American credit rating provider Fitch Ratings predicts what it terms a ‘neutral outlook’ for the global airline sector for 2024, estimating that although global demand for air travel will continue to rise, it will remain below its historical trend line. Although business travel and sustained positive trends in premium products will also grow, mitigating matters of OEM delays, maintenance issues and overall higher costs will also impact airlines’ ability to support yields.
“Airline cost pressures, supply chain issues and consumer health will be key industry watch items,” clarified Joseph Rohlena, senior director at Fitch Ratings, adding that “consumer health and overcapacity may present downside risk”. Rating outlooks are also primarily stable, with negative outlooks primarily centred around low-cost US carriers struggling to generate sustainable operating margins amid issues such as overcapacity.
Although Wizz Air is on a negative outlook, Air Canada continues to see strengthening credit metrics, with Fitch believing further positive rating actions among other airline peers to be possible. The number of global airlines with a stable rating outlook has also risen from around 25% in 2022 to over 70% so far in 2023, with the volume of negative ratings vastly reduced.
Revenue growth has slowed in the 2023 (forecast to close the year at 10.1%, down from the immediate post-pandemic recovery of 84.4% in 2022), although the EBITDA margin is up from 6.1% in 2022 to an estimated 11.2 in 2023. Additionally, the free cash flow margin improved from -1.0 this time last year to -0.7.
Despite ongoing constraints (including longer lead times for maintenance visits, engine inspections and supply chain shortages) continuing to affect fleets, Fitch expects aircraft values to hold up in the tear term, with the limited supply of new aircraft also pushing airlines to extend operating leases and a further rise in post-pandemic widebody values. However, issues of engine availability and OEM delays will also limit overall capacity growth.
An underlying trend of higher operating costs (more than 20%) is also prevalent, with efficiency gains also impacted by wage pressures. ‘The airlines will need to drive higher unit revenues in the coming year to maintain healthy margins,’ concludes Fitch.