Until the last few weeks of 2018 it appeared that rising fuel costs would give many airlines the stiffest test yet of the robustness of their newfound profitability in the year to come. Even as airlines have shifted to more efficient models amid fleet renewal efforts over recent years, fuel remains airlines' most significant – and volatile – cost.
The barrel price of crude oil ended 2018 around $10 per barrel lower than it started at, but the effect of the creeping cost of fuel across much of the year was the primary contributor to a stream of profits warnings. This serves as a reminder of airlines’ inherent vulnerability to rising fuel prices, especially those carriers flying in markets where they are unable to pass on the extra cost through higher fares.
Investors, though, may take some comfort from the still relatively high profit levels among the larger operators, even when oil prices were heading beyond $80 a barrel. While IATA expectations are for collective net profits to be more than $5 billion down on the $37.7 billion airlines posted in 2017, it still marks another year of profits above the industry's cost of capital.
That shows a robustness among the biggest operators, which suggests that profits are likely to be buffeted rather than blown completely off course should there be a repeat rise in oil prices during 2019. IATA itself sees industry profits bolstered by the fall-off in oil prices, and is projecting a slight increase in profits for 2019 at $35.5 billion.
But at the fringes of the market, the impact of fuel costs has again been made clear by a number of distressed carriers and airline collapses. Expect more casualties among the smaller players if there are further sharp rises in fuel prices.
Another area that is mostly outside airlines' sphere to influence is politics – and most of the uncertainties in play for the last two years show have yet to abate. In Europe, the course of Brexit continues to dominate headlines, with little more certainty now than there was in in the summer of 2016.
All eyes remain on the Trump administration and its ongoing trade rows, most notably with China. The mixed messages from Trump around a potential truce with China, reached during talks at December's G20 trade meeting, merely serve as a reminder of the challenges in second-guessing White House policy at present.
Political flashpoints continue to arise across the globe – most recently in Ukraine – while 18 months on there is no sign of warming in relations in the Gulf, following Qatar's diplomatic and aviation isolation by some neighbouring states.
Qatar Airways' renewed – and seemingly firmer – threats to leave Oneworld, together with US airlines' objections to its role in Air Italy, suggest that headline open skies agreements struck last year merely papered over cracks in relations between the US and Gulf majors. These faultlines could reopen in 2019.
The economy remains the fundamental driver of air travel, and while no two markets are the same, the most recent IMF forecasts point to a continuation of current economic growth levels in 2019. Association of Asia-Pacific Airlines director general Andrew Herdman, who projects “more of the same” for the region's carriers, notes that for all the global concerns hanging over the economy there has not been a weakening of consumer demand.
As a result, demand for air travel remains strong. IATA is projecting traffic growth of 6% for the year ahead, slightly down on recent highs but still above the historical trend.
"Confidence has dipped, financial markets are nervous, but we are still seeing very healthy jobs growth in the US, the corporate sector seems to be in good shape, we are seeing business investment rising and government fiscal policy loosening, so that's all quite supportive," says IATA chief economist Brian Pearce.
One source of problems for airlines has been weak currencies. Herdman notes that these have been particularly challenging for airlines operating in countries with big domestic markets, such as India and Indonesia. Operators in these markets find big chunks of their revenues worth less against the more heavily US-dollar denominated cost base. This is likely to again be a primary source of pressure for some airlines in 2019.
The historic labour cycle of trading concessions in the bad times against rises in the good seems a bit outdated, given that the current economic cycle has defied the slump-and-boom tradition. But labour costs have been rising, which Pearce attributes to a decade of economic expansion that has used up spare resources. This has led to tighter labour markets.
"If you look at the last 12 months, labour costs have been rising, whereas they had been falling," he says. "That I think is the challenge ahead with labour and infrastructure costs."
US carriers have largely seen profits undented after striking deals with unions in recent years. In Europe, labour remains a key issue, highlighted in the key role that staff resistance played in the malaise at Alitalia and the departure of Air France-KLM chief Jean-Marc Janaillac.
Recent joint pay demands by unions at British Airways, seeking to re-establish a connection between "financial success and staff reward", illustrate the challenges for those reporting strong profits, while Ryanair's attempts to recognise unions across its pan-European operations remain a challenging work in progress, likely to dominate headlines again during 2019.
The last year was a significant year for airport capacity – although, as has become a regular narrative in this area, progress is slow. While the full launch of the new Istanbul airport slid into the first quarter of 2019, it should be up and running in earnest soon. But attention will remain on the path to new capacity in London – with the long-running Heathrow third runway story inching forward – and in Mexico City, following moves to abandon development of its already-started new gateway.
Perhaps most interesting will be the arrival of another airport for Beijing – the second biggest airport in the world. The new facility at Daxing is set to open in September and could change competitive dynamics among Chinese carriers, notably affecting Beijing's biggest carrier Air China. Rival carriers China Eastern and China Southern will both operate from Daxing, and the latter has already received preliminary approval for its new Beijing-based unit.
Will 2019 be the year that Norwegian is acquired? Many observers see this as the ultimate endgame – be it of the airline's own choosing or through challenging circumstances – since Norwegian embarked on its ambitious foray into long-haul operations. A takeover appeared to be closer in 2018, when IAG launched a bid for the carrier. Norwegian rejected the group's advances, but many remain unconvinced that it will last the course as a standalone carrier.
Elsewhere in Europe, the fate of Alitalia – still to be resolved more than 18 months after its filing for restructuring – cannot remain in limbo indefinitely.
Little major consolidation seems likely in the US airline market, given the mergers that have already taken place, though Frontier continues to be mooted as a possible target – especially given that an IPO is still emerge almost two years after the airline outlined its intentions.
Challenges south of the border may mean some consolidation in the Mexican market, where Interjet is already on the hunt for new investment.
Fractured ownership rules make cross-border consolidation a rarity within Asia-Pacific. But if challenging pricing and economic conditions persist, link-ups among Indian carriers appear likely. Jet Airways, which has been seeking investors, seems a candidate. Harsh conditions have already prompted tie-up moves in Indonesia, between Garuda unit Citilink and Sriwijaya.
Etihad seems likely to remain involved in Jet, although the Abu Dhabi carrier's appetite for investment has clearly diminished since its buying spree of a few years ago. Late 2018 brought a resurfacing of the periodic speculation on a potential tie-up with Emirates. This was dismissed, as it usually is. While Emirates in November warned of a tough second half to its financial year, there seems no obvious change of mood that would make a tie-up any more likely in 2019.
In the absence of true consolidation, joint ventures will move further to prominence. A number of slated tie-ups – such as Delta's newly-enhanced transatlantic tie-up with its European partners – should be finalised during 2019.
The role of the global alliances within this environment remains to be seen. China Southern is dropping its SkyTeam membership from the start of 2019, to pursue its own partnerships, while Qatar Airways has flagged that it may drop out of Oneworld. However, both moves appear tied to specific issues, and it seems too early to project a wider exodus from these groupings.
Indeed Oneworld late in 2018 rolled back the years by announcing its first new full alliance member for six years, with plans for Royal Air Maroc to join the grouping in 2020. Further new members of all three alliances though seem far more likely to come through their various associate membership programmes.
Source: Cirium Dashboard