the UK’s December inflation figure was on the verge of a “reversal”.
Today Collins Stewart’s Andrew Fitchie provides some detail, using the International Air Transport Association’s (IATA) latest figures on premium traffic (first- and business-class).
Recently released IATA premium traffic data [chart below] highlights that premium yields [average ticket prices] are showing strain; 18 months of yield growth fizzled out in November with yields flat on volumes down 12%. This will in part reflect the unwind of fuel surcharges. However, it highlights the risk ahead as corporate-driven premium volumes fall and pricing is squeezed. Air France yesterday cited weak premium yields (along with a collapse in freight revenues) as the key drivers of their profits warning. In November, BA surprised the market with a 13.8% increase in Q2 yields; it raised its full year revenue guidance from 3% to over 4% growth. The deterioration illustrated in the chart would suggest this trend could be about to reverse. Other than fx, all the drivers of yield have now turned negative.
Meanwhile Tim Marshall at UBS is also feeling the pricing pressure in a note out today:
We feel we are very bearish on airline revenue accounting for the difficult operating environment which remains ahead of us, but we are concerned that market consensus has yet to factor in these pressures, particularly where easyJet is concerned. We are forecasting larger declines in yield than occurred in 1998, when the Asian crisis and overcapacity on the North Atlantic followed a period of unprecedented capacity growth among the European carriers. We are assuming that yields return to levels seen in the early 1990s and don’t assume a significant bounce back in 2010 which has been the reality in previous downturns.
One of the reasons fares have so far resisted downward pressure was the effect of the summer’s record oil prices. Even as the price of crude started coming down in the Autumn airlines were, unsurprisingly, reluctant to remove the fuel surcharges they had instituted during the summer.
With those now being both inexplicable to customers and unsustainable with oil at about $40 a barrel — they’re starting to come down (Chart 21, below). To make matters worse, by Marshall’s reckoning, the capacity reductions undertaken by European carriers (Table 7) so far won’t be enough to offset the fall in surcharges and demand — hence his rather dramatic predictions for future yield declines in Chart 14, below.
Unsurprisingly, neither Marshall nor Fitchie is optimistic on airlines in general. Marshall, for instance, recommends investors insane brave enough to get their feet wet in airline stocks aim where expectations are the lowest and capacity cuts are the highest (British Airways) and hope for the best.
Not exactly a ringing endorsement for airline shares then, but at least the consumers will get something out of it.
Related links:
Flying forces – FT Alphaville
Inflation’s upside surprise- FT Alphaville