Michael Dyment of Nexa Capital Partners believes the top of the current cycle is still in the future, so there is still upward movement to come. It is “just recently that U.S. carriers have been able to gain access again to Wall Street” investment, Dyment says. Carriers are obtaining unsecured financing at rates lower than they have seen for 20 years—partly due to improved cash flows, he notes.
Generally, executives are managing airlines “more like a business” than they have in the past, says Terry. This is reflected in sustained capacity discipline—particularly in the U.S. and Europe—and the ability of airlines to pass on oil price increases.
Although there is still some “irrational behavior” such as government ownership and failing carriers being propped up artificially, “the extent of financial responsibility is generally increasing in the airline industry,” says Craig Jenks of New York-based Airline/Aircraft Projects.
Because of the restructuring of the airline industry in recent years, carriers can still be profitable if oil rises to $200 a barrel, says Nexa Capital's Raymond Neidl. However, the industry will obviously still be at the mercy of the broader economy. Down-cycles “won't be as disastrous as in the past, but this industry is still going to be cyclical,” Neidl says.
The industry's profit cycle is closely aligned to the aircraft ordering cycle, says Jenks. Airlines veer from over-ordering aircraft to under-ordering during the course of what seems to be a capital equipment cycle. Prompted by the current low interest rates and high oil prices, airlines are “beginning to order quite a lot of equipment as [the industry] comes out of a trough.”
Jenks notes that this is particularly evident in the Middle East, China and Southeast Asia. He says the industry is seeing “an early upturn in that capital growth cycle, although we're not yet at that danger point” of having excess orders.
While the overall trend is positive for the airline industry, one of the more notable subtexts is the continued weakness of carriers from some developing regions. The so-called BRIC nations—Brazil, Russia, India and China—are typically described as having huge economic growth potential, but the TPA results show their airlines are lagging.
Of the 10 airlines from these four countries that are in the TPA study, only two show slight positive growth in their scores. The remainder declined, some significantly.
Jenks says the issues for China, India and Brazil are similar. Economic growth has been slower than expected—although China's is still robust—and there has been a high rate of airline capacity growth in all three.