18/08/2017

H1 2017 traffic growth and load factors up but Middle East sees decline

H1 2017 traffic growth and load factors up but Middle East sees decline

Strongest first half in passenger growth since 2005…

 

H1 2017 saw the fastest pace of traffic growth (industry-wide) since 2005. Overall, RPKs grew by 7.9% in the first half of 2017 compared to 6.0% during the same period in the previous year, as per IATA. Asia Pacific and Europe were the primary drivers of this robust performance. Asia Pacific is understandably growing at a double-digit pace considering its an emerging market and includes the two fastest growing markets in the world (China and India). However, the European region’s performance is impressive considering it is a mature market. IATA highlighted that part of the reason is the weak traffic trends witnessed during 2016 on account of macroeconomic conditions and the threat of terrorism related incidents. However, the negative effect of those factors appears to be dissipating.

 

 

…but the weakest since 2003 for the Middle Eastern airlines

 

While the industry as a whole enjoyed the best first half since 2005, the same period was in-fact the weakest performance for the Middle Eastern airlines since 2003. While a 6.9% growth rate is still fairly healthy, the region’s airlines benefitted from double-digit growth rates for a long-time. The region continues to witness softening traffic conditions due to a combination of several factors but primarily due to the various bans instituted by the US government. Though there has been a relaxation in some of the earlier restrictions, passengers continue to desert the ME3 carriers particularly on the North American routes. As per data published by IATA, traffic growth was negative between March and May 2017 on the Middle East-North America segment with load factors falling by nine percentage points y-o-y in May 2017.

 

Load factors improved in all markets except the Middle East

 

 

The first half has shown extremely encouraging signs of rational capacity management. Numbers suggest that airlines have been sensible at adding capacity and this has had a positive effect on capacity utilisation levels. Overall, load factors improved by 1.3 percentage points in H1 2017 vis-à-vis the same period in 2016. As highlighted earlier, an acceleration in traffic growth coupled with judicious capacity management means that on average airlines are functioning at higher efficiency on an operational level. This is not only sustainable but also profitable in the long-run.

 

India remains the fastest growing market segment despite deceleration in traffic growth

 

Traffic growth in domestic India decelerated from mid-20s to the low-teens in the first half of 2017. IATA highlights the effect of the unanticipated ‘demonetisation’ that hit the country in late 2016 post which growth has slowed down. Nevertheless, it still remains the fastest growing markets globally presenting a massive opportunity for aircraft investors. Positively, it appears capacity growth too adjusted downwards in response to the change in traffic conditions. In the end, despite the slowing traffic growth, load factors improved compared to the previous year period.

 

 

Many of the previously struggling domestic market segments have also witnessed some level of improvement in the first half. Russia and Japan, in particular, have seen substantial recoveries in y-o-y traffic trends following a general improvement in the economic conditions. As highlighted in a previous Ishka Insight (Market review: Lessors warm to Russia but financiers remain skittish), there has also been an uptick in lessor interest in Russian airlines even as legacy issues emanating from the economic sanctions continue to hold back the investor community.

There seems to be no end to the political saga in Brazil and the softness in the commodity market continues to put pressure on the economy. Nevertheless, it appears domestic Brazil travel too has recovered from declining traffic to some extent, but it is still struggling to live up to its potential.

 

The Ishka View


Following a vastly positive Q1 2017, it is encouraging that airlines continued to remain judicious with capacity management for the entire first half of 2017. Despite the improved traffic growth, capacity has been added at a fairly cautious pace which has resulted in substantially improved load factors. This pragmatic approach assumes even more significance considering some of the major demand drivers such as low fuel prices, which boosted traffic growth in the past two-three years, have risen since 2016. The continual improvement in capacity utilisation in H1 2017 reinforces the optimism in an operationally healthy 2017 for airlines.
 
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