IATA confirmed last month that growth in airline passenger traffic and cargo volumes fell in August, signalling an expected slowdown in demand. Scheduled international passenger traffic in August grew 6.4% year-to-year, down from a revised 9.5%, which was if you recall a revised down figure in itself. This news should not be taken lightly, if it were January or November then fine, but August should show good traffic being the holiday month. We could just sit back and say that things are still fine as the only way is up but of course the reality is so much more complicated.
Airlines are at this time seeing an upturn as compared with the dire figures of 2009 but what we need to ask is not where we are but where we are going.
One investor of note recently came out and told a small crowd that he had put a reasonable long term punt on an airline at this he was immediately given a bottle of champagne in recognition of his bravery. Such is the reputation of aviation as an investment.
The investor’s noted bravery was indeed sound though. Banks are going through a boom period at the moment, many desks (outside of aviation finance) are increasing staffing levels by significant amounts especially FX, ETFs and the like, this in turn is leading to increased business travel. Make no mistake, the business market is back. It is ironic that a country that has spent the past few years in non compliance of just about every EU/single currency rule, not to mention the no hope of Basel 111 compliance, should produce two of the current powerhouses of banking; BBVA and the now mighty Santander. These two banks alone are shipping staff between London, Hong Kong and Madrid weekly in all directions, this is just one example of the very real bounce-back of business travel, the winners? The likes of BA/Iberia. Iberia/BA with its new base in Madrid is ideally placed to collect many new business travellers alone.
Moreover: Airline costs are falling, especially labour costs. Airline insurance costs remain low and oil remains steady with an outlook that leaves it more likely to fall rather than increase, but do watch this, the news today of US Airways fuel increases is a warning (see Americas news today or airline news on the website) This is set against a backdrop of hardening airline ticket prices, so we can expect the traditional airlines to fair well while the low cost carriers start to feel the pressure as the working classes are hit by interest rate rises, not to mention huge inflation on just about every household item. This in turn leaves the low cost carriers with a dilemma. Does the low cost risk increasing the service levels with the ticket price or does it ride out the storm?
So the short term outlook for major flag carrier airlines is good, especially BA/Iberia/AA. This airline(s), with control over most Atlantic routes of note (both North and South), will surely show value for investors.
Cash remains king though, not assets, so Lufthansa, THY and Ethiopian remain the airlines that can leverage the best deals out of the market for future investment of any sort. For airlines with debt mountains or little by way of cash reserves the future remains rough at best. New banking regulations will force further retention of funds, thus aircraft financing will continue to slow for the time being and without export credit for EU and US airlines the future is tough. This and the sure reality of defence spending cuts across the globe and throughout NATO means that Airbus and Boeing shares are at this time, against this backdrop, going to fluctuate.
So we can expect to see a further collapse in mainstream passenger travel for 2011 while business travel continues to recover. There is no point dodging the fact that the USA is going through a commercial sub prime nightmare at this time and the European economies, having lived in a grey area of zero interest rates for two years, are about to come to terms with the reality that contraction is yet to take place, no matter how much extra money is printed.
We do indeed live in interesting times......