Alaska Air Group stock leapt to a new 52-week high of $81.75, up 36% year-to-date earlier this week following a note from Cowen noting that capacity added to Seattle over the past two years is clearly being absorbed as load factors are flat to down just one or two points. Then came the news today that airlines fare averages for the US market fell 5.6% month on month from June to July and down 5.6% year on year (unadjusted) – this is the sharpest fall since December 1995 and has put further downward pressure on US airline stocks.
Other airline stocks in the USA remain depressed given that they have not been tracking up as oil prices decrease over the past month, but this week the US Department of Transportation’s Bureau of Transportation Statistics (BTS) reported that the average domestic air fare increased to $388 in the first quarter of 2015, up 1.7% from $382 in the first quarter of 2014, adjusted for inflation. This is highly significant given the large increases in capacity seen in the US market over the past 12 months. This average does not include ancillary revenue charges.
Adjusting for inflation, first-quarter fares have risen 7.9% from the 2009 low of $348. Since 2011, first-quarter fares have shown little change, increasing 3.3% from 2011 to 2015. But Q1 2015 fares remain 18.2% down on the 1999 average of $475.00. Air fares have fallen 16.1% between 1995 and 2015 while the consumer price index has risen by 56%. But because an average of +15% of US airline income is now ancillary, overall US airlines are very close to being on par with the 1999 average fare highs right now but they remain well off of consumer price increases for economy cabins, even so things are better than they at first appear in the US airline market. Moreover, in 2015 travel from the US to Cuba has increased 35% year to date, and the White House is now working on agreeing a deal that will allow scheduled commercial flights before the end of December 2015. At the moment, Americans must take charter trips to Cuba, and their visit must fall into one of 12 authorized categories due to a congressional ban. The new move would loosen the terms of those categories, permitting direct commercial flight bookings between the two countries. This will create a boom for US airlines, none more so than American. Spirit with its very strong Latin American core customer base should be at the vanguard of the rush into Cuba.
On a global scale economy class travel rose 3.2% in June year-on-year, a slowdown on May growth of 6.4%, even then growth is being supported by lower fares across the globe. Premium travel on the other hand was up just 1.4% in June year-on-year, down from 4.1% growth for May. Much of this decline is due to the slowdown of the Chinese economy which is starting to have a serious impact on airline revenues in the APAC region. Were it not for fuel prices being so very low at this time many airlines would be falling into the red, and yet competition is still ramping-up in Southeast Asia with huge numbers of deliveries scheduled over the coming years, if oil prices and capacity growth both trend upward at the same time over the coming five years then we will see more airline failures, that is for sure.
At the same time Angela Gittens, director general of ACI World, said a forecast doubling of global air passenger numbers by 2031 means that decisions about how airports will manage increasing demand need to be made now. With many airports struggling to cover their operating expenses and major capital costs, “due in large part to a squeeze on airport fees by airlines” Gittens argues that the world may face a shortage of vital airport infrastructure in the next 15 years unless regulatory change sees airlines paying a larger share of airport costs.
Gittens says: “In many instances, airlines are not paying the cost of the airport infrastructure they use. In fact, we are now seeing some airlines pushing for even lower airport charges, arguing that such cuts would save passengers money and thereby boost employment opportunities. We believe such arguments are flawed and make overly optimistic assumptions of how directly passengers would benefit from such cost reductions.” The fact is that airports have survived to date by deriving on average 62% of revenues through retailing and other activities, while airline revenue has fallen to 38% of the total.
Over in Russia matters continue to deteriorate as international airlines pull out of the market. Finnair announced last week that it will suspend flights between Helsinki and Nizhny Novgorod from next February, joining Cathay Pacific, Thai Airways International and Niki in cutting back on Russian flights. Emirates has decreased the size of aircraft going into Russia and is keeping the matter under review. As the US Federal Reserve and the Bank of England start to increase interest rates the Russian Ruble will undoubtedly fall even further making the market impossible for many airlines.
In the first half of 2015 the number of passengers flying with international air carriers from Moscow's airports fell from 5.7m to 4.6m year on year according to Russia's Federal Air Transportation Agency, while it is known that international transits on Russian airlines has fallen by 15.2% in the first half. We now have a situation where all international airlines serving Russia are concentrated in Moscow and St. Petersburg, which has left the rest of the country open for Aeroflot and S7 to feed the two cities for onward transits. In October Delta will cease Moscow operations. We are now in a position not far removed from the situation in 1989 where Aeroflot enjoyed total dominance but, just like in 1989, government money will be flowing into the airline to sustain it. We have come full circle.