While 2016 will be remembered as a year of seismic shifts on the political landscape, the impact of these on the airline sector is still to fully filter through.
As 2016 began, airlines were wondering whether an economic downturn was around the corner; what impacts a rise in interest rates and a possible UK referendum vote to leave the EU might have; as well as what a possible Donald Trump presidency would mean for the industry.
While some of those have come to pass, and despite the UK government's mantra of "Brexit means Brexit", it is still not clear in many cases how events will affect the airline sector.
The resulting uncertainty has undoubtedly contributed to market volatility, hitting yields and airline profitability. But little has changed structurally over the last 12 months and airlines largely find themselves where they were a year ago.
So while the gloss may have been taken off recent profit highs, strong results banked in the first half were still enough for IATA to estimate 2016 will, albeit by a small margin, still be the most profitable year in airline history, with a collective net profit of $35.6 billion.
FUELLING PROFITS
At the heart of the improved airline fortunes are lower fuel costs. Those costs had come to be such a burden for airlines – accounting for around 30% of expenditure in 2014 – that any fall in the oil price was bound to give profits a lift. That the oil price should fall so far and, while rising since early year lows – particularly since OPEC's decision to trim production – remain relatively low, has helped fuel bumper profits this year.
This has given airlines breathing space to deal with hits on the revenue side. That is just as well, given that in 2016 revenues have only been going in one direction.
Reduction of yields this year was inevitable as airlines passed on some of the fuel savings through lower fares. And a further reduction was always likely to be the end result of increased airline capacity in certain markets.
But a string of external factors has played a part too.
Stock exchange wobbles in China had kick-started the year by sending global financial markets tumbling, serving as a reminder of the impact this key market has on the wider world economy. While China shored up, more market shocks followed as the year continued. The first big "what if" became a reality with the UK "Brexit" referendum vote in the summer, followed even more spectacularly by Trump's election victory.
Terror attacks, which in most years play a part in stifling demand, hit close to home for the European aviation market in 2016, with the devastating bomb blasts at Brussels and Istanbul Ataturk airport. Coming between attacks in Paris and Nice, and the continued challenges in North Africa, demand in several markets has continued to suffer.
While the events have had an impact already, this has largely been a symptom of the uncertainty rather than the cause itself. Be it the duration of the economic cycle peak, the impact of Brexit on European economies, or how the Trump presidency plays out, the waiting game continues. Airlines remain in something of a holding pattern.
LIVE ISSUES ON HOLD
This remains the case for many of the live issues within the airline sector as well.
The row between the US majors and the Gulf carrier giants over state support, which erupted in the first half of 2015 with a request for the US government to renegotiate opens skies agreements with the UAE and Qatar, came off the boil. But the issue continues to simmer as fundamental differences remain, and a coalition of US airlines and labour groups may look to turn up the heat again with Trump and his new government.
In Europe, network airline efforts to restructure in a bid to combat strong competitors – notably low-cost carriers – remain a work in progress. The latter continue to heap pressure on network carriers – Germany in particular becoming a focus for Ryanair, even to the extent the airline has announced previously unthinkable plans to serve Frankfurt’s main airport.
Lufthansa and Air France-KLM are among the network carriers continuing efforts to reset the competitiveness of their cost base. Both still have work ahead of them in taking unions on the journey to securing these gains and to demonstrate that their fresh takes on in-house low-cost units will be any more successful than previous initiatives.
The low-cost response is also directed at long-haul as well short-haul operations. Air France-KLM has unveiled plans for a new long-haul low-cost unit, while British Airways has moved to take on Norwegian at London Gatwick on routes to Oakland and Fort Lauderdale.
US carriers too have recognised the challenge of new lower-cost transatlantic rivals and are responding, with Delta Air Lines, for example, rolling out a new no-frills economy fare for the transatlantic.
For Norwegian, the waiting is at least finally over after it secured US approval for its Norwegian Air International unit in December. Its application had been lodged three years ago and final approval followed just days after the European Commission lost patience and sought formal arbitration on the issue. The application has proved contentious, with US carriers and labour groups arguing it is using the Irish unit as a flag of convenience to lower labour costs.
US carrier attention to the low-cost competition has been driven by the impact on yields, something which on a wider basis US carriers have been chasing for much of the year. Most now do not expect to see a return to unit revenue growth until 2017.
Falling revenues have begun to impact the highly profitable US carrier sector – all three majors reported a fall in third-quarter profits. That though remains in the context of the profit highs that North American carriers, which are relatively free from hedging and currency constraints, have posted over recent years, ensuring it is again the mainstay of industry profits in 2016.
The long wait for a recovery in air cargo continues. Even when volumes rise, yields fall – in part because of the freight capacity growth inherently built in through belly capacity of the expanding passenger fleet.
But the arrival of Amazon, through tie-ups with Atlas Air and Air Transport Services Group, brings a new entrant into the air cargo sector, while providing access to the booming e-commerce market for these operators.
Geopolitical factors have hit hard in Turkey and North Africa. Turkish carriers have had to slow growth for the first time in a generation, while access to major Egyptian travel resort Sharm el-Sheikh remains restricted for its key Russian and UK markets. But other struggling markets, notably Latin American growth engine Brazil, look to be in recovery mode.
The lifting of sanctions meanwhile presents opportunities to open up the Iranian market. Airlines have been returning to Tehran and Iran has struck a series of aircraft deals to fuel the growth of its own carriers.
Some clarity was achieved with a resolution on market emissions reached in 2016 at the ICAO general assembly in the autumn. While this keeps moves to adopt a global market-based scheme for tackling aviation emissions on track, what it means for airlines and the environment is still to become clear.
Even the long-awaited decision on a new runway at London Heathrow, which after years of delay and buck-passing, finally appeared unavoidable, has been delivered with its own built-in consultation period.
It means the airline industry goes into the year-end still in relatively profitable shape – facing higher, but still relatively low, fuel costs and looking nervously ahead at what might be coming down the road. Some may well be more nervous knowing Brexit and Trump are now a reality, even if financial markets have taken heart at a potential easing on fiscal policy. But fundamentally the waiting game for airlines seems likely to continue well into 2017.
This article was first published on Flight Dashboard on 13 December
Source: Cirium Dashboard
