Aviation Finance

Market review

Looking back on 2010, it can be concluded that for the commercial aviation industry as a whole the recovery from the 2008/2009 global economic crisis was actually much stronger than anticipated. During the second half of the year, many market segments returned to business volumes that equalled or even exceeded pre-crisis levels. According to the International Air Transport Association’s (IATA) international traffic statistics, airlines gained about 8.2% in revenue passenger kilometres (RPK). Towards the end of 2010, traffic volume exceeded the pre-crisis level of early 2008 by 4.0%. Not all regions benefited equally, though. Passenger traffic expressed in RPKs increased by 17.8% for carriers in the Middle East, followed by 9.0% growth in Asia-Pacific, 7.4% in North America and only 5.1% in Europe. The smaller regions (in RPK terms) performed well, with Africa growing 12.9% and Latin America 8.2%. The disciplined capacity growth – in terms of available seat kilometres – of only 4.4% benefited the airlines as it resulted in an improved average passenger load factor of 78.4%. Asset utilisation (average daily hours flown per aircraft) improved, which was a significant boost to profitability in this capital intensive industry. In addition, the tightened demand-supply conditions resulted in a strong yield environment. The mix of discount/economy and the more profitable premium/business travel improved as well.

The favourable market circumstances resulted in a sharp increase in operating cash flows for the airlines as well as their profitability. IATA’s projections for commercial airline 2010 net results (post tax) improved during the year from a projected US$5.6 billion net loss (December 2009 projection) to a US$15.1 billion net profit (projection dated December 2010). Thanks to strong growth in the region, Asia-Pacific is expected to be the most profitable region with projected net profit of US$7.7 billion. With a projected US$5.1 billion, North America is second, partly thanks to capacity cutting as early as 2008. Latin America has a projected net profit of US$1.2 billion. Europe continues to be one of the more problematic regions, with only US$0.4 billion projected net profit. The sovereign debt crises did not help to stimulate demand for air travel, and neither did the April eruption of a volcano in south-eastern Iceland that caused a huge cloud of ash resulting in the temporary closure of some major airports, as much as 1,700 kilometres away. One element that did not cause too much problems during 2010 was the cost of fuel. Crude oil (West Texas Intermediate) averaged around US$80 per barrel for the full year, albeit with an increase to around US$90 towards the end of the year.

On the cargo side of the business, freight volume measured in freight tonne kilometres (FTK) quickly recovered from the depths of the depression in September 2009. In May 2010, freight volumes reached a new peak, mainly driven by recovering economic conditions and inventory restocking activity. In recent months, some stagnation has been observed. Over 2010 as a whole, global FTK volume increased by no less than 20.6%, and the year ended at a traffic level 1% above the early 2008 pre-crisis level. The accelerating freighter capacity expansion brings some worries. With available freight tonne kilometres increasing 8.9% in 2010, it is clear that most of the temporarily stored capacity has returned to service. Despite all of this, cargo load factors climbed to an average of 53.8%.

Overall, the real underlying magnitude of the recovery is overstated somewhat by the fact that most of the growth during the first half of 2010 was a result of a technical recovery caused by the collapse of air transport during the first half of 2009. According to IATA, both passenger and freight traffic are now expanding at annualised rates of 5–6%, in line with generally accepted, sustainable long-term growth trends.

With the recovery of the air transport markets, the commercial jet market enjoyed a much better year compared to 2009 as well. The net order total (corrected for cancellations) for the Airbus- and Boeing-produced mainline narrowbody and widebody jets more than doubled from 413 in 2009 to 1,104 in 2010. While many orders were placed for fleet expansion, the prospect of future fuel cost increases as a result of the economic recovery was an important driver for airlines to order replacement capacity for their ageing fleets.