ATW Editor's Blog

Uncertain Times: The global airline industry’s 2017 watch points

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No matter your industry or priorities, the common feeling entering 2017 is one of uncertainty about how this year will turn out. The airline industry is no exception, so here are a few thoughts on five watch points that could make the difference between a good and a not-so-good year:

The global economy: As always, the fortunes of the airline industry are linked to (and also a driver of) GDP. However, there has been an interesting split in recent years. Despite a sluggish GDP, the airline industry has collectively enjoyed three consecutive years of record profit. The large majority of that profit has been achieved by North American carriers, a trend expected to continue. Most predictions, including the IATA 2017 forecast, are for another profitable year – but not for another record. Expectations are that the global airline industry will make a net profit of almost $30 billion this year, which would be some $5 billion down on the $35.6 billion collective profit anticipated for 2016. That $30 billion is still a healthy sum, but it will represent just a 4% margin. Oil prices and labor costs are expected to be higher, but what will really swing the difference this year will be consumer confidence. And the consumer, like everything else in 2017, is uncertain. Depending on which travel survey you read, there’s either a willingness to travel if the price is right, or a lot of belt-tightening, or a simple reluctance to plan travel because of security concerns. Demand for air travel will continue to grow overall, but yields will be softer. How soft depends on the levels of confidence in the economy by individuals and businesses.

Oil prices: Airlines can likely manage their books even if oil climbs back up to over $100 a barrel. Two big reasons for this is that most airlines have learned how to increase utilization of their aircraft – making them more revenue generating -  and have also twigged to ancillary fees, which also generate revenue vital to this industry’s financial health. But if oil prices spike, everything becomes more expensive – gas for vehicles, utility bills, food; the cost of living. So there’s an effect on consumer confidence and willingness to spend that impacts air ticket sales. Oil prices are not just about an airline’s cost – significant as that is; they shape passenger demand patterns.

New aircraft orders & deliveries: 2017 is expected to be another slow year for new aircraft sales, but deliveries will continue apace as all those big orders of new-generation, super-efficient airliners enter service. The question will be whether the pace of deferrals will also pick up? Airlines and manufacturers make a fanfare of new orders; they tend to be much quieter about deferrals, so not all of the 2017 slippages will be apparent. On the other side, there are plenty of airlines that would like to take delivery of their new aircraft sooner: after some high-profile delays in 2016, the pressure will be on the aircraft OEMs and their suppliers to synch production rates with promised schedules. The Boeing 737 MAX is the next of these new-gen airliners to enter service – in mid-2017 with Southwest Airlines. All eyes will be on Boeing and CFM for a smooth EIS.

Security: The global air transport industry is far more secure and safe than it was before the 9/11 attacks and compared to other modes of transport. But events such as the attacks on airports in Belgium and Turkey demonstrate that those with ill intent still seek to target the air transport industry if they believe they can find a weak link. It’s no coincidence that those airport attacks were on the pre-security sides of the terminals; ironically, it shows how it is almost impossible to get a bomb past screening and on to a plane. And tragically, 2016’s high-profile attacks on crowds in markets, event venues and gathering places also illustrate that terrorists recognize these are easier targets. But airlines do not have to be directly attacked to be affected financially; people’s desire for travel is dampened when they have safety concerns regardless of the cause of fear.

The political arena: At least we go into 2017 knowing where we stand; last year’s twin political shocks of the UK Brexit vote and the US presidential election outcome are just that – last year’s shocks. But, to paraphrase Donald Rumsfeld, there are known knowns, but there are also unknown unknowns. Politically, we are entering a world where there are things we don't know we don't know.

The airline and aerospace industries will be monitoring certain areas for indications of any major policy changes in 2017. Will the new US administration understand the importance of markets like China, and now Iran, to the US aerospace industry and to US high-tech jobs? Access to global markets – including China and now Cuba – is essential for airlines. Will protectionism or open markets be king? The global air transport industry needs the latter; its business health depends on being able to transport all people and goods to wherever they want to go, not merely to move local populations within their national borders.  

On the regulatory side, will government interference increase or loosen? Will US airlines be freer to operate like normal businesses, or will personal whims rain down on practices such as ancillary fees because they make for popular tweets? Or could 2017 be a turning point in removing the political hurdles to US air traffic management system reform?

Since the Wright Brothers, nothing has reversed the overall growth trend of the global air transport industry. People want to go places and they are doing so in record numbers. That’s the one certainty this industry has as it goes to work in 2017.

Karen Walker Karen.walker@penton.com

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