Published March 31, 2009

Airline stocks may have bottomed out: Iata

By VEN SREENIVASAN

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(SINGAPORE) Have airline stocks bottomed out and do their current prices reflect the realities of the operating environment?

The chances are, airline stocks have already priced in the poor fourth quarter results and the slump in traffic, says the International Air Transport Association (Iata).

In its latest industry Financial Monitor, Iata notes that market values of airline stocks have moved sideways over the past month, on average.

However, they remain 18 per cent lower than where they started the year and 64 per cent below their late-2007 peaks.

'This suggests much of the recent bad news on Q4 profits and slumping traffic is now 'in the price',' Iata said. 'However, there is much regional variation. US airline stocks fell 9 per cent over the month, as analysts revised earlier optimistic views on US profits, offset by rises in Europe and Asia.'

Indeed some Asia-Pacific airlines stocks have either rebounded or held their ground over the past month.

Singapore Airlines shares closed at S$10 yesterday compared to its last low of S$9.39 on Mar 18, while Cathay Pacific is trading at HK$8.22 up from a low of HK$6.98 on Mar 9. Similarly, Qantas ended the trading day at A$1.84. It's recent low was A$1.42 on Mar 9.

Airline financial performance during Q4'08 was much worse than had been expected, Iata noted: 'A loss of around US$1 billion had been expected but, due to the sudden collapse in air freight and also cash losses on fuel hedges, major airlines reported losses in excess of US$4.5 billion.'

Asia-Pacific carriers collectively posted fourth quarter operating loss of US$1.03 billion last year, versus an operating profit of US$2.29 billion in Q4 2007. In net profit terms, they collectively lost US$1.14 billion, versus US$1.81 billion profit in Q4 2007.

On the cost front, however, the price of fuel has fallen, while the 'crack spread' between crude and jet kerosene had also narrowed.

But airlines cannot capitalise on this under current poor demand conditions, Iata noted.

Air freight volumes are exceptionally low, down over 22 per cent in February, but the level has moved sideways since collapsing in November and December.

'A possible floor appears to have been found but, like oil, a further downward leg cannot yet be ruled out until economic recovery is in sight,' Iata noted.

But passenger travel has not found a floor and is now declining at a faster rate. Singapore airlines, for example, is cutting capacity this year by 11 per cent and parking 17 planes.

Iata said load factors have fallen so fast because the deepening recession has cut away the foundations for travel demand, but in addition yields are now falling as well as volumes.

'Shrinking load factors means that unit revenues are now falling at a faster rate than yields,' it said.

More than 90 new aircraft were delivered and only a handful retired so the fleet expanded in February. The 5.9 per cent fall of international ASKs (paid seat capacity) was achieved through lower utilisation of the fleet, another negative for profitability.