Fitch Sees Stability among North American Carriers Next Year

The North American airline sector can look forward to a financially stable year in 2018, in the view of debt-rating agency Fitch Ratings.

In its newly released Fitch 2018 Outlook: North American Airlines, Fitch opined that while “the unit-revenue environment has stabilized after three difficult years…we remain cautious in our outlook for material unit-revenue growth,” as intense competition and substantial capacity growth offset a healthy travel-demand environment. Meanwhile, Fitch reckons “unit costs are likely to rise at a pace that will continue to pressure margins,” although cost pressures will diminish compared with those the North American carriers have faced this year.

“The North American airlines are working through a difficult competitive environment and rising costs that have pressured margins,” wrote Joe Rohlena, Fitch’s lead analyst covering North American airlines. “Nonetheless, we expect steady growth in demand for air travel and fewer cost pressures to support a stable environment in 2018.”

Fitch expects debt-leverage trends across the North American airline sector to remain stable or decline slightly next year, while aggregate debt balances and operating margins remain consistent with this year’s levels. Some carriers—such as Alaska Airlines, American Airlines and United Airlines—might bring their debt balances down incrementally next year, the rating agency reported.

However, the airlines’ ability to generate free cash flow will improve in 2018 as a result of slowing new aircraft deliveries. For example, American’s capital expenditure next year will total about $3.3 billion, compared with $5.7 billion in 2017, the Fitch outlook noted.

North American carriers will also enjoy sufficient liquidity in 2018. “Most carriers currently maintain cash as a percentage of revenue well into the double digits [percentages] to guard against unexpected events,” the Fitch report stated. “We expect these levels to stay roughly consistent. Financial flexibility is supported by ample amounts of capital currently available to finance aircraft as debt capital markets, bank markets and aircraft-leasing options all remain highly favorable to the airlines.”