Miami Beach (FL), June 7, 2015: The International Air Transport Assn. (IATA) Annual General Meeting (AGM) opens against a backdrop of conflicting signals from the industry, including from the organization itself.
On the one hand, IATA said last week freight traffic declined in April after a robust start through the first three months of the year. Freight traffic is usually a harbinger of passenger traffic.
On the other hand, IATA said April passenger traffic was up higher than usual.
At the same time, Delta Air Lines warned its passenger revenue per available seat mile was falling on weaker short-term business bookings and Southwest Airlines continued a fare sale that, given typically strong load factors and going into the historically strong third quarter, indicates weaker traffic.
Delta’s PRASM guidance was accompanied by a forecast that it may adjust downward its US domestic capacity. Southwest, which contributed to a frenzy over airline stocks two weeks ago with statements that it would grow its capacity by up to 8% (thus sparking fears of a market share war), walked this back.
Helene Becker, the aerospace analyst of Cowen and Co., tried to put perspective to the conflicting information.
As expected, Delta stated they will consider reducing their domestic capacity in the fall and as of now the current bias is for downward revisions. We believe this is hugely bullish for Delta and the airline industry. Over the last several weeks, the investment community was overly fixated on domestic capacity growth. We have now seen Southwest walk back their 2015 capacity plans and Delta at least think about cutting capacity growth. Delta currently forecasts 3Q15/4Q15 domestic capacity up 4%/2%. If Delta makes an adjustment to their 4Q domestic capacity it is more than likely they move to flat growth. In terms of who is next, we believe American could make a reduction, while United has already made their reductions. The action by Delta give us more comfort that PRASM will turn positive in 4Q15. Delta and the industry already addressed the international weakness reducing growth as a result of currency headwinds. That said, demand in the summer months continues to remain encouraging, especially to Europe given the strong dollar.
IATA said April passenger growth was up in April, “showing robust demand growth compared to April 2014. Total revenue passenger kilometers (RPKs) rose 5.9%. April capacity increased by 6.1%, and load factor slipped 0.1 percentage points to 79.4%.”
IATA said domestic traffic grew by 7.2%, much greater that international demand, which grew by 5.2% year-over-year.
“Demand for connectivity remains strong. That’s positive news. But the performance of the industry is multi-tiered. Middle East and Asia-Pacific based carriers led with growth well above the 5.9% average, while carriers in Europe and the Americas were below it. And African airlines reported a contraction compared to the previous year,” said Tony Tyler, IATA’s DG and CEO.
But freight traffic growth has lost momentum, IATA said. Global air freight markets showed a 3.3% increase in cargo volumes in April compared with a year ago. “While there is growth compared to the same month in 2014, there has been no actual growth in aggregated global cargo volumes since late last year,” IATA said.
“At a regional level, only the Asia-Pacific and Middle Eastern airlines reported growth in April. North American carriers reported essentially flat demand, while Europe, Latin America and Africa all reported declines when compared to 2014. April data also revealed a slowdown from the growth for the first quarter of 2015, which averaged 5.3%, in line with a recent weakening in world trade growth. Despite a cyclical pick-up in the global economy, acceleration in trade and air freight demand is unlikely in the near term as business confidence and export orders are flat or declining.
“After a volatile start to 2015, the market is settling down, and it is clear that momentum in air freight growth is being lost. First there is the structural challenge of world trade no longer expanding at a faster rate than domestic production. Layered on top of that trend we now see a weakening of economic indicators in the crucial air cargo markets of Asia-Pacific and Europe,” said Tyler.
The US domestic economic growth actually turned negative in the first quarter, IATA noted.
Boeing is counting on recovering in the freighter market to breathe new life into its 777F and 747-8F programs.