Fitch Ratings, one of the three globally recognized statistical rating organizations, says global airlines sector outlook is stable, reflecting the balance between healthy, albeit moderating traffic growth rates, disciplined capacity growth and marginally better yields, as well as elevated oil prices, FX risk, Brexit uncertainty and a slowdown of the Chinese economy.
It however warned that regional patterns are likely to vary with a potential divergence in Europe in the case of a “hard” Brexit.
“Most of the airlines with positive outlooks are in North America where profits are healthy and several airlines are focused on de-leveraging. Approximately half of EMEA portfolio is rated in the ‘CCC’ category and below due to negative operating cash flow generation and weak liquidity, which may result in further downgrades,” it said in a report, “Fitch Ratings 2019 Outlook: Global Airlines”
The foremost rating agency said Brexit is a key risk for European airlines as a result of its potential impact on economies, traffic and currencies as well as on aviation agreements and access to markets but assumes uninterrupted operations of both U.K. and European airlines post-Brexit.
- Agusto & Co. rates Coronation MB ‘A+’ with a stable outlook
- Dana Air's seamless booking, competitive fares strategy leads Nigeria's…
- By shrinking importation, NNPC can lead GDP growth (2)
- IMF keeps Nigeria’s GDP growth forecast at 2.5% in 2021, 2.6% in 2022
- PenCom investment philosophy driven by growth of pension pot, says Dahir-Umar
“Though our airline forecasts globally do not incorporate an economic downturn in the near term, downside risks increased over the past year due to rising fuel, trade and geopolitical risks, as well as growing concerns around the broader economic environment.
“We believe the North American airline sector is better equipped to deal with a potential downturn compared to other regions where only financially strong airlines could withstand a material dip in demand.”
The International Air Transport Association (IATA) reports that global traffic increased 6.7 percent through September of 2018, which is down from 2017 but remains well above the long-term average.
For Fitch, global growth is unlikely to remain at such elevated levels for a sustained period, and we expect growth will likely revert toward the mean. Nevertheless, the rapid growth in demand from emerging markets like China and India will likely keep global traffic growth well above global GDP for the foreseeable future, barring a major exogenous shock.
The strength of the U.S. dollar relative to local currencies as well as fuel price volatility remain a concern. Although Fitch is not forecasting further increases in crude oil price in 2019, subsequent spikes in energy prices could dampen demand and increase operating costs for airlines putting weaker airlines at risk of default. Jet fuel prices also present a risk to airlines in countries with weak currencies. Rising crude prices and simultaneously weaker local currency trends versus the U.S. dollar can create rapid spikes in operating costs.
Fitch expects commercial aircraft deliveries from Airbus and Boeing to rise to approximately 1,725 units in 2019 (+8.5%) and 1,800 units in 2020 (+4%). Including A220 deliveries (50.1% controlled by Airbus) adds 70 and 95 aircraft to the totals, and Fitch expects Embraer will deliver 85 and 90 EJets. Fitch expects further single-aisle rate increases would not come until after 2020. The combined order books at Airbus and Boeing totaled 13,189 aircraft at the end of October, equivalent to about 7.5 years of production at 2019 rates. The current aviation environment is generally positive, but Fitch sees reasons to be cautious, including the impact of fuel and foreign currency on airline profits; imbalances throughout the airline industry (traffic, profits, etc.); late-cycle behavior in parts of the aircraft finance sector and the credit quality of some airlines.