It was yet another tumultuous year in the airline industry with many storied names (Thomas Cook, for example) going under and the grounding of one of the world’s best-selling jets (the Boeing 737 Max). No one said aviation was an easy business.
As the International Air Transport Association (IATA) discussed in detail last week, the world’s airline industry enters the 2020s with a 10-year profit streak. But as 2019 again reaffirmed, profits are increasingly concentrated among the sector’s largest intercontinental airlines, together with its strongest low-cost carriers. Left out is a long tail of smaller and less-efficient carriers unable to cope with the rigors of geopolitical volatility, subdued economic growth, intense competition, currency volatility, and other pressures. Indeed, 2019 was both a prosperous year for many and a year of death and distress for others. Here, in no particular order, are Skift Airline Weekly’s 10 most noteworthy developments of the past year.
Trade wars and economic softness decimate the air cargo market.
It seems like ages ago, but it was only in 2018 that cargo markets flourished, providing a major lift to passenger airlines based in export-heavy countries. This year, with tariff battles escalating and world GDP slowing, cargo markets sharply contracted. That’s been extremely difficult for carriers like Korean Air, China Airlines, and Cathay Pacific, all with large cargo businesses. Indeed, as the Association of Asia-Pacific Airlines (AAPA) notes, carriers in the region account for 35 percent of all global cargo traffic. But others are feeling the pain too, including Lufthansa with its large cargo unit, and even a carrier like United — it gets only about 3 percent of its annual revenues from cargo, but that’s still more than $1 billion. During the past two quarters Lufthansa’s cargo unit suffered $63 million in operating losses.
U.S. dollar strength persists.
This was a trend that Skift Airline Weekly highlighted in our 2018 list. But it was no less an influential factor in 2019. Weak home currencies can be helpful for attracting tourists. But it also inflates an airline’s cost base because key inputs like fuel and aircraft are purchased in dollars. Airlines often borrow money in dollars, too. In extreme cases like Argentina, currency depreciation devastated the nation’s economy. Less extreme but still hurtful was depreciation in the eurozone, and in Scandinavia, China, South Korea, Brazil, and Australia.
On the other hand, there were a few exceptions to the trend. Thailand’s baht is stronger today than it was at the start of the year, though with so much tourism, that’s ironically been more of a headwind for airlines there. Japan’s yen and India’s rupee were largely stable versus the dollar all year. The British pound, after dropping in value during the first half of 2019, steadily strengthened after August. Mexico was a rare exception to the depreciation trend affecting most of Latin America.
In some cases, exchange rates between two non-dollar currencies affected airline markets. One example is the yen’s appreciation against the euro, which helped carriers like ANA and Finnair fill their planes with Japanese tourists visiting Europe. Armed with a strong dollar, meanwhile, U.S. tourists had a field day. According to the U.S. commerce department, the number of Americans taking trips overseas is up 8 percent year-on-year through September.
A big shake-up in Latin America.
Currency volatility was just one factor shaping a Latin American industry that witnessed great change throughout 2019. In one of the biggest blockbuster announcements of the year, Latam decided to join forces with Delta, following a Chilean court ruling that doomed its planned alliance with American. The region also saw the collapse of Avianca Brasil, which immediately turbocharged domestic Brazilian profit margins for Latam, Gol, and Azul. Avianca itself, a separate airline based in Colombia, narrowly avoided bankruptcy. It in any case cut routes and greatly tempered its future growth ambitions. Low-cost carriers began making an impact in South America with Argentina, Chile, Colombia, and Peru all hotbeds of activity. The year even ended with some LCC consolidation as Norwegian sold its Argentine unit to JetSmart. Mexico had its share of drama too, with a big scuffle between Aeromexico and Emirates, financial distress at Interjet, and bullish capacity growth tempered by Aeromexico’s MAX disruption. Panama’s Copa, throughout all the big changes, maintained strong profits. One big Latin development didn’t even involve a Latin airline: IAG agreed to buy Air Europa, a power player in the Latin market from Spain.
IAG’s Air Europa move punctuated a year of turmoil for Europe’s weaker carriers, whose struggles further empowered the continent’s stronger carriers. Air Europa’s struggles stemmed from MAX exposure, B787 Rolls-Royce disruptions, the weak euro, and difficulties in the Latin American market. What’s more, cash management became a challenge as credit card processors restricted access to proceeds from forward bookings. These were issues faced by many sub-scale European carriers, and even some big ones like the tour operator Thomas Cook. Its collapse was the biggest casualty in a market that also saw the deaths of Germania, Flybmi, Wow Air, Aigle Azur, XL Airways, and Slovenia’s Adria Airways. Air France closed its Joon unit. Norwegian managed to survive but not without a dramatic turn from hyper-expansion to major contraction. Lufthansa undertook a similar reversal with Eurowings. Flybe sold itself to a group led by Virgin Atlantic. Alitalia … well it never goes away, but further capacity reductions contributed to the market’s concentration of power among the Big Three legacy giants (IAG, AF/KLM, and Lufthansa) and the Big Three low-cost-carriers (Ryanair, easyJet, and Wizz Air).
