ANALYSIS: Will airlines bear brunt of a global trade war?

Fears that a global trade war could upset the strong growth of the global airline industry appear to be misplaced, but the devil will be in the detail.

Broadly, airlines have been seeing risk increasing from the tariff actions taken by the USA against China, Europe and Canada on certain goods, but few are running for the hills just yet.

In Cathay Pacific's recent first-half results letter, chairman John Slosar pointed to the "economic uncertainty arising from global trade concerns" as one of two main challenges for the remainder of the year – the other being the relative strength of the US dollar.

In a recently released research paper, IATA Economics also noted that the trade situation was a risk but seemed to indicate that it was unlikely to cause major disruption to the industry.

On the passenger side, protectionist measures such as the tariffs imposed by the Trump administration on China and the associated retaliatory actions, are unlikely to have a direct impact. Rather, any change in passenger demand will be induced by how the measures may impact global GDP growth.

IATA Economics and Tourism Economics both modelled the impact based on the present and announced trade restriction measures, and another scenario under which the protectionist measures intensify. The analysis did not detail the assumptions made in the latter picture, however.

In that scenario, the industry would continue to grow annually over the next 10 years, albeit at a 3.4% lower rate than previously (see graph).

Both scenarios are expected to slow passenger demand at the macro level, but importantly, neither points towards a contraction in the industry. Thus, it appears that fleet forecasts by Airbus, Boeing and FlightGlobal's Ascend Consultancy remain intact – for now.

The difficulty, as IATA acknowledges, is that it is nigh on impossible to predict future actions that the Trump, Xi or any other administration may take. For all their retrograde nature, tariffs that have actually been imposed by the US government are much more targeted at particular goods than the broader ones bandied around earlier in the year.

Similarly, with no boundaries set if a global trade war were to erupt, it is hard to gain a true understanding of the impact at a broad level.

Part of the issue is that, as IATA acknowledges, the impacts will likely be felt the most strongly in some markets and less so in others.

CHINA-US LIKELY FIRST MARKET TO BE AFFECTED

As it stands, the most likely passenger sector to feel the effect of the thaw between Washington DC and Beijing is naturally the US-China market – one that has been growing strongly in recent years.

FlightGlobal schedules show that ASMs between the USA and China grew at an average of 16% between 2013 and 2018. Most of that capacity has been added by the big four Chinese carriers, which have maxed out their traffic rights between the tier one cities, and have resorted to opening up new transpacific flights from smaller centres – often with the assistance of subsidies from municipal and provincial governments. That may only increase as tier two carriers, including Juneyao Airlines and Spring Airlines, take delivery of widebody aircraft in the coming years, with their eyes firmly set on the North American market.

Source: FlightGlobal Schedules via Diio Mi

AA slowing in business relations between the USA and China is likely to mean that the carriers that have piled capacity on routes between those two countries could be the first to feel any retraction in demand. While that it is likely to impact business traffic first, a wider economic slowdown in China related to the tariffs could also hit the strong outbound tourist market.

But therein lies another risk. If tariffs against it continue, Beijing could use its powerful state organs and tourist operators to discourage travel to the USA. A similar move by Beijing in 2016 against South Korea due to a diplomatic spat saw capacity between the two countries plunge. In contrast, stronger diplomatic relations over the past year have seen Korean carriers report that demand is rebounding on their China routes.

To do that, though, China's ruling class would have to consider that such a move would harm Chinese carriers the most, as they have the greatest share of capacity on US routes. While that capacity could be redeployed to other markets, such as Southeast Asia or Europe, how much those markets can absorb is hard to predict – and much more so if a global trade war hurts other emerging and mature markets.

FEELING FLAT ON FREIGHT

With passenger services unlikely to be strongly impacted, most parties expect that the more immediate effect of the trade hostilities will be felt in the air freight market. Again, it appears difficult at this stage to understand where the real impacts will be – and much will depend on how further tariffs or other protectionist measures come into play.

To date, most of the US tariffs on Chinese goods thus far have affected commodities such as aluminium, steel and soybeans, which are usually surface shipped.

IATA points out that looming tariffs on imports of Chinese auto parts and semiconductors has the potential to be more disruptive to air cargo carriers. Nonetheless, by value the US sources more of those goods from Mexico and Canada than they do from China, so again, it appears that the impacts will be minimal for now.

But the Association has recently warned that an increasingly protectionist environment could, in the longer term, be a major problem.

"While air cargo is somewhat insulated from the current round of rising tariff barriers, an escalation of trade tension resulting in a 'reshoring' of production and consolidation of global supply chains would change the outlook significantly for the worse," says IATA chief executive and director general Alexandre de Juniac.

Freight growth has tempered this year, with FTKs in June up 2.7% against a capacity increase of 4.1%, resulting in a small slip in freight load factor to 44.3%. IATA notes that slower growth by Asian carriers (up 1.5%), which account for 37% of the air cargo market, weighed on the global rate and offset stronger growth in the Americas, Middle East and Europe.

It has been acknowledged that the slower growth in 2018 has been driven by the end of a restocking cycle in March. IATA also points to negative factory export order figures out of China, Japan and the USA as another moderating factor. Thus, any slowdown in global trade caused by tariff measures is likely to lead to a further deceleration, which could drag on airlines in Asia particularly.

A SILVER LINING?

For all the doom and gloom around trade and the impact on global growth, there may be some upside for carriers.

IATA expects that the lower GDP growth would also drive down oil prices, which would help to lower one of the largest costs that airlines face. Of course, there are any number of geopolitical events that can push oil prices around in the meantime, which are very hard to predict.

Thus, IATA is among the voices calling for nations to do their best to maintain the progress of previous years in opening borders and allowing trade to flow freely.

"Trade wars never produce winners. Governments must remember that prosperity comes from boosting their trade, not barricading economies," says de Juniac.

Source: Cirium Dashboard