2020 Airline Industry Outlook

January 23, 2020

 

Generally speaking, last year was a year of slowing passenger growth and declining cargo traffic volumes. The airline industry has been faced with a number of externalities. Slowing global economic, regional and international trade wars, geopolitical tensions and social unrest, not to mention uncertainty over Brexit all came together to make a more difficult than forecasted business environment for airline operators. As a result, many airlines have been forced to go out of business, putting  jobs in jeopardy including pilots and airline staff. The grounding of the Boeing 737 Max, the rise of flight boycotting movements and a series of airline bankruptcies all combined to remind us how vulnerable the industry is.

 

International Trade Wars

Global trade tensions between the US and China have led IATA to sharply downgrade the airline industry’s profit forecast for next year. Last October, the US imposed fresh tariffs on £92bn of Chinese imports. In response, Beijing introduced measures targeting $75bn worth of US goods, including a 5% tariff on US crude oil.

As the tensions are likely to continue to intensify, passenger traffic and especially freight business will be affected. Airlines will somehow still make a profit this year, but there is no easy money to be made.  

 

No-deal Brexit

The UK’s exit from the EU still to take place, negotiations are ongoing but the future relationships after Brexit remain unclear. A no-deal Brexit would cause much confusion and changes for the UK and its European neighbours. Airlines and their personnel might need new or modified certificates, licences and documentation to design, produce, maintain and operate between the UK and the EU.  

The UK is currently a key member of EASA. But when leaving the EU, the UK CAA will take over many functions currently performed by EASA with regard to aviation safety approvals and certifications. In preparation for a no-deal Brexit, the UK will need to ensure that safety and maintenance standards match with European and global standards. Hence negotiations and communication between the UK and the rest of the world will be crucial.

 

Safety

The industry’s safety performance has significantly improved over the past decade, with 2017 witnessing the safest year in aviation history. However, tragic crashes with the newly introduced B737 Max in Indonesia and Ethiopia, and most recently, with B737-800 in Tehran have worsened the reputation. It is believed that the Boeing’s woes will last for several more years as there is no clear end in sight and many other questions still to be answered in terms of ensuring the safe introduction of new technology, certification systems and public confidence.

 

Sustainability

Environmental and climate change issues are at the top of the aviation industry’s agenda, alongside safety and security. The industry is actually responsible for 2% of global warming, and with air traffic forecasted to double within the next 15 years, reducing emissions will be extremely challenging for airlines. ICAO has urged airline operators to achieve the global aspirational goals and to promote sustainable growth by pursuing a basket of measures including operational improvements, sustainable aviation fuels, and market-based measures (CORSIA). Moreover, climate activists have stepped up efforts to convince travellers to boycott air travel in recent months, spearheading the ‘trains-over-planes’ movement.

 

Profitability

During the last few years, we have witnessed a significant number of airlines which have gone bankrupt, highlighted by companies such as Thomas Cook, Air Berlin, Avianca Brazil and Jet Airways, and recently South African Airways have filed for bankruptcy protection.

For most airlines, high fixed and variable costs are one of the reasons. Firstly, aircraft are very expensive assets, and airlines do not have the choice but to make large lease or loan repayments. In addition, volatility in fuel prices is another challenge that carriers have to cope with, given that they represent the largest cost component. Labour forces are also needed to run the airline’s complex operations, making payroll expenditure another component of fixed costs that have to be incurred month after month.

It seems that 2019 will be the bottom of the current economic cycle and the forecast for next year is somewhat brighter. The International Air Transport Association (IATA) has predicted air passenger growth, and with a net profit of US$29.3 billion, 2020 is foreseen to be the 11th consecutive year in the black for the airline industry.

 

Resilience

Despite setbacks, the industry has shown underlying resilience with innovation through technology (biometrics, digitalisation etc.), giving travellers more opportunities to travel in an experience-based business environment. Qantas’ “Project Sunrise” London to Sydney non-stop research flight last year was truly the final frontier in aviation. The airline aims to launch commercial Project Sunrise flights from 2023.  

 

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