Home / Travel / Top 10 Airline Developments in 2018 – Skift

Top 10 Airline Developments in 2018 – Skift

Editor’s Note: This story was first published in Skift Airline Weekly on December 17, 2018.

Was 2018 a good year or a bad year? Speaking collectively, airlines can’t complain. As IATA pointed out last week, industry profits should hit about $32 billon this year, good for a 7 percent operating margin. This 7 percent comfortably exceeds the sector’s cost of capital. But IATA isn’t throwing any parties. That might sound like a lot of money, but $32 billion will be down from $38 billion. And it’s the lowest figure since 2014. The industry’s operating margins will also have declined for the third straight year. The fact is, 2018 was filled with pressure, most importantly from fuel prices, and with no shortage of economic and geopolitical headwinds. There were, of course bright spots too, especially on the demand side.

Here, in no particular order, are Skift Airline Weekly’s 10 most noteworthy developments of 2018:

1. New aircraft technology forges ahead, but with production headaches: It wasn’t the first year for the latest generation of A320s and B737s. But in 2018, airline fleets began achieving a critical mass of NEOs, while rapidly incorporating MAXs. On the wide-body side, Qatar Airways debuted the newest and largest version of the A350, the -1000, while Singapore Airlines introduced the newest and largest version of the B787, the -10. Back on the narrow-body side, it was a breakthrough year for the A220, previously called the CSeries, winning big orders from JetBlue and JetBlue’s founder David Neeleman for his new U.S. airline. Brisk demand for MAXs and NEOs continued, although the wide-body market stayed tepid, notwithstanding some activity from Turkish Airlines, American and a few others. Selling planes, however, wasn’t the big issue. More problematic was building the planes and delivering them on time, which Airbus in particular struggled to do. Engine manufacturers were partly to blame. Engine issues on some B787s already flying, moreover, caused disruptions. More tragically, following a fatal Lion Air crash, Boeing faced questions about whether it had done enough to inform airlines and pilots about the MAX’s updated stall avoidance system.

2. Cargo boomed despite threats to global trade: Just hearing the word “tariff” sends a shiver down the spines of airlines like Korean Air, China Airlines and Cathay Pacific, all heavily dependent on the cargo business. It’s a big business for others like Lufthansa, Air France-KLM and LATAM too. But the worst fears haven’t materialized. Instead, demand has held strong, and some of those same carriers have counted cargo as a big profit contributor. It helped that many carriers had cut cargo capacity in response to several years of losses in the sector.

3. The low-cost long-haul business model disappoints: It’s like a siren that keeps calling. But are long-haul LCC flights a good idea? Evidence from 2018 isn’t encouraging. Norwegian’s problems certainly didn’t go away. Its rival Primera disappeared. Wow Air was on the verge of doing the same. Lufthansa’s Eurowings had a rough year, and Air France’s Joon looks destined to close. Scoot doesn’t seem to be helping Singapore Airlines. AirAsia X had a terrible 2018. Yet none of this discouraged carriers like IAG, WestJet, Japan Airlines and IndiGo, which either launched or will soon launch new low-cost long-haul flying. Just as notable are those that considered the idea but refrained, like Virgin Atlantic and SpiceJet.

SIGN UP NOW TO SUBSCRIBE TO SKIFT AIRLINE WEEKLY

4. Loyalty, loyalty, loyalty: It’s nothing new. But strategies to win the loyalty of higher-paying customers were top of mind throughout 2018. Some struck deals to outright buy back parts of their plans they previously sold—think Air Canada, most prominently, plus LATAM, Gol and perhaps Aeroméxico and Alitalia. Others like easyJet made improving loyalty benefits a key pillar of their business plans. Airlines agreed to new partnerships that expanded benefits. And with varying degrees of enthusiasm, airlines worked to personalize their customer relationships, using the data they possess to identify what exactly individual travelers want, and when. It’s a big focus of the industry’s IT spending. But personalization to win loyalty is an easier endeavor when customers come directly to you, as opposed to when they book through travel agencies using global distribution systems. For that, airlines are in the early stages of advancing a new distribution capability (NDC) spearheaded by IATA. The effort has in some cases led to airline-GDS clashes, notably in Europe, where Air France-KLM in 2018 joined Lufthansa and IAG in enacting surcharges for bookings made through the GDSs.

5. A segmentation sensation: Remember the densification sensation from a few years ago, which remains in vogue today? Well in 2018, airlines were enthralled by the idea of grouping passengers into categories based on their traveling preferences and willingness to pay. No longer was a simple split between business and leisure good enough. So onboard, carriers—including many low-cost carriers—enthusiastically adopted products like premium economy or extra-legroom seating. That changed the physical layouts of airplanes. But another means of segmentation was achieved through ticketing rules, as exemplified by the proliferation of basic economy fares first started by Delta years earlier as a narrow attempt to defend itself against Spirit in a few markets. Now United, American, Alaska, JetBlue, Air Canada and WestJet offer or soon will offer basic economy fares targeting ultra-price-sensitive fliers. The concept is even spreading to international markets, including those connecting North America with Europe.

