Signals Maintains Its Airlines Outlook At Upcycle Late For North America

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Signals maintains its Airlines outlook at Upcycle Late for North America, which is expected to have the strongest performance of any region with approximately half of the industry’s profits, amounting to $15.7B (Business Insider, Jun-15). The overall industry is projected to generate $29.3B in collective profits in 2015 from revenues of $727B. Growth in developing markets will help drive a 4%-6% increase in passenger demand, measured in revenue passenger kilometers (RPKs). Much of the growth in the airline industry can be attributed to more passenger departures, which have increased 6.5% YoY (IATA, Jun-15). This suggests that while there is an increase in the number of departures, the average flight is shorter. A drop in the price of oil…show more content…
Careful management of capacity has been an integral part of US airlines’ strategy and consolidation has given US airlines an element of pricing power. Despite a concentrated effort from the majority of airlines to resist capacity expansion, investors are concerned that expansion by some airlines is putting too many seats into the market, which could disrupt the balance between supply and demand at the same time that oil prices have climbed 34% since a 2015 low on March 17 (current price for Brent oil is $54/bbl.). However, most airlines will likely resist expanding capacity rather than use their fuel cost savings to pursue market share gains (Bloomberg Business, May-15). Moody’s projects that ROIC for rated US airlines will improve sharply in 2015 as lower fuel costs and capacity discipline spur growth in profits. The average ROICs for 2010-2014 for Delta, Southwest and United were 10.8%, 8.4% and 7.5%, respectively. Moody’s believes that each of these companies can keep their ROICs above these historical averages if the industry maintains capacity discipline, and the price of Brent oil remains below $100/bbl (Mar-15). CAGR from 2005 to 2014 for airline revenues in the US was 5%. EBITDA margin also increased from 9.5% in 2013 to 11.8% in 2014. The
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