Moody's: Outlook for the global airline industry changed to stable from positive

The outlook for the global airline industry has been changed to stable from positive, Moody's Investors Service says in a new report. Airlines' operating margins and operating profits are expected to decline in the coming 12 to 18 months, as capacity continues to outstrip demand.

"Capacity will continue to grow a bit more than passenger demand over the next year or so," said Moody's analyst, Jonathan Root. "As a result, both the aggregate operating margin and operating profit of Moody's-rated airlines will drop to ranges that are within our range for a stable, rather than a positive, industry outlook."

Aggregate operating margin is expected to fall to 9.4% in 2017 from a projected 10.8% this year, while operating profit will contract by about 11% in 2017, against a projected 1.2% contraction this year, Root says in "Global Airline Industry-Changing Outlook to Stable; Operating Margin to Decline Below 10%." Moody's estimates that global capacity will grow between 5.5% and 6.5% next year, against 6.1% growth during the first nine months of this year, spurred by the still-low cost of fuel and increased deliveries of new aircraft that need to be placed in service, primarily by airlines in developing markets.

Meanwhile, growth in passenger demand will slow modestly next year due to lackluster global economic expansion, as well as geopolitical uncertainties and the effect of the threat of terrorism on Asian demand for long-haul travel, particularly to Europe. The strong US dollar, excess capacity growth and competing business models will continue to pressure yields until more players reduce capacity or limit growth, Moody's says. Demand will expand between 5.2% and 6.2% over the next 12 to 18 months, against 5.9% in the first nine months of this year.

For US airlines, a combination of slightly higher fuel costs and higher labor costs at American Airlines, Delta Air Lines, Southwest Airlines and United Continental Holdings will contribute to a 20% contraction in operating profits over Moody's outlook horizon. Conversely, improving economic activity, along with significant capacity adjustments, will drive a recovery in operating profit for rated Latin American carriers, though volatility in local currencies remains a key risk.

Moody's is now basing its outlook for the global airline industry on its expectations for operating margins and changes in operating profits on a reported basis for rated airlines only, in order to better reflect changes in operating conditions for airlines. Previously, the outlook was based on the rating agency's forecasts for aggregate adjusted operating margin, changes in industry yields and revenue passenger kilometers for all carriers.

Powered by Capital Market - Live News