Industries to Watch: Domestic Airlines Lifting Off

Among issues that in recent years dogged the US airlines industry—and, by proxy, suppliers downstream—were routes operating well below capacity, surging fuel costs and an economic recovery that saw its share of delays. But those concerns have largely been grounded for domestic-based carriers, placing the airlines industries and direct suppliers on NACM’s Industries to Watch list for positive reasons, a rarity in recent years.

Z-Score bankruptcy prediction model creator Ed Altman, the Max L. Heine Professor of Finance at the New York University (NYU) Stern School of Business and director of research in credit and debt markets at the NYU Salomon Center for the Study of Financial Institutions, told NACM this week that the turnaround in the airlines industry has been noteworthy. The reasons are many: reduced number of flights, fewer empty seats per flight, general economic improvement domestically, less aggressive pricing competition between the major carriers and eased concerns over fuel costs.

“They’re just more efficient,” said Altman, who will serve as a first-time instructor at NACM’s Graduate School of Financial and Credit Management on the campus of Dartmouth College in June 2015. “And with a fairly vibrant US economy, flying is back in fashion more than it was during and right after the economic crisis.”

Altman is not alone in his predictions of stability for the airlines industry. Each of the so-called “Big Three” ratings agencies based in the United States have offered upgrades to either the credit ratings or outlooks of some airlines. Justification for the positive movement focused on expectations for continued strong demand, especially for the four largest US-based carriers and an absence of “debilitating, widespread battles for market share,” as Moody’s Investors Service characterized it.

Less stable are predictions of health for carriers conducting business primarily in the European Union and, to a lesser extent, Asia. Economic woes and potential concerns over fuel access caused by the deepening Russia-Ukraine border dispute have created significant headwinds.

“I think the fundamentals definitely are not good in the EU situation,” said Altman. “It’s not just because of Ukraine. They’re also not as competitive right now.” Altman added that one advantage favoring EU-based carriers is the strengthened US dollar versus the euro, which had gained significantly in strength when the US was deep into its recession.

- Brian Shappell, CBA, CICP, NACM staff writer

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