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Airline share prices increased by 4.7% in February, recovering some of the decline seen during January’s turbulence. US carriers’ share prices saw the biggest month-on-month rise (+9.5%), while European airlines saw a smaller gain (+1.9%). By contrast, Asia Pacific was the only region to see a further decline (0.4%). The modest recovery in airline stocks in February occurred alongside a second consecutive monthly fall in global equities: the FTSE Global All Cap index dipped by 0.7% over the same period.

The latest financial results have continued to point to a strong end to 2015 for industry profitability. Net post-tax profits in our sample in the final quarter of 2015 were almost 60% higher than in the same period a year ago.

As in previous quarters, the strongest results were posted by North American airlines, with an aggregate operating margin of around 15%. Financial performance improved in the other regions too with the notable exception of Latin America, where challenging domestic economic conditions have taken a toll.

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Fuel costs

Crude oil prices have rallied in recent weeks, driven by market participants anticipating a tightening in supply. At the time of writing, the price of crude oil (Brent) was around 50% higher than its January low-point.

That said, the bigger picture is that oil prices are still some 30% lower than this time last year. Moreover, with storage levels remaining high, it remains to be seen whether the rally will hold

Yields

Average global fares in reported US dollar terms fell by around 12% in 2015 compared to the previous year. The strong appreciation in the US dollar seen over the period exaggerated the downward trend in airfares: adjusting for the currency effect, nominal global fares were approximately 4-4.5% lower than in 2014.

The downward trend in exchange rate-adjusted air fares flattened towards the end of last year. However, competitive pressures within the industry mean that the declines in oil prices seen around the end of last year and into 2016 are likely to translate into further declines in fares during H1 2016 as fuel hedges unwind.

Demand

The global air passenger market carried strong momentum into 2016. Global passenger traffic in January was 7.1% higher than in the same month in 2015. The continuation of the strong upward trend in seasonally-adjusted traffic underlines the resilience of industry performance to the equity market turmoil seen early this year.

The recovery in air freight volumes from the weak first half of last year also continued into 2016. FTKs finally surpassed their seasonallyadjusted peak reached in February 2015 at the time of the US West Coast seaport disruption. That said, the absence of any particularly strong demand tailwinds – not least the ongoing sluggishness of world trade – suggests that freight volumes are set for another year of just modest growth in 2016.

Capacity

Airlines have continued to react to robust travel demand by adding capacity cautiously (total available seat kilometres increased by 5.6% year-on-year in January). As was the case in 2015 as a whole, demand growth in January outstripped capacity growth in all regions except the Middle East.

By contrast, growth in the amount of capacity coming into the freight market has continued to far outstrip that of freight demand. (Indeed, freight capacity has grown faster than passenger capacity over the past year or so as well.) Available freight tonne kilometres increased by 7.0% year-on-year in January. Aircraft deliveries slowed in the first month of 2016 The number of available seats in the global airline fleet increased by 0.2% in January compared to the previous month, and by 5.4% compared to January 2015. 76 new aircraft were delivered in January – a slowdown from recent months, possibly reflecting delivery schedules being affected by the earlier timing of Chinese New Year this year.

As in January, net storage activity made only a modest net negative contribution to the fleet size. This mainly relates to fewer aircraft going into storage in recent months, as lower oil prices have made it economical to keep flying less fuel-efficient aircraft.

Divergent trend in passenger and freight load factors continues

The industry passenger load factor increased to 80.8% in January on a seasonally adjusted basis, just 0.5 percentage points lower than its all-time high. Achieved industry loads have remained elevated while breakeven loads have declined.

This combination has supported the strong financial results achieved in 2015. By contrast, the industry freight load factor edged up to 43.5% in seasonally-adjusted terms in January – further evidence that its downward trend seen during 2015 has bottomed out. Nonetheless, the bigger picture is that loads remain close to a six-year low, and are keeping cargo yields under pressure. (This is a particular headwind for Asia Pacific carriers, for whom cargo is a key part of their business.)

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