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Taking Stock

November 22, 2017

As 2017 rolls into 2018, it is reasonable to look back on a year that has been referred to as one of the most progressive in aviation since the era of Otto Lilienthal and the Wright Brothers.





This has been confirmed by the most astute of investors, Berkshire Hathaway, headed by Warren Buffet. In 2013, he referred to the airline industry as a ‘death trap for investors’. Four years later, his company owns US$1.6 billion of shares in American Airlines, Delta and United Continental.

This pales in comparison to Buffet’s confidence in the aircraft-affiliated manufacturing sector, which saw an investment of US$32 billion in Precision Castparts. This operation produces complex metal components for jet engines and airframes, as well as being a major supplier to the power generation industry.

Airline statistics for year-on-year comparisons with 2016 are most interesting in terms of trends.

One of the most consistent trends is that of steadily decreasing airfares. 2017, so far, has seen the predicted 2% drop in average world airfares, down to around US$353 per single sector. This is a staggering 64% drop in real terms since 1996, and an indication of why the demand for air travel has increased exponentially.

This is further borne out by looking at city pairings. Unsurprisingly, when you fly, you go from one city to another, creating a city pairing. The Flight Management System (FMS) of any modern airliner asks for this pairing as part of the initial cockpit set up.

Worldwide, the number of unique pairings is now at 19,699, and this is an increase of 99% since 1996. That has to be one of the most significant numbers in aviation today. Keeping up this pace of increasing connectivity will see air transport brought to the most remote and obscure places on this planet in the foreseeable future, and points to the continued expansion of the industry, as predicted by Boeing and Airbus, over the next 20 years.

As new routes are being continuously added, so too are the airframes serving them – now standing at a global figure of 28,645 serviceable commercial aircraft, which is up 3,8% year on year.

IATA recently released the figures for the estimated global airline profit of US$31.4 billion for 2017.  This is less than 2016, which saw profits of US$34.8 billion. With a few months of 2017 to go, it remains to be seen where it actually ends up, but it is probably fairly accurate.

This is significant, in that it shows a decline in yields despite a 7.4% increase in passenger demand from 2016. This demand is around 275 million new passengers (those that have never flown before), which pushes total passengers carried for the year to a mind-blowing 4.1 billion. That’s 11.2 million people per day in the air, and more than three times the entire population of China being moved annually.

Slap me with a platypus.

The reducing yields and increasing passenger numbers indicate a reduction in margin per passenger to US$7.69 for 2017, from US$9.13 in 2016 and US$10.08 in 2015. Overall, this is a global drop in net profit margin from 4.9% in 2016, to this year’s 4.2%.

The USA, however, is holding steady at US$16.32 profit margin per passenger carried. That’s an industry unheard-of margin of over 10%.

No wonder Mr Buffet has changed his tune …

IATA does go on to caution the industry that this average of US$7.69 per passenger is not a massive buffer, and adverse movements in the cost base, specifically the oil price, can turn the black to red if not adequately managed. Yields will have to be maintained, as assumptions going forward look at a Brent Crude price of US$54.00 per barrel. That’s where we are sitting now as I write this, and anything upwards of this is downside for the margin.

Meanwhile, back in Africa, we are solidly in the red, at US$-1,50 per passenger loss. We did get a pat on the back on two counts, though. We didn’t do worse than 2016 (gotta love the consistency), and we managed to not toast a single jet transport aircraft for the entire year. Hooray!

Only Ethiopian and our home-grown Comair showed a profit on the entire continent.

Similar figures for the Middle East are telling, and, some may argue, point to the beginning of the end of the ME3 bubble.

Margin per passenger is around US$1.78, despite the same 7% increase in demand. Profitability and load factors are down significantly from 2016, indicating excess capacity within the region. Contributing to this decline is the electronics ban in the cabin, some significant US travel restrictions and the political furore around Qatar.

That margin can go from black to red in a heartbeat.

The Asia Pacific region managed US$4.96 per passenger, down from 2016, but not hugely.

Latin American countries are holding in there at US$2.87 per passenger, with a better than average growth of 7.5%.

Global cost of operation rose from US$643 billion to US$687 billion, of which the fuel bill was US$128 billion, or 18.8% of total cost.

No figures of wage bill costs seem to be available yet for 2017, although I’m sure there will be a steady increase in percentage here as the skills shortage, specifically on the flight deck, starts to become more acute. Those unbelievable salaries for experienced flight crew have to hurt somewhere.

IATA has referred to the labour market as being ‘tight’, with no specific reprise on the horizon. The US is the most vulnerable, due to their impending train smash with retirements.

Due to the horrific performance of my current employer, I cannot specifically comment on these statistics from a local South African perspective, as this performance is more politically influenced than an indication of market forces. I am still optimistic of our prospects over the next few years, due to both the changing political landscape, as well as the sheer momentum of the entire industry. 

Whether this is enough for us to stop digging our own hole deeper and actually start some semblance of climbing out of it, remains to be seen. On a micro level, however, as seen with my training operation at Lanseria, the green shoots are most certainly there.

Charter operators and associated businesses (AMOs and other support) are not at all well, and as a direct barometer of the economy, probably have a few more tough years ahead.

Training, on the other hand, has gone stratospheric (certainly in my case), although at present around 85% of operations are foreign-contract based. It seems the local training market is similar to the charter market, in that there’s not much money floating around.

A combination of the USD-based training market and our weak Rand makes South Africa more appealing than ever as a training destination, and I’m doing my damnedest to capitalise on this.

I have managed to shore up additional contract work for the New Year, and this leaves me with a relatively warm fuzzy feeling as we look forward to 2018.

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