AIRLINES FINANCIAL MONITOR

KEY POINTS June 2016 July 2016

The initial financial results from Q2 2016 point to another solid quarter for industry profitability and cash flow;
Global airline share prices increased by 5.9% in July, but they remain well down on where they started the year;
Brent crude oil prices fell back sharply in July, driven largely by a near-term glut in supply. The futures curve has
shifted down in recent weeks, with oil prices now expected to remain below $55/bbl for the foreseeable future;
Yields have fallen by around 6.5% year-on-year in constant exchange rate terms in 2016. Ongoing downward
pressure on yields is expected to provide further stimulus to demand during the rest of the year;
The premium segment continues to offer an important buffer for overall airline financial performance. Premium
airfares have held up better than their economy counterparts on many of the main premium routes so far this year;
The global air passenger market grew solidly in annual terms during H1 2016. That said, the upward trend has
eased in recent months on the back of modest economic growth and cumulative impacts of terrorist attacks;
The latest freight volumes data point to an improvement from the weak conditions seen earlier in 2016. But familiar
headwinds persist, and low freight loads are keeping downward pressure on cargo yields and revenues.

Financial indicators
Global airline share prices increased in July following a torrid few months
Airline Share Prices
Index % change on Global airline share prices rose by 5.9% in July.
US$ indices (Jan 2012=100) Jul 29th one month one year start of year North American and Asia Pacific carriers saw the
World airlines 147.2 +5.9% -14.8% -16.5%
biggest increases (7.9% and 4.8% respectively),
Asia Pacific airlines 82.8 +4.8% -14.9% -5.6%
European airlines 167.1 +2.6% -23.1% -28.4% alongside a more modest rise for European airlines.
North American airlines 308.8 +7.9% -12.4% -18.4% Uncertainty following the Brexit vote, along with
FTSE All World $ 132.0 +4.2% -2.4% +4.2%
lingering impacts from ongoing terrorist attacks, has
Index (Jan 2012=100) added to existing investor concerns about the
200
180 impact of falling unit revenues on industry
160 profitability. So while the pick-ups in share prices in
140
120 July were a welcome relief following a torrid few
100 months, the bigger picture is that global airline
80
shares still ended the month more than 16% below
2012 2013 2014 2015 2016
FTSE All World $ World airlines $ their level at the start of 2016. All told, global airline
Source: Thomson Reuters Datastream shares have underperformed the wider equity
market by a sizeable margin so far in 2016.

The initial financial results from Q2 2016 indicate that EBIT margins remain solid
The initial financial results from Q2 2016 point to
Airline Financial Results another solid quarter for profitability.
Number of Q2 2015 Q2 2016
airlines in Regions EBIT Net post- EBIT Net post- Net post-tax profits in our sample in Q2 2016 were
1 2 1 2
sample margin tax profit margin tax profit 15% lower than in Q2 2015, but the EBIT margin
11 North America 16.8% 5,614 17.3% 4,342
edged up to 13.6%. The initial results are slightly
3 Asia-Pacific 3.0% 171 5.3% 281
6 Europe 6.7% 876 7.5% 980 ahead of the signs from our latest Business
2 Latin America 4.2% 29 2.7% 53 Confidence survey, which indicated that year-on-
22 Sample total 13.0% 6,690 13.6% 5,656 year profitability fell slightly during Q2 2016.
1 2
% of revenues US$ million
Sources: The Airline Analyst, IATA However, a clearer picture will emerge as more Q2
results are released over the coming months.
 Airlines Financial Monitor June 2016-July 2016

Airlines generating higher free cash flow in Q2 2016, despite higher capital investment