An avionic plague sweeps across the globe.
Europe was hardly the only theater of airline despair. As mentioned, Avianca Brasil perished in South America. The biggest collapse of all came in India, when Jet Airways stopped flying. Just last week a small Taiwanese carrier called Far Eastern suspended operations. Just as relevant were airlines that managed to stay alive but just barely. Norwegian was just one. Hong Kong Airlines was another. Mexico’s Interjet faced existential difficulties. Virgin Australia hired a new chief to dig the airline out of deep trouble. Asiana had to sell a big chunk of itself. Hainan Airlines has a parent with massive debt distress. And then there’s the collection of state-owned carriers fighting for a future, including South African Airways, Malaysia Airlines, and Thai Airways. Air India’s future, politicians hope, lies with privatization.
Pressure builds on the industry to help fight climate change.
It was hardly the first year in which governments imposed and threatened new environmental taxes and regulations on airlines. But in 2019, as the dire consequences of a warming planet became more and more clear, airlines became more and more of a target. Airlines are becoming more efficient with new aircraft technology, for sure. But they’re also growing, so that even while carbon emissions per passenger are declining, total carbon emissions are not. Europe was the epicenter of a consumer movement that treated air travel much like some treat smoking: irresponsible, harmful, and even sinful. Hence the flight shaming movement originating in Sweden. Everywhere though, airlines are on the defensive, prompting many to adopt a more proactive and aggressive approach to carbon cutting. In 2019 the environment became a topic of discussion and decision even at the highest management levels.
Fuel prices moderate.
In a year of sluggish global growth and other turmoil, imagine how much rougher things would be had oil prices spiked. Instead, they moderated, holding steady at about $60 per barrel Brent all year. This trend coincided with the introduction of many new fuel-efficient airplanes. So many airlines saw steep year-on-year declines in their fuel bills. This wasn’t so in Europe, however. There, most airlines were excessively hedged, leading to losses. In addition, weak European currencies offset the impact from lower fuel prices.
Low-cost, long-haul carriers again failed to live up to their hype.
Not too long ago the advent of low-cost intercontinental travel was all the rage. Norwegian was making headlines with its cheap transatlantic flights. Startups like Wow Air and Primera joined in. Established carriers like IAG, Lufthansa, Singapore Airlines, and even WestJet started long-haul LCC operations of their own. Alas, the results haven’t been pretty. AirAsia X, an early pioneer of the model, continued to struggle in 2019. Smaller airlines, like XL Airways, were among the year’s bankruptcy victims. IAG’s Level is clearly not what its creators envisioned. Cebu Pacific decided that most of its widebodies were better deployed closer to home. Even so, Japan Airlines is trying its luck with Zip Air. Jetstar and Rouge, meanwhile, seem to be exceptions to the trend, performing adequately for Qantas and Air Canada, respectively.
Passenger demand was generally strong.
Yes, it’s true. Passenger traffic grew considerably less in 2019 than it did in 2018, with year-on-year increases thinning late in the year. And yes, some of this slowdown was related to a weak global economy and geopolitical uncertainty ranging from Brexit fears, trade war concerns, and a wave of protest movements from Santiago to Paris to Hong Kong. Just as importantly, though, the slower traffic growth had a lot to do with aircraft capacity shortages and the many seats lost as distressed carriers slashed capacity or outright collapsed. Survivors, in turn, often saw an uptick in demand. With key industries like finance, consulting, and technology still traveling with zeal, key premium markets affecting cities like New York, London, and Tokyo were strong. So was the giant U.S. economy and airline market more generally. International tourism was mostly strong. The Chinese and Indian markets on the other hand, did experience a sharp contraction in traffic growth that worsened late in the year, and that reflects more worrisome economic trends.
Tragedy leads to severe disruptions to aircraft supply.
March 10, 2019 was a dark day for the airline industry. A Boeing 737 Max operated by Ethiopian Airlines crashed near Addis Ababa, killing all aboard. It was the second Max crash in six months and a clear message to regulators that the plane needed to be grounded. Nine months later and the Max remains grounded with little prospect of flying again before the spring at the earliest. And Boeing has said it would pause the jet’s production, raising serious questions about when it may return to the skies. The plane’s absence has meant a significant shortfall of seat capacity throughout the world, which on the one hand lifted unit revenues in a way that benefitted many airlines. But for airlines that were counting on the Max for capacity growth, range capabilities, and cost efficiencies, the grounding has proved highly disruptive. Aggravating the industry supply shortage were severe production delays at Airbus, specifically affecting the popular A321 NEO. Rolls-Royce engines problems affecting B787s persisted. And carriers learned of yet another missed deadline for delivering a new model, in this case Boeing’s delayed introduction of the B777-X. As for new aircraft demand, airlines continued to fill their shopping carts with narrowbody planes. But their appetite for widebodies waned.
This story was originally published in the Dec. 16 edition of Skift Airline Weekly.
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Photo Credit: IAG’s Air Europa move punctuated a year of turmoil for Europe’s weaker carriers. Olivier CABARET / Flickr