The skies may be cloudy but the message is clear - Global Airline Industry is beset with a number of problems: rising fuel prices, economies in recession, swine flu and business cycle typical to the industry. It looks – news flow painting rosy picture for the industry is unable to compete with news flow that paints a gloomy outlook. As an investor you might be wondering "which airline stocks will deliver profits for me, if at all".
Industry fundamentals
Global Airline Industry posted a net loss of $10.4 billion (-2.0% margin) for 2008 as compared to a net profit of $5.6 billion in 2007 (2.5% margin). The only saving grace was - operating profits in 2008 remained in positive territory: $1.5 billion in 2008 vs $19.7 billion in 2007. The poor performance is attributable to skyrocketing oil prices in the first half of 2008 and global recession in the second half of 2008.
Rising oil prices could once again cause headwind for the industry
Oil price for Brent registered a single trade at $100 on January 2, 2008, but the price did not stay above $100 until late February 2008. On July 11, 2008, oil prices rose to a new record of $147.27 following concern over Iranian missile tests. Since then, oil prices have charted southward journey in 2008. However, the rise in oil prices caused the industry to fork $165 billion in 2008 for fuel. Amidst unprecedented economic recession, oil prices continued their southward journey in the first quarter of 2009. But, on June 11, 2009, oil price once again set a new 2009 record of $72 per barrel. If oil price remains at this level in the remainder of 2009 then probably global airline industry will have to fork just $106 billion, a decrease of $59 billion over 2008. Oil bill is expected to account for 25% of costs in 2009 as compared to 31% in 2008. However, rising geo-political and security concerns, and increasing speculation in oil prices may not spare that $59 billion.
Weak global out look and swine flu = lower demand for airline industry services
As far as global economy is concerned – 'green shoots' or no shoots – don’t expect a recovery at least until the end of 2009. In addition to the economic concerns, swine flu joined the list of headwind generators as WHO declared swine flu as the first international pandemic of the century. As a result, demand for global airline industry services is set to decline in 2009 - passenger traffic may fall by 8% and cargo demand could decline by 17%. Consequently, industry revenues are expected to touch $448 billion in 2009, $80 billion less than 2008 revenue.
Business cycle typical to the industry
The global airline industry is characterized by short booms followed by long busts.
