It seems a benign 12 months awaits the industry, but expect the unexpected says Brian Pearce, IATA’s Chief Economist.

Brian Pearce: Looking into the crystal ball

We are all interested in looking ahead. Investments need to be made. Staff need to be hired, or fired. Operations need to be planned. But the reality is that we run our businesses in a world characterized by radical uncertainty. Geopolitics, asset price bubbles, pandemics, confidence, are all more or less unpredictable. Knowing the future is difficult!

Big Data and predictive analytics increasingly allow us to better understand consumer behavior. We can better predict consumer responses to changes in product characteristics, like price or service levels. That does not mean we can better predict the future.

Weather forecasts have a similar challenge and, despite vast computing power, are still unable to accurately predict the weather more than a few days ahead. Weather systems are chaotic. So are air transport markets.

 

Big Data and predictive analytics increasingly allow us to better understand consumer behavior

 

The best response is to ensure our business models and balance sheets allow us to be flexible  in responding to changes. But part of developing that flexibility means understanding trends and thinking about potentially disruptive factors. 

So, what trends have we seen develop in the recent past and can we identify potential disruptions?    

Traffic growth

One important trend going into 2018 is strong traffic growth. The key question is how long can this last? Past traffic cycles have typically lasted around eight years before a downturn, and we are now in the ninth year after the 2009 low point. Barring unpredictable shocks, strong traffic growth looks set to continue on the back of a solid economic expansion. In our December forecast, we have predicted passenger growth of 6% in 2018.

Strong traffic growth often, but not always, means strong financial performance by airlines. It depends what is happening to profit margins, and last year these were being squeezed by a sharp acceleration in unit costs—fuel and labor.

The key issue for margins is whether unit revenues will keep pace with costs. The trend in load factors is promising. New records were set at the end of last year, and announced schedule increases for the summer season look modest.

Yields also looked more positive at the end of last year. Certainly, if the economy stays strong there is a good chance margins will too, which is why we have forecast the collective airline industry profit will hit a record $38.4 billion this year.

So, what could disrupt this relatively benign picture? As mentioned, markets are typically chaotic and so shocks are common and, by definition, unpredictable. But we can point to possible source of shocks with which to stress test your business.

Economic shocks are always possible. Trade wars have been threatened but so far have not happened. Asset prices have been inflated by the trillions of dollars of central bank quantitative easing operations, the unwinding of which is underway.

Accidents could happen. Fuel prices could also surge, though the emergence of responsive US tight oil supply may limit this risk.

Perhaps the key opportunity in 2018 will be to use still healthy cash flows to prepare for future shocks, strengthening balance sheets and building flexibility into business models.

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