CAPA airline profit outlook: descending to a soft landing

The Jul-2019 update of the CAPA world airline industry airline operating margin model cuts forecast margins for 2019 and 2020. It reiterates the view that the industry has been in a cyclical downturn since the 2016 margin peak.

This report is CAPA's third successive six monthly update of the model with cuts to forecast margins, following four previous upgrades.

The oil price outlook appears to have stabilised relative to the 2014-2018 period, although this is always subject to macroeconomic and geopolitical caveats. This means that the balance of supply and demand is the key driver of airline margins.

Slowing global economic growth and softening passenger traffic growth (plus negative air cargo traffic growth) indicate weaker demand growth. Supply is indicated by fleet growth in the CAPA model, and this is complicated currently by the grounding of the 737MAX. The underlying trend in fleet growth appears to be upward, although not yet faster than demand growth.

In spite of the weaker outlook for airline profitability, operating margin is forecast to remain only slightly below previous cyclical peak levels of the order of 6% and to increase modestly in 2020 versus 2019.

However, macroeconomic and geopolitical risks could precipitate a steeper decline.