6. It was a bad year for emerging markets: Start with Latin America. Argentina was hardest hit by currency depreciation, which led to a dramatic drop in outbound international travel, even as domestic traffic got a boost from new LCCs. Brazil’s difficulties were only modestly less severe, cushioned, however, by capacity discipline. Mexico’s economy was a bit healthier, but “disciplined” is the last way you’d describe the capacity situation there. Latin America was hardly alone in distress. India’s airlines were even harder hit by overcapacity, even as strong economic growth sustained extremely high rates of traffic growth. Conditions were more stable in China, but amid unmistakable economic softening. Overcapacity again reared its ugly head in the ASEAN region. IATA says African airlines will lose money again this year. Turkey experienced a currency crisis of Argentina-like proportions, although its airlines enjoyed rising profits thanks to ample foreign currency revenues and a recovery in inbound tourism. Gulf carriers drew further away from their days in the industry spotlight.

7. A strong U.S. dollar added to airline cost pressures: A weak local currency wasn’t just a problem for airlines in places like Argentina. It was a problem for most of the world’s airlines, outside the U.S. anyway. A strong dollar often meant higher fuel outlays, higher aircraft costs and more expensive debt servicing. Currency movements, of course, can impact international demand too, and carriers with a lot of inbound U.S. tourism welcomed the additional visitors. But ask Mexican carriers if the cheap peso did more to bring Americans to Cancún than it did to spike their cost base—they’ll all say no way, José. Same for European carriers. In general, airlines prefer their home currencies to be strong, not weak, even when they’re dependent on inbound tourism. European carriers were, at the same time, happy to see their currencies weaken against the Japanese yen, for one, which sparked tourism without the cost penalty.

8. Fuel costs rose and rose, until they didn’t: It was all anyone in the industry was talking about for most of the year: Fuel kept rising and rising, starting the year at about $64 per barrel (WTI), then averaging $66 in April and $70 in May before flirting with $80 in October. Sure enough, almost every airline in the world saw y/y profit margins drop throughout 2018. The spike, moreover, was hugely disruptive to capacity planning, prompting some to reduce flying in response. In any case, something strange happened in November: Oil prices began tumbling, reaching current levels of about $50 per barrel. How big a windfall will this provide for current quarter earnings? We’ll find out when airlines start reporting next month.

9. In Europe, competitive conditions ease a bit, notably on short-haul, but operational conditions worsen: Consolidation is happening in Europe, but more via liquidation than U.S.-style merger mania. Last year saw the deaths of Air Berlin and Monarch, whose absence had a great impact in 2018. IAG tried to advance the consolidation cause with a takeover of Norwegian, which has rejected the idea. Bankrupt Alitalia spent the year looking for new partners, one of which could be easyJet. At the same time, it looks set to join forces with Italy’s railway, which reduces competition on short-haul travel. Indeed, it’s the short-haul European market, once a hell pit of red ink for all but the strongest LCCs, that saw the biggest improvement in unit revenue trends. Ryanair invested in Laudamotion. easyJet bought Air Berlin’s Tegel airport assets. Icelandair nearly had a deal to buy Wow Air. In addition to Primera, Cobalt in Cyprus went away, as did Sweden’s NextJet and Switzerland’s SkyWork. Flybe is on the ropes and cutting seats. The regional carriers CityJet and Air Nostrum joined forces.

And so on. If you weren’t Air France or Ryanair, you got a big short-haul boost from union unrest at those airlines. Europe’s tourist sector boomed, both inbound and out, with no major security issues. And trending this year was the practice of creating multiple flying platforms within the same airline company, some with unique brands, to help lower costs and foster internal competition for resources. The Big Three are all practicing the idea. So are SAS, Thomas Cook and even Ryanair in Poland. In the long-haul space, international JVs continue to be the consolidation method of choice, with more alliances forthcoming (i.e., IAG-LATAM). But hold the enthusiasm: Courtesy of air traffic control snafus, labor strikes, airport capacity shortages and aircraft delivery and inspection issues, Europe’s carriers and their passengers suffered a year of operational discontent.

10. Intercontinental premium demand was stronger than ever: If there’s a single reason why the world’s airline industry earned some $30 billion in profits this year, it’s scorching hot demand for seats at the front of the plane on long-haul routes. This was the savior for otherwise-embattled Asian carriers like Singapore Airlines and Cathay. It was the engine of success for the Big Three carriers of Europe and the U.S. It helped Japan’s Big Two thrive. It made life for Air Canada, Qantas, Korean Air and so many others much better. The trend was on clear display in transatlantic markets, where non-premium Nordic LCCs struggled but where airlines with premium cabins saw remarkable y/y unit revenue gains.

The story was much the same on long routes connecting North America and Europe with Asia. Strong premium demand also supported the launch of ultra-long-haul non-stops like Perth-London and Singapore-Newark. And it encouraged carriers to invest in their elite products and elite customers. Who were these free-spending front-cabin travelers? Many hailed from multinational firms, taking advantage of a global economy likely to have grown between 3 percent and 4 percent this year. Will next year be better, worse or similar? That, for airlines, is the $30 billion question.

SIGN UP NOW TO SUBSCRIBE TO SKIFT AIRLINE WEEKLY

Photo Credit: Qantas is making a bet that intercontinental premium demand will stay strong with the introduction of its Perth-to-London route. Skift

ViaSkift

About coolgnvj_thenewsspace

Check Also

Airbnb Faces New Challenge With Google Vacation Rental Biz and 10 Other Top Hospitality Stories This Week – Skift

ShareTweetPinGoogle+LinkedIn0shares Qi Wireless Car Charger with Auto Clamping Car Travel Bed Camping Inflatable Sofa WITHOUT …

Leave a Reply

Your email address will not be published. Required fields are marked *

shares