The initial cash flow metrics from Q2 2016 also

Airline Cash Flow1 show improvement compared to the same period in
Number of Q2 2015 Q2 2016
2015. Net cash flow in our sample rose to 23.2% of
airlines in Regions Net cash Free cash Net cash Free cash
2 Capex 2 Capex revenues in Q2 2016, from 20.3% a year ago.
sample flow flow flow flow
11 North America 20.9% 12.1% 8.8% 24.6% 13.4% 11.2%
4 Europe 17.9% 10.3% 7.6% 18.1% 13.6% 4.5% In aggregate, airlines in all regions of our sample
3 Others 19.9% 14.1% 5.7% 21.2% 24.6% -3.4% increased capital expenditure as a share of
21 Sample total 20.3% 11.9% 8.4% 23.2% 14.2% 9.1%
1 2
revenues over the period, but not to the same
% of revenues From operating activities
Sources: The Airline Analyst, IATA extent as the pick-up in net cash flow. As a result,
free cash flow also rose, from 8.4% of revenues to
9.1%. This gives airlines more flexibility to repair
balance sheets by paying down debt.

Fuel costs
Brent crude prices fell back sharply in July
US$/bbl Index (Jan 12 = 100, inverted) Brent crude oil prices fell back sharply during July,
160 90 ending the month below US$43/bbl the lowest
95 level since early-April. The sell-off follows the rally
140
Jet fuel (LHS) Weaker US dollar, in oil prices seen during the first half of 2016, and
100
120
higher oil prices has been driven by a near-term glut in supply and
105 a tick-up in the US dollar. The oil futures curve
100 Brent crude oil (LHS) 110 has shifted down over the past month, with the
market now expecting oil prices to remain below
80 115
US$55/bbl over the next three years or so.
120
60 Oil prices ended the month of July 22% lower
125
US dollar trade- year-on-year. However, the annual comparison is
40 weighted index (RHS)
130 becoming less favorable: levels in early-August
20 135 are currently around 12% lower than August 2015.
2012 2013 2014 2015 2016
Sources: Platts, Thomson Reuters Datastream

Yields and premium revenues

Industry-wide yields continue to trend downwards
US$ per RPK, seasonally adjusted The average global yield in reported US dollar
0.130 terms has fallen by around 9% year-on-year so
0.125 far this year (the latest data go up to end-May
and exclude taxes, fees and surcharges).
0.120
Adjusting for distortions from earlier gains in the
0.115 Global average yield, US$ constant
exchange rate (Jan 2011)
dollar, we estimate that global yields fell by
0.110 approximately 6.5% in constant exchange rate
0.105
terms in early-2016. Given the sharp fall in the
Global average yield dollar at the start of 2016, the distortions have
0.100
started to reverse in recent months data.
0.095
The downward trend in seasonally-adjusted
0.090
yields remains in place. Further stimulus to
0.085 demand is likely to come through during the rest
0.080 of 2016 from lagged impacts of prior falls in oil
2011 2012 2013 2014 2015 2016 prices, and wider trends in the market.
Sources: IATA Economics, IATA PaxIS+, DIIO, Thomson Reuters Datastream

IATA Economics: www.iata.org/economics 2

 Airlines Financial Monitor June 2016-July 2016

Premium fares continue to hold up, offering a buffer for financial performance on key routes
Premium international passenger traffic growth
Premium fare growth minus economy (2016 YTD*, %-points)

8
South Atlantic North Atlantic
has continued to lag behind that of economy. O-D
6 Europe-Asia
premium international journeys accounted for
North And Mid Pacific
4 Within Europe
Within Asia
Europe-Middle East 5.5% of the total over the first five months of
2
2016, from 5.9% in the same period a year ago.

0 Nonetheless, premium fares have held up better

than those in economy on the majority of the key
-2 Europe-Southern Africa
Asia-Southwest Pacific premium routes. In fact, premiums share of
-4
revenues has risen slightly so far this year on the
Note: the size of each bubble is proportional to each
-6 route's share of industry-wide premium revenues. North Atlantic and Europe-Asia markets (which
-8 accounted for nearly 40% of industry-wide
North-South America
premium revenues between them in 2015). With
-10
-18 -16 -14 -12 -10 -8 -6 -4 -2 0 2 industry yields coming under pressure, the high-
Premium passenger growth minus economy (2016 YTD*, %-points)
yielding premium segment offers an important
Sources: IATA Economics, DIIO *Latest data up to May 2016
buffer for overall airline financial performance.

