Sunday, May 29, 2016

Airline Executives Gather at International Air Transport Association Convention and Look for Answers: Industry seems more stable now but investors worry about signs of trouble ahead

Kathryn's Report: http://www.kathrynsreport.com

The Wall Street Journal
By Robert Wall and Doug Cameron
Updated May 29, 2016 8:38 p.m. ET


The airline industry has finally shaken off its boom-and-bust past, says the head of the world’s largest carrier, but investors aren’t buying it because familiar signs of trouble loom on the horizon.

Global air fares are falling as carriers add ever more aircraft, and low oil prices, which helped airlines land record profits of $33 billion last year, are inching higher. In addition, terrorism fears are weighing on bookings and, even as more passengers take to the skies, growth is stalling in some regions.

It’s a challenging mix for the 200-plus airline executives gathering in Dublin this week for the industry’s annual jamboree hosted by the International Air Transport Association, a big trade group.

The message they’d like to deliver echoes that of American Airlines Group Inc. Chief Executive Doug Parker in a well-publicized speech in March.

“We have an industry that also can be a real business like other businesses,” said Mr. Parker, who has spearheaded much of the consolidation that’s allowed airlines to become more efficient, and last year earn more than their cost of capital for the first time.

“The airline business has been fundamentally and structurally transformed and the valuations do not reflect such a transformation,” he said. “They’re not even close.”

Investors have shrugged and headed for the exits, dragging an index of global airline stocks down 6.4% since the start of the year. U.S. carriers have been hit hardest, with Mr. Parker’s American shedding a quarter of its value even as it poured profits into stock buybacks.

Demand isn’t the problem. Global passenger numbers rose 7% in the first quarter from a year earlier, driven largely by growth among carriers in Asia and the Middle East. Fliers are paying less, with global fares down an average 4% through April and are particularly weak on trans-Atlantic flights and in the U.S.

Average U.S. domestic fares haven’t risen in more than a year and airlines don’t expect them to stabilize before the end of 2016.

Hunter Keay, airline analyst at Wolfe Research LLC, last week boosted his airline investor sentiment gauge to 4, on a scale of 1 to 10, having pegged it at 1 or 2 for much of the year. “This is the 2016 version of good news, sadly,” he said of the recent raise.

The executives gathered in Dublin have few levers to pull to soothe disgruntled investors or those passengers facing long security lines at airports this summer.

Airlines can cut flights to gain more control over fares. Such U.S. carriers as Delta Air Lines Inc. have recently announced plans to trim capacity after the Labor Day holiday in September. In Europe, British Airways parent International Consolidated Airlines Group SA and Deutsche Lufthansa AG have also scaled back.

Executives have to be careful in Dublin. Antitrust laws bar them from discussing or coordinating fares in most markets. Comments made at last year’s IATA meeting in Miami form part of a class-action lawsuit lodged against four U.S. carriers, which all deny the charges.

Cheaper jet fuel has been the biggest driver of higher profits, but prices have been rising since January. Still, the airline industry should deliver strong earnings this year, said Peter Morris, chief economist at aviation consultant Ascend Worldwide Ltd. Many carriers in Europe and Asia are only starting to see the benefit from cheaper fuel as costly fuel hedges, made before crude tumbled, are replaced by ones made at more favorable rates.

“There have been a number of negative developments that have come up, but they don’t override the underlying achievement for profitability,” Mr. Morris said.

Also on the Dublin agenda is the prospect of a new cost headwind as regulators consider making carriers pay for carbon dioxide emissions.

Airlines are exempt from the global climate change deal struck in Paris last December, but pressure has been mounting on politicians and regulators to curtail the CO2 output from commercial flights. Environmental groups fret that the airline industry’s rapid growth could undermine other climate change initiatives unless limits are imposed.

The International Civil Aviation Organization, an arm of the United Nations, is trying to secure agreement on a mechanism to limit the industry’s C02 output without curtailing growth.

ICAO members pledged to improve the fuel efficiency of commercial aircraft by 2% a year and to see that any industry growth beyond 2020 won’t increase pollution. ICAO representatives convened this month to help bridge differences between member states about what the system might look like.

Exactly how much of an airline’s carbon emissions will need to be offset is still being negotiated. IATA estimates that the airline industry’s annual bill would be around $2.8 billion compared to projected profits this year of $36 billion, a forecast expected to be updated this week.

Original article can be found here:  http://www.wsj.com

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