While the global airline industry is in the midst of a relative boon, industry insiders see headwinds ahead posed by a convergence of rising rates and oil prices, and changes to the competitive landscape, according to Steve Mason, Vice President of Aircraft Evaluation and Strategy for CIT Aerospace at CIT Group. These views and others are presented in “Clouds on the Horizon? Airlines Look for Best Flight Path Through Rising Interest Rates, Fuel Prices” (cit.com/mason), the latest piece of market intelligence to be featured in the CIT Executive Insights series.
Long-term Industry Risk Rising
A recent CIT Aerospace survey of more than 100 global airline fleet and finance executives found that most executives expect both interest rates and fuel prices to rise, potentially adding risk for the sector.
“Airlines could see operating cost headwinds with the retreat of favorable oil prices and rates, combined with a shifting market landscape,” said Mason. “Some of these market changes include the continued growth of low-cost carriers and currency weakness in Europe and Asia.”
Financing Costs Impacted by Volatility
With clouds looming over the industry – including the certainty of rate hikes – executives surveyed indicated that they anticipate their airlines will increase the percentage of leased aircraft in their fleets.
“As the Federal Reserve continues to show support for a rate increase in the very near future, companies are looking for alternatives to finance their aircraft,” said Mason. “While markets like Europe are sluggish, other markets such as China are under-ordered in terms of their aircraft requirements and will look to continue growing their fleets despite the added turbulence. They will seek options such as leasing to meet those needs.”
Fuel a Cause for Concern
The cost of fuel is a top concern for airline executives, half of which indicated that they believe fuel costs will increase in the next 18 months, and more than 80 percent believe they will see an increase in the next three to five years.
Mason commented that historic hedging strategies may not be suitable, indicating, “Hedges represent a more costly solution in the wake of fuel price volatility. New, more fuel-efficient technology is the only truly long-term hedge against fuel price increase.”
Sector Consolidation to Increase
Consolidation is beginning to change the face of the European airline market as pressure mounts on the legacy airline model. Among the European airline executives polled, more than half see mounting competition from different types of carriers as their most significant challenge in the next two years. This pressure is coming in the form of low cost carriers (LCCs) and Middle Eastern carriers continuing to make headway into the European market.
“European airline consolidation is likely to intensify, and we will continue to see the ‘conglomerate style’ alignment in which operating companies combine, but the airlines fly and market as separate brands,” said Mason. “With LCCs growing their market share in Asia, we may see similar trends begin to rise there as well.”
The Need for Newer Aircraft
These issues put into sharp relief the need for airlines to keep costs low and improve customer service by incorporating more efficient aircraft into their fleets. The survey found that more than 90 percent of industry executives expect improved and more efficient aircraft designs in the coming years, and nearly three-fourths are leaning on that technology to remain competitive.
Mason ends with this final thought. “At CIT, our expertise and history as an aircraft lessor give us unique insight on the shifting conditions of the market. We understand the need for flexibility in lease arrangements with our airline partners, and pride ourselves in being quick and efficient in order to help our customers navigate rapid changes in the sector.”