2018 represented the seventh consecutive year that North American passenger traffic was 5 percent. But during Jan-Aug 2019, that number was down to 3.9 percent.
“Looking back at 2018, airline passenger traffic grew 7.4 percent - the ninth year in a row of consecutive gains, said Rob Morris,head of consultancy for Ascend by Cirium in a presentation in New York last month.”
Overall, the company’s analysis is one of continued aviation industry health – just not as much as in past years, as North American airlines face pressure on pricing, costs, and capacity. Meanwhile, on top of the recessionary fears that remain, Ascend by Cirium’s data shows even more concerns regarding the impact of Boeing’s 737MAX anticipated return to service by next year.
Healthy, But Not As Strong
The growth in air travel was largely driven by India and China, as well as the continued rise of low-cost carriers around the world. European air travel demand was also very strong. But those kind of gains couldn’t keep going forever. As such, between January and May 2019, Ascend by Cirium data shows evidence of a slowdown, though demand was still a respectable 4.6 percent.
Overall, the picture of airline industry currently indicates 3-to 5 percent capacity growth for Q3 2019 based on scheduling, Ascend by Cirium finds. Meanwhile, IATA has forecast a healthy 5 RPK (revenue per passenger measured in kilometers) increase for all of 2019.
As if there weren’t enough confusing signs about what’s in store for the air travel marketplace in 2020, Ascend by Cirium notes that North American airlines saw margins of 12 percent in Q2, an improvement over an already strong 2018.
Still, global airline margins peaked in 2016 at 8.5 percent. IATA initially forecast global margins to reach 7.5 percent in 2018, but has since revised that number down to 5.8 percent. The global trade organization is forecasting 2019 margins of 5 percent worldwide for airlines. In all, IATA’s snapchat of airline health shows 11 of 30 sample airlines with margins falling year-over-year, while nine are improving and 10 appear stable.
“U.S. airlines are unhedged, so benefitting from lower fuel costs, as well as lower ASK (available seat miles/kilometers) growth,” Morris said during his presentation. “Europe has a weaker economy, with less capacity removed by MAX grounding.”
Lastly, load factors are at a record global high, and Ascend by Cirium finds all major regions are either “levelling off,” or experiencing “very slight declines.” Here too, U.S. airlines have reported renewed improvement, helped by capacity shortfalls.
What Happens At The End Of A 10-Cycle?
When we caught up with Morris at the end of his presentation, we discussed his primary caveats regarding airlines’ ability to maintain the strong pricing power that has resulted from the higher rates of air passenger demand in the U.S.
“The U.S. economy has been reasonably strong, in a long slow growth through this cycle, still potential for more growth,” Morris told Kambr Media. “So that's why U.S. airlines are doing pretty well right now. They're also able to control costs. But if suddenly the MAX logjam opens, the naturally puts more capacity into the market. And when you reduce supply, and demand has to be matching it, you lose your pricing power.”
As Morris added, airlines have gotten a lot better at controlling supply, and managing demand, and then being able to leverage prices accordingly.
In terms of recent examples of what has happened in other regions hit with a sudden rise in capacity, Morris pointed to when Air Berlin went bust in August 2017. The German discount carrier had roughly 100 aircraft.
“The market failed, not because of demand, but because their business model was confused and bad,” Morris said. “And Lufthansa, Ryanair, through Niki Lauda, which was formerly part of Air Berlin, and easyJet all came into the German market.
“Those airlines then lost lots of money, because they didn't let reduce the necessary supply, so yields dropped,” Morris continued. “It's all about putting too much supply, in not matching demand, having to use price. Because the one thing about an airline seat of course is it's perfectly perishable product. The minute it's gone, it's gone.”
With passenger demand being higher than expected through this cycle to date, why is 2020 still likely to be weaker?
“Everybody talks about airlines being a long-term, 5 percent growth industry, but over the last 20 years it's been an average of 6 percent, even as we've seen more and more low-cost carriers,” Morris said. “We've seen a stimulation of demand over supply. Airlines have been able to increase load factor and control price and make profits. In this cycle airlines have made globally $220 million net profit. That's more than they'd ever made in the whole industry. But it's been a long cycle, but they mustn't forget that discipline.
“But the important thing to note is that we’re at the end of a 10 year cycle, so 6 percent is starting to turn down to 4.6 percent this year. So demand might be softening. And if that’s what’s happening, then supply increases. Airlines might be able to absorb the
capacity. Looking to 2020, and the likely return of the 737MAX, that’s the big question.”