Jan 192015

MANILA, Philippines – Moody’s Investors Service has upgraded its outlook on the global airline industry to positive from stable as the sharp drop in fuel costs is expected to bolster financial performance of major players.

Moody’s expects the operating profit margins of the industry to settle at 12 percent to 14 percent this year and 11.5 percent to 13.5 percent next year, instead of the estimated 8.5 percent to 9.5 percent for 2014.

“US carriers will continue to garner the largest increases, leading to stronger performance relative to airlines based in increasingly competitive developing markets, and in Europe,” Moody’s vice president and senior credit officer Jonathan Root said.

In a report titled “Lower Fuel Costs to Boost Operating Profit Margins; Yield Growth Still Constrained,” Moody’s said the outlook reflects expectations for the fundamental business conditions in the industry over the next 12 to 18 months.

Passenger demand would also increase due to steady economic growth, higher disposable incomes and rising air travel in developing economies. Passenger demand, which is measured as revenue passenger kilometers (RPKs), is estimated at five percent in 2015 and six percent in 2016.

Yields are forecast at flat to two percent in 2015 and one percent to three percent in 2016.

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Despite the slower yield growth, Moody’s said its profit margin and RPK forecasts support a positive outlook.

With the average price of jet fuel declining $1 per gallon or more in 2015, Moody’s pointed out that aggregate fuel costs for rated US airlines would decline as much as $15 billion, including the impact of hedging.

Likewise, Moody’s added that airlines outside the US would also benefit from declining fuel costs in 2015.

However, it said airlines outside the US face larger hurdles for similar profitable gains.

The US airlines’ savings are unlikely to be passed on to customers as record-high load factors and sustained demand lessen the incentive to do so.

Moody’s said the windfall would be used for debt reduction, aircraft purchases and shareholder returns.

Longer-haul flights would see fares decline, particularly in Asia, where fuel charges are more prevalent and regulated by some governments.

Moody’s said capacity growth would continue to remain balanced to passenger demand in the US, Australia and Europe as the airlines seek to earn acceptable financial returns.  

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