Making news earlier this month was the International Air Transport Association (IATA) announcing that it will cut profitability expectations for the airline industry. Primarily, rising fuel and labor costs are weighing down sentiment for airliners. Additionally, the IATA noted one-off tax benefits artificially boosted total 2017 revenues.
It’s not hard to see why the IATA struck a bearish tone against the airline industry. The international benchmark Brent Crude Oil has been rising since hitting a multi-year dip in June of last year. Based on its technical momentum, it’s not entirely out of the question that Brent will return to triple-digit rates.
Furthermore, airliners must contend with gyrating U.S. dollar strength. For the past few months, positive sentiment has lifted the greenback relative to other currencies. However, in the longer-term picture, the dollar has lost significant value, and the Trump administration hasn’t exactly been helpful in this regard.
A weak dollar places inflationary pressure on the economy, and that hurts the airline industry in terms of labor costs. Moreover, employee benefits, such as healthcare insurance, aren’t getting any cheaper. To retain the best, companies have to put up the goods, and ultimately, such endeavors cut into the bottom line.
That said, the airline industry should be prepared to tackle the challenges that the IATA has listed out. For instance, rising oil prices is a concern, but not one that sprang up by surprise. Like I said, prices have been rising for a one-year period, and airliners typically hedge their fuel costs for budgeting purposes.
Labor costs are a burden for the airline industry, though this isn’t a surprise either. What other sector enjoys declining labor costs? None that I can think of. While challenging, let’s be real – it’s an obstacle that any business faces.
Finally, those who are bearish on airliners might be overlooking why things like fuel and labor costs are rising in the first place. No matter what criticisms are leveled against the Trump administration, unemployment is staying at multi-year lows. Naturally, this means more people have more discretionary income, which equates to more dollars chasing fewer goods.
That’s your inflation, and it’s not necessarily driven (at this point) by a doomsday scenario.
So yes, the airliners will struggle with rising costs, but these should be balanced out with a robust tourism industry. While visitors to the U.S. took a small dip since President Trump took office, the decline has actually been in place for a few years.
Furthermore, we should look at the outbound tourism industry. Americans will pony up for both domestic and international travel thanks to their newfound income boost. That bodes well for airliners long-term, irrespective of immediate challenges.