A side from delighting motorists who have had a respite from escalating fuel costs over previous years, the current low in the price of oil has surprisingly resulted in many airlines getting back into profit.
“Airlines are making money through the low price of fuel. Airline employees getting pay rises for the first time in years and we are starting to attract people back into aviation,” said Jonathan Berger, vice president, ICF International who was addressing attendees of the opening conference at MRO Europe (18-20 October), in Amsterdam, the Netherlands.
Berger said that there was a commercial aircraft OEM production backlog of around 14,000 aircraft who are now focusing on rolling out new aircraft rather than fighting hard to sign up new customers. However, cash rich(er) airlines also meant consequences for the MRO community. Airlines have quickly understood that the lower fuel costs have led to a reversal in aircraft retirement trends. “In the 1990s we were averaging around 200 aircraft retired, which escalated into the 2000s to around 400 aircraft retirees per year,” said Berger. “Now we are witnessing a 30 percent drop in retiring aircraft.”
Where the growing trend was to produce aircraft that could demonstrate improved fuel economy – and that is still important for airlines procurement policies in the medium to long term – Berger said that currently there has been a trend to keep older less fuel efficient aircraft in place as the low oil price allows them to keep returning a profit. The upside of that is an increased MRO spend on older airframes and engines.
But there is also a negative effect on the surplus market with a reduction of ‘feed stock’ parts for older aircraft. This is a benefit to distributors who can improve the sales margins on used part values and sales. Correspondingly OEMs also benefit from a up-kick increase in new part sales. So airlines are paying a premium out of their increase in revenues to keep those older aircraft in the sky.
Berger said that a good number of airlines are showing a return on invested capital (ROIC) which he said is clearly correlated with the drop in fuel costs stating a 20 percent drop in operating costs from the highs of 2008 to 2016.
“The industry will make around $40 billion in profit in 2016. With a strong dollar the US sector is looking at a margin of 15.4 percent, clearly leading the sector, with Europe only showing around five percent.
He pointed to four external macro-economic forces that were significantly modifying the aviation market. Firstly, fuel costs were the lowest they have been for a long time, although a further serious drop is not predicted and a gradual rise should be witnessed again through the 2020s. China has undergone an economic GDP slowdown too, and global commodity prices have fallen. Global currency rebalancing has also resulted in a strong dollar which has effected some countries more than others.
This has meant that not all airlines are in a cash-rich position noted Berger. There have been numerous countries that have suffered and seen their own currency devalued most against the surging value of the US dollar – Canada, Russian, Australia, Brazil, and South Africa (during the two year period September 2014 – September 2016).
Those now in the enviable position of having surplus cash have been quick to give their equity partners some reward – in fact up to 42 percent of the total across the sector. They have also taken the opportunity to upgrade their own facilities and passenger lounges, with up to 38 percent being spent here suggested Berger. Finally, the last 20 percent has gone to profit shares and wage increases.