As airlines publish half-year results it is worth listening to the economic mood music to see what the rest of the year holds writes CTAIRA analyst Chris Tarry
As we enter mid-year results season, the majority of quoted companies (and increasingly central banks) are issuing guidance on their performance expectations.
Such an approach provides a way to minimise any unexpected shocks at the time of the results announcements if expectations and reality correspond.
While we might hear such guidance, we should all take our own views as it is the difference in opinions that will tend to make the market. It is clearly easier to offer a perspective on the future that subsequently materialises if the operating environment is or is close to one that might be described as stable.
Some airlines have made substantial progress in structurally changing their economics of operation and are able to produce more profit (or reduce losses) for any given combination of traffic volume and value.
There are however a number of airlines that still have some way to go with performance improvement programmes and in some cases a very long way to go. Notwithstanding, the reality is that the potential profitability of the industry has improved and the real kicker is an improved economic environment.
Although global growth is forecast to be 2.4% in 2013 and to be just over 3% for both 2014 and 2015, when measured in terms of a real increase in GDP which, for mature economies, would be perceived to be a reasonable rate of growth, the reality is that this outcome reflects a wide range of expectations.
These include weak performance on the part of most mature economies as well as slowing rates of growth for most of the emerging economies.
It is now some five years since the onset of the economic downturn. The rather worrying thing is that there are still a number of economies, chiefly in Europe, where the volume of economic output has some way to go to recover to levels previously seen. If anything, this highlights the extent of the structural problems that still need to be addressed in these particular countries.
There are a number of economies that are linked and part of the same system. At the simplest level a drop-off in demand for finished goods and services has an impact on supply and demand all the way through to commodity-based economies. Although there are various leads and lags in the system, the effects will inevitably feed through. In view of the latest expectations for world GDP, there appears to be a greater degree of stability that should make at least some forecasting easier. However, key questions remain as to whether what we are seeing now might be described as normal growth? Also how far away we are from the "necessary rate" of growth that would assist in achieving, among other things, "full employment" at an economic level and attractive returns for the airline sector in particular.
Against this background, it is worth listening to some of the recent economic mood music, but there is often a general need to cut through political rhetoric and make our own assessment of the data. At an aggregate level, Markit's global purchasing managers' index points to "broad-based growth" with consumer services "rising at the fastest pace" for some 14 months. Given the relationship between consumer spending and air travel, this is potentially a positive sign.
At a regional level, with a focus on business expectations, the results for China suggest that expectations continue to weaken and are now at their lowest for around 15 months, with the service sector at the weakest level since the survey began in 2005. Conversely, India has begun to recover from a low point.
For the eurozone, the result is probably best described as not as bad as it has been, but also one that highlights how far the region still has to go. Just as what we are really interested in is the performance of individual airlines, rather than how the industry has fared (which is the aggregation of individual performances), the same goes for companies. This is because they are interested in the likely future performance of the economies they operate in.
While global growth may appear to be more stable, there is clearly a lot that underlies the aggregate and this will obviously be reflected in the management comments and future results for all businesses - not just those for the airlines. The key questions to be answered include: is what we are expecting for global growth the likely "normal" or "steady" rate? If it is, how far is this from what might be described as the "necessary" rate?
Furthermore, if there is a gap, how will it be closed? In other words, will a recovery in the current underperformers be enough and by when? These are perhaps still the key economic questions and they are certainly worth pondering as the northern hemisphere summer progresses.