Macro-economic risk and the outlook for aviation 25 th January 2018, Dublin Brian Pearce, Chief Economist, IATA www.iata.org/economics
Macro matters 24% 20% Global GDP and RPK growth 12% 10% 16% 12% 8% 4% 0% -4% -8% -12% Global RPK growth Global GDP growth 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 8% 6% 4% 2% 0% -2% -4% -6% Source: IATA Economics using data from ICAO, IATA Statistics, IMF and our own forecasts
Peak-to-peak cycles lasted 8-11 years; but are downturns predictable? Billions of passenger kilometers flown Global passenger kilometers flown (RPKs) 9,000 10 years 8,000 7,000 6,000 8 years 5,000 4,000 10 years GFC 3,000 11 years dot.com/9-11 2,000 9 years Gulf war 1,000 Oil crisis 0 Inflation emerges 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: IATA Economics using data from ICAO, IATA Statistics and our own forecast
Source: http://www.telegraph.co.uk/news/matt/
Macro-economic forecasts fail just when you need them 8 6 4 Jan 07 Actual and forecast US GDP growth - Fair Model Actual Oct 07 Oct 09 Jul 08 Apr 09 % saar 2 0-2 -4 Oct 08-6 -8 2007 2008 2009 2010 Source: IATA Economics using data from the US Fair Model and Datastream
The same is true in forecasting air travel UK DfT forecasts of terminal passengers at UK airports Source: UK DfT, UK Aviation Forecasts, October 2017
What can be done? Turning points can t be forecast consistently Too many unknown unknowns We don t even try We focus on how the trend is evolving but listen to Adam Consider the known unknowns Stress-test with scenarios Build flexible, robust, business models Long-term trends may be predictable for some aviation variables IATA/TE 20-year country-pair passenger forecast service
What are the known unknowns? 1. Geopolitical risk is at a 25 year high Source: Tina Fordham, Chief Political Strategist, Citi
But political shocks of 2016 did not end the cycle Donald Trump Vows to Rip Up Trade Deals and Confront China The New York Times 28 June 2016
In fact confidence rose to new highs Index 50 = no change Index 60 Business and consumer confidence 103 55 Global PMI manufacturing + services confidence 102 101 50 100 45 40 Consumer confidence OECD + 6 large emerging economies 99 98 97 35 96 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: IATA Economics using data from Datastream, Markit
Liquidity helps; central banks have not yet started to unwind QE Billions US$/100,000 Yen 6000 Central bank assets Bank of Japan 5000 US Federal Reserve Bank 4000 3000 2000 1000 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Datastream
Asset prices near all time highs bubbles about to burst? Index. Equals 1 in 2000Q1 1.8 1.6 Asset prices, indexed to 2000 Global house prices, inflation adjusted FTSE all World equity index 1.4 1.2 US 7-year Treasury bond index 1 0.8 0.6 0.4 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Source: IATA Economics using data from Datastream, IMF
If so, high debt ratios could be the source of a downward shock Outstanding debt held by non-financial private sector, % GDP 175 Developing economies 170 165 140 130 120 160 155 150 145 140 Developed economies 110 100 90 80 70 60 135 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Datastream 50
But asset prices don t look exceptionally high compared to nominal GDP Index equal 1 in 1998 1.6 A broader P/E ratio: equity prices as a ratio of nominal GDP 1.4 1.2 1.0 FTSE All-World equity index / World nominal GDP 0.8 0.6 0.4 0.2 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Source: IATA Economics using data from Datastream
Normal bond yields should be closer to trend growth in nominal GDP 16% 14% 12% 10% US 10-year Treasury bond yield and growth in US nominal GDP 8% Growth in US nominal GDP % 6% 4% 2% 0% 10 year US treasury bond yield -2% -4% 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Source: Datastream
The interest rate cycle is finally turning up 8 US interest rates 7 6 5 % 4 3 US 10-year treasury bond yield 2 1 Federal funds rate 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Source: Datastream
So far there is no sign yet of an inflation problem 4.0% Core consumer price inflation 3.0% 2.0% 1.0% US Eurozone Japan 0.0% -1.0% -2.0% -3.0% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Source: Datastream
But an inflation shock may come from the US, now out of spare capacity Billions of US$ constant prices 18,000 GDP and potential GDP in the US 17,500 US GDP 17,000 16,500 16,000 US potential GDP or supply capacity 15,500 15,000 14,500 14,000 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Datastream
Hard Brexit looking more likely damaging not disastrous The Treasury View: 3-4 years worth of GDP growth lost Source: UK Treasury The Long Term Impact of EU Membership and the Alternatives
Airlines have been using strong cash flows to reduce debt Debt adjusted for operating leases/ebitdar 8 Adjusted net debt/ebitdar 7 6 5 4 3 2 1 0 Middle East 2010 2011 2012 2013 2014 2015 2016 Latin America Asia Pacific Industry average Europe North America Investment grade credits Source: IATA Economics using data from The Airline Analyst
Focus remains on sweating assets as well as protecting margins EBIT margin, % revenue Capital productivity, revenue/invested capital, US$ 10 Components of return on capital EBIT margin 1.5 8 1.4 6 4 2 0 Capital productivity 1.3 1.2 1.1-2 1.0-4 0.9-6 0.8 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Source: IATA Economics using data from ICAO, McKinsey, The Airline Analyst, IATA forecasts
% of invested capital The evolving trend for 2018 points to a 4 th year of good returns 12.0 10.0 Return on capital invested in airlines and their cost of capital Return on capital (ROIC) 8.0 6.0 4.0 Cost of capital (WACC) 2.0 0.0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Source: IATA Economics using data from McKinsey, The Airlines Analyst, IATA forecasts