Demand
Ongoing moderation in upward trend for passenger traffic; welcome trend for freight
Air Passenger and Air Freight Volumes The global passenger market grew solidly in
Billion per month Billions per month annual terms in the first half of 2016, with growth
580 18.0
broadly in line with the average pace seen over
560 17.5 the past decade. That said, the upward trend in
seasonally adjusted passenger volumes has
540 17.0
moderated since January, in the face of
520 16.5 moderate global economic growth and the
ongoing and cumulative impacts of recent high-
500 16.0
profile terrorist attacks.
480 15.5
Meanwhile, the latest freight data point to an
460 15.0 improvement from the weak conditions seen
earlier this year. However, the outlook for air
440 14.5
2012 2013 2014 2015 2016 freight continues to face significant headwinds,
RPKs, seasonally adjusted FTKs, seasonally adjusted including broader weakness in global trade.
Source: IATA Monthly Statistics

Capacity
Upward trend in passenger capacity has eased in recent months
Air Passenger and Air Freight Capacity
Billions per month
Available seat kilometres grew by 5.6% year-
Billion per month
720 42.0 on-year in June. However, airlines have slowed
700 41.0 the upward trend in capacity growth somewhat
40.0 in recent months in line with slowing demand.
680
39.0
Industry-wide available freight capacity growth
660 38.0
has continued to outstrip that of demand;
640 37.0
ongoing impetus to freight belly capacity from
620 36.0 additions to the passenger fleet mean that
35.0 annual growth in industry-wide freight capacity
600
34.0 has now exceeded annual growth in volumes
580 33.0 for 16 consecutive months. Despite their
560 32.0 relatively small share of the freight market,
2012 2013 2014 2015 2016
ASKs, seasonally adjusted AFTKs, seasonally adjusted African carriers are at the forefront of the
Source: IATA Monthly Statistics freight capacity growth story, with AFTKs up
more than 22% year-on-year in H1 2016.

IATA Economics: www.iata.org/economics 3

 Airlines Financial Monitor June 2016-July 2016

Net storage activity makes another positive contribution to fleet growth

Airline Fleet Development
Change in operating fleet (a/c per month) The number of available seats in the global
250 1.0% airline fleet increased by 1.0% in June
200 compared to the previous month, and by 5.6%
150 year-on-year.
0.5%
100
161 new aircraft were delivered in June the
50
highest in a month since December 2014. Net
0 0.0%
storage activity made another solid positive
-50
contribution to the fleet size, driven in the main
-100
-0.5% by fewer aircraft going into storage. Lower oil
-150
prices and robust demand have made it
-200
economical to keep flying less fuel-efficient
-250 -1.0%
2013 2014 2015 2016 aircraft. 79 aircraft were removed from the
Storage activity Deliveries Other factors % change in seats m-o-m global fleet in June 2016, compared to 135 that
Source: Ascend
left in June 2015.

Passenger loads have broadly stabilized at a high level, but freight loads remain weak
The industry-wide passenger load factor was
79.2% in H1 2016 just 0.2 percentage points
Load Factors - Passenger and Freight
lower than the all-time period high reached in
% of ASKs % of AFTKs
82% 47% 2015. The industry has managed to keep the
seasonally-adjusted load factor broadly stable
46%
at around 80% over the past five months. High
81%
achieved passenger loads have helped to
45%
support robust financial results in recent years.
80% 44%
By contrast, the industry freight load factor fell
43%
to 42.5% in the first half of 2016 a record low
79% for the period and 2.3 percentage points lower
42% than in H1 2015. The seasonally-adjusted load
factor has recovered somewhat from the lows
78% 41% seen in Q1 2016. But low freight loads are
2012 2013 2014 2015 2016
Passenger load factor, seasonally adjusted Freight load factor, seasonally adjusted keeping yields and revenues under pressure,
Source: IATA Monthly Statistics and remain a particular headwind for Asia
Pacific carriers, for whom cargo is a key part of
their business.

David Oxley
economics@iata.org
9th August 2016

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