Global airline share fell by 3% in May
Global airline share prices fell by 3.0 per cent during May 2016, and ended the month nearly 11 per cent below their level at the start of the year.
Meanwhile, Asia Pacific airlines saw the biggest month-on-month fall (-5.2 per cent), while North American and European carriers saw more modest declines (-2.8 per cent and -0.7 per cent respectively).
The International Air Transport Association (IATA) stated that amid ongoing investor concerns about the impact of declining unit revenues on industry profitability, airline shares have now under-performed the wider equity market for three consecutive months.
In fact, since the start of 2016, global airline shares have lagged behind the Financial Times Stock Exchange (FTSE) Global All Cap index by nearly 12 per cent.
In spite of recent declines in airline share prices, the latest financial results continue to point to a robust start of the year for industry profitability. Net post-tax profits in Q1 2016 in our sample are around 25 per cent above those seen in Q1 2015.
The strongest financial results were once again posted by North American airlines (who are seeing improved free cash flows too). By contrast, as is usual in Q1, European airlines in our sample posted a modest operating loss, albeit smaller than a year ago.
Crude oil prices rose further during May, driven by a combination of short-term supply disruption and a weaker US dollar. The price of a barrel of Brent crude oil broke through $50/bbl at month-end for the first time since October 2015.
To be clear, oil prices in May were still 27 per cent lower than the same month in 2015. Moreover, the market still expects oil prices to remain at reasonably low levels for the foreseeable future (below $55/bbl until mid-2018 according to the latest forward curve).
Nonetheless, the annual comparison is going to become less favourable over the coming months, with the year-on-year growth rate set to move back into positive territory in August.
Average global fares in reported US dollar terms (excluding taxes, fees and surcharges) have fallen by around nine per cent year-on-year so far this year (latest data to end-March). Adjusting for the impact of earlier gains in the dollar, we estimate that airfares fell by around five in constant exchange rate terms in early-2016.
However, given the sharp fall in the dollar in recent months, the distortions caused by its prior strength will ease over the months ahead.
Airfares are expected to decline further in the near future as prior declines in jet fuel prices feed through. That said, with oil prices now up more than 80 per cent since their January low, the stimulus to demand from lower airfares is likely to fade in the second half of 2016.
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