30-Nov-2010 3:44 PM

Airline shares strengthen on share and profit recovery in 3Q

Analysis

IATA, in its October-November Airlines Financial Monitor, stated positive 3Q financial result announcements have given airline shares a "further boost", with some notable exceptions, as the airline share price index increased by a further 12% over the past month led by the Asia Pacific.

Summary

Airline shares have experienced a significant boost, particularly in the Asia Pacific region, with a 12% increase in the airline share price index over the past month.
The financial results for Q3 2010 were better than anticipated, indicating a strong industry bounce-back, with Asia Pacific carriers leading in terms of market capitalization.
Yields and fares are showing signs of improvement, with US domestic yields and international fares moving back upwards due to slower capacity growth compared to traffic.
Fuel prices remain stable within the USD80-100/barrel range, with no expected changes to quotas at the upcoming OPEC meeting.
The in-service fleet saw a net addition of 70 aircraft in October 2010, with new deliveries becoming the major source of new capacity.
Traffic growth remains above trend, with solid growth expected in the last quarter of the year, indicating a favorable supply/demand balance and a new monthly peak in traffic volume.

IATA added that 3Q2010 financial results were "much better than anticipated" and underlying the extent of the industry bounce-back which has shown Asia Pacific carriers have the largest market capitalisation in the industry. Passenger and freight traffic growth, meanwhile, remains above trend, with solid growth being seen going into 4Q, while passenger load factors have regained their highs.

IATA added that the gain in airline shares over the past month and the 37% increase so far this year has outperformed the FTSE Global All-Cap by around five fold. Looking forward, IATA cautioned that there will likely be a need for earnings upgrades to maintain the momentum given the forward looking nature of the share markets

Airline share prices by region: Jun-2005 to Nov-2010

Sharp recovery in profits as new peak profits are reported

The improvement in operating profits in 3Q was a very strong USD11.3 billion compared with 3Q2009 results. IATA added that the extent of the achievement is put into "sharper relief" when compared with the 3Q peak of 2007. 3Q2010 operating profit was around USD9.2 billion higher than in 3Q2007. While the US airlines have matched their 1-3Q2007 operating result, the Asia Pacific airlines have more than doubled operating profits to USD7.4 billion.

Airline financials results for 3Q2010 vs 3Q2009 (based on 51 airlines reporting to-date)

Yields and fares on way up again?

The yield situation has also improved since the last forecast, when IATA stated that the recovery in US domestic yields and international fares had stalled. Based on recent data, IATA noted that there has been a "move back upwards" aided by capacity continuing to grow at a slower rate than traffic. IATA added that yields could be "on the way up again" highlighting the uncertainty of the yield situation.

The latest data suggests a recovery for US airline yields to within 4% of the Oct-2008 yield and to within 10% of the recent peak in Aug-2008. However, the average international fare remains more than 10% below pre-recession levels.

Average international fares, ex taxes and surcharges: 2006 to 2010

Fuel prices remain in USD80/barrel range

IATA noted that fuel prices remain in the USD80/barrel range, at a level which OPEC has in the past described itself as "comfortable". IATA added that all indications are that if prices remain stable and broadly within a band of USD80-100/barrel, then there is unlikely to be a change to quotas at the Dec-2010 OPEC meeting.

IATA added that the recent increases in the price of oil back to the top of the range of the past year has more to do with seasonal factors and the heating season rather than anything more fundamental.

Jet fuel and crude oil prices: Jan-2003 to Nov-2010

Net addition of 70 aircraft in Oct-2010

Oct-2010 saw an increase in the in service fleet by a net of 70 aircraft with new deliveries now the major source of new capacity after a period where aircraft coming out of storage added almost as much capacity as new deliveries.

Airline aircraft retirements and deliveries: 2006 to Oct-2010

Traffic growth remains above trend; solid growth into 4Q2010

IATA also reiterated demand, capacity, load factor and freight data for Oct-2010 with IATA noting that traffic growth remains above trend, with solid growth being seen going into the last quarter of the year. IATA added that the 3Q2010 results "very clearly" show the benefits of restrained passenger capacity growth. IATA expects a continuation of the favourable supply/demand balance for at least the first month of the final quarter. Traffic growth, meanwhile, is expected to slow further not least as the comparison become more difficult and also because, in volume terms, traffic (RPKs) are at a new monthly peak.

IATA traffic results: 10 months to Oct-2009 v 10 months to Oct-2010 growth levels

	RPK Growth	ASK Growth	PLF	FTK Growth	AFTK Growth	FLT
Africa	13.1%	9.1%	69.2%	31.2%	12.1%	27.4%
Asia/Pacific	10.1%	3.2%	77.9%	28.3%	16.1%	65.8%
Europe	5.0%	2.1%	80.0%	12.1%	-0.5%	51.9%
Latin America	9.9%	4.1%	76.5%	35.3%	17.0%	43.2%
Middle East	18.6%	13.2%	76.1%	29.7%	15.8%	46.6%
North America	7.2%	3.0%	82.7%	26.0%	5.4%	43.4%
Industry	8.5%	4.0%	78.8%	24.0%	9.2%	53.7%

IATA traffic results: Oct-2010 v Sep-2010 growth levels

	RPK Growth	ASK Growth	PLF	FTK Growth	AFTK Growth	FLF
Africa	-0.1%	0.3%	-0.3 ppts	0.1%	-3.6%	1.0 ppts
Asia/Pacific	0.3%	-0.4%	0.6 ppts	1.7%	-0.7%	1.5 ppt
Europe	1.5%	0.9%	0.5 ppts	1.0%	0.5%	0.3 ppts
Latin America	1.1%	-0.5%	1.3 ppts	-3.6%	0.4%	-1.8 ppts
Middle East	-1.0%	0.2%	-0.9 ppts	2.7%	1.6%	0.5 ppts
North America	1.2%	2.1%	-0.8 ppts	0.2%	0.8%	-0.3 ppts
Industry	0.8%	0.6%	0.2 ppt	1.2%	0.1%	0.6 ppts