Are Rising Fuel Costs Bringing The Airlines Industry Back Down To Earth?
Published on: 24/08/2018
With rising fuel costs, strikes and pay disputes, a pilot recruitment crisis, growing political uncertainty in previously stable areas and now the impact of looming trade wars, it’s a complicated time for the world’s leading Passenger Airlines.
The relentless growth in passenger numbers masks growing financial peril for many of the world’s 384 leading carriers according to new research.
The latest Plimsoll Analysis is designed to give busy executives a clear view on the long-term financial performance of the world’s leading Airlines. Based on the latest available data, Plimsoll’s unique assessment of the Global market shows:
- A quarter of leading Airlines make no profit at all
- Half of companies have seen profit fall in the latest year
- 143 carriers are in financial danger and vulnerable to future shocks
- Despite healthy growth in the market, profits have fallen in the latest year
- 110 companies are ‘Best Acquisition Prospects’
Christopher Evans, Senior Analyst at Plimsoll, explains the findings, “Demand has never been higher, but profit margins are being squeezed. Most of the blame seems to fall on the return of fuel price rises. At Plimsoll, we produce instant analysis that reveals which Airlines are best prepared to cope with the macroeconomic factors shaping the market over the next couple of years”.
“With so many Airlines making a loss, cuts are already being made to unprofitable routes and innovations to fill planes are being rolled out. White-hot competition on busy routes means carriers can’t pass on increased fuel costs to passengers. Instead, offerings such as Basic Economy (introduced by the likes of Virgin and American) help larger carriers compete on price with budget rivals and sell seats. Add-on charges such as hold baggage, pre-booked seats and food allow them to extract value from other passengers on the same plane. Even budget airlines such as Ryanair have announced a reduction in free hand luggage allowance in a drive to increase revenue opportunities”.
Evans continues, “This year’s Farnborough Airshow also shows how carriers are hedging against rising fuel costs. Record orders for next generation, fuel efficient aircraft such as the Boeing 787, Airbus A350 and new, hi-tech variants of old designs like the A320 Neo show where the market is heading. According to our analysis, half of Airlines saw margins fall last year. Replacing old, thirsty aircraft with more efficient ones will improve both passenger experience and long-term profitability. With margins in the low single digits any further rises in fuel cost could push many over the edge”.
“We’ve also identified 110 Airlines as the ‘Best Acquisition Prospects’. In such a low margin, cut throat market, consolidation is inevitable. Lufthansa’s acquisition of Air Berlin saw it jump back to the top of the European league table and is rumoured to be eyeing Alitalia. IAG continues to circle Norwegian. The market is in consolidation mode and we consider the targets highlighted in our study to have the best potential”.