The airline profit cycle: what goes up must come down. Possible warning signs as Farnborough nears

After another year of record high aircraft orders in 2013, both in absolute numbers and as a percentage of the fleet at the end of the previous year, there is naturally some concern in the industry about the impact this might have on capacity discipline.

CAPA has looked at this and related concerns a number of times before, but they continue to occupy attention. IATA published its updated airline industry financial forecast in early Jun-2014 and we have now passed the half-way point of 2014. Just ahead of the Farnborough Air Show, we recap and update our analysis of the global airline profit cycle and its relationship with the capacity cycle in this report.

The airline industry is well above historical mid cycle margins and still in the upswing phase. Moreover, there are signs that the current rising trend of sector profitability is not purely cyclical, but that it may also have a structural dimension. However, what goes up must come down. Are there very early warning signs of an approaching downswing?