Airline sweet spot unlikely to be maintained in 2018: CAPA

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December 29, 2017
CAPA outlook oil prices

Higher oil prices could stall fare decreases and  buffet airlines in 2018 after the industry enjoyed a profitability “sweet spot” in 2017, a new CAPA Centre for Aviation report warns.

CAPA’s 2018 outlook argues 2017 was arguable the sweetest spot for combined airline proftibality and traffic growth ever experienced.

It  says profits hit record levels, load factors were high and traffic growth was “off the radar”

“Basking in globally synchronised, if modest, economic growth, with historically low fuel prices and interest rates, airlines have lowered fares, in the process adding extra stimulus to passenger traffic growth,’’ it says

“Now the core ingredients for the future of this phenomenon may be at risk.

“Rising oil costs will stall fare decreases, dulling demand in what has become a highly price sensitive market. And interest rates too are gradually increasing.”

CAPA notes the price of Brent crude rose on December 26 to above $US67 per barrel, its highest level in almost two years, and is already 10 per cent higher than the International Air Transport Association’s most recent forecast for 2018 of $US60 per barrel.

It argues the course of the airline and travel industry in 2018 will be defined by whether this is a continuation of a trend or a pricing peak.

Oil prices account for 20 to 30 per cent of a legacy carrier’s costs and as much as 40 per cent of r a low-cost carrier.

The outlook notes that the rapid reduction in oil prices after peaks of more than $US100 per barrel influenced airline decisions on capacity growth and encouraged airlines to keep in service aircraft that otherwise would have been retired.

This added further seats to the market and combined with low interest rates, global economic growth, new fuel-efficient aircraft and the creation of new airlines and markets to contribute to sustained high international traffic levels.

Competition also encouraged new capacity into the market and pressured airlines to pass on benefits to consumers as lower fares.

But CAPA warns that the influx of new players has created a market even more strongly stimulated by supply-driven growth and this may not be sustainable in the long run because of increasing price sensitivity.

It cites one Asian long-haul low-cost carrier chief executive as saying many of his passengers could not afford to buy a meal if its cost more than $US3.

“In other words, this is a market where just a few dollars of increase in air fares has the potential to deter a large profile of potential travellers,’’ it says.

“As a result of this confluence of events, there is a today a much higher proportion of these highly price sensitive travellers than has ever been the case in the past. And that’s dangerous.”

CAPA predicts low cost carriers will be “first in the firing line” when it comes to higher fuel prices but full service carriers who rely on bulk low-cost market segments will also be affected.

Those airlines with fuel hedging will see the impact phased in but those have not hedged will feel the pain “almost immediately”

“If accompanied by higher interest rates and progressively suppressed demand, the damage is likely to be further compounded,’’ the outlook says.

“Some supply might be removed from the market – reducing the prospect for traffic growth – but there is little room for airlines to push load factors higher to offset any capacity reductions. Generally, aircraft are flying fuller than ever before.”