What’s going on in the world economy? And where is aviation heading?


As the bond rate inversion curve appeared on 14-Aug-2019 in the US and the UK, Wall Street headed rapidly south. A number of other countries have already this experienced inversion for a while. And in Germany, the world’s fourth largest economy, GDP growth rate went into reverse in 2Q2019.

Does this mean recession is coming, or even imminent?

Air freight numbers have been steadily falling for nearly a year. They used to be good forward indicators of where the world economy is headed, but not so much in recent years. Passenger traffic growth too has slowed markedly in the past year.

Global trade conflict is creating uncertainty and aviation is inevitably caught up in that.

So are we heading for trouble, and if so, when?


  • On 14-Aug-2019, the Dow Jones Index fell 3%, as waves of concern washed around
  • International air freight volumes fell again in Jun-2019. This was already trending down, but trade tariffs can only have a negative impact
  • Airlines tend to be at the pointed end of downturns (and the reverse when things improve)
  • Meanwhile, oil prices are falling, sort of good news, but not so good because one reason is that national economies are slowing
  • Amid the uncertainty, CAPA’s “How to survive an economic downturn” guides are worth another read…

Air Freight is not only an economic indicator, but a large revenue earner

Especially for airlines in Asia Pacific, freight contributes considerably to overall revenues. And, since late-2018, the freight downturn has hit almost all regions, as this IATA chart shows.

Freight tonne kilometres (FTKs) fell nearly 5% y-o-y in Jun-2019, the eighth consecutive month for negative annual growth.

FTK growth by region, Jan-2016 to Jun2019

The aggregated figure shows this emerging trend clearly, as the seasonally adjusted line tracked down since late 2018.

Freight Tonne Kilometre growth 2014-2019

Uncertainty is the killer ingredient for trade and investment

There are conceivably two factors involved in this air freight trend: a broad slowing in many economies, cooling imports and exports, and the flow on impact of the accelerating trade dispute.

In this mix, uncertainty is the common and increasingly dominant feature. Uncertainty leads to reluctance to invest and that, simply and predictably, flows down the line.

President Trump’s recent threat to impose higher duties on a range of Chinese exports can be imagined as having a similar effect to that in a three mile long freight train, when the driver slams on the breaks.

All down the train there is a thud-thud-thud as each truck hits the one in front of it, each creating disruption.

Then, when the driver suddenly pushes the train back into fast forward, the process is repeated in reverse, thud-thud-thud, with each impact creating repercussions for every part of the supply chain.

Those repercussions translate to bankruptcy for some in the supply chain, as payments and commitments become more unpredictable.

Strong passenger growth of recent years is slowing fast

Passenger number growth has slowed in most markets, notably Europe; 5.4% is still healthy growth but it is trending downwards. Only Latin America, Africa and Asia Pacific were up, month over month.

International passenger traffic growth, year to May-2019, by region*

World markets have been skittish for some time

Most of the world’s stock markets take their lead from Wall Street, which in turn is a fair reflection of the world’s most powerful economy. And, fuelled by tax reductions and low interest rates, that economy has been growing strongly for over a year.

More recently, as the trade war has escalated, direct and collateral damage has spread through the world economy.

The 14-Aug-2019 800-point fall in the Dow was the worst single day drop of the year, although the second worst fall, of 768 points had occurred the previous week. Recent behaviour has been for a quick recovery on the following day.
And the index is still well above where it started the year and happily in front of the mini-slump in Jun-2019.

The Dow Jones Index performance 1-Jan-2019 to 14-Aug- 2019

But some US airline stocks have had a less positive year

Despite a solid profit performance in recent years, and professed expectations that high profitability would continue indefinitely, investors have been less kind to the US majors.

American notably has borne the brunt of negative sentiment.

American Airlines Group share price performance 1-Jan-2019 to 14-Aug- 2019

United Airlines share price performance 1-Jan-2019 to 14-Aug- 2019

Delta has been a standout, and even when the overall market came down 3%, managed to sustain a slightly smaller fall.

Delta Air Lines share price performance 1-Jan-2019 to 14-Aug- 2019

And JetBlue too has been a strong performer, caught in the day's downdraft.

JetBlue share price performance 1-Jan-2019 to 14-Aug- 2019

Globally, the airline share price picture is somewhat gloomier

When viewed against generally strong overall share markets, the airline sector has clearly come off its highs of 2017 and 2018, when oil prices were low and traffic was stimulated by lower fares.

Lufthansa has disappointed, down over 25% since Jan-2019. Meanwhile, by contrast, the DAX Index is up nearly 10% over 2019.

Lufthansa share price performance 1-Jan-2019 to 14-Aug- 2019

Battered by Brexit, the International Airlines Group share price is down by one third for the year. There may be more to come, as B-Day looms.

IAG share price performance 1-Jan-2019 to 14-Aug- 2019

Oddly enough, despite its weak marketplace performance, Air France-KLM's stock has performed relatively well, compared with its European airline neighbours.

Air France-KLM share price performance 1-Jan-2019 to 14-Aug- 2019

In Asia, steep competition and recent trade insecurity have taken their toll on airline share prices 

Although performing sluggishly in 2019, Singapore Airlines has been relatively unaffected by the US uncertainty of the night before.

Singapore Airlines share price performance 1-Jan-2019 to 15-Aug- 2019


Cathay however has other problems in the short term, as well as being a victim of the freight downturn, a significant earner for the airline.

Its share price is down nearly 6% on the day following the Dow’s 3% fall.

Cathay Pacific share price performance 1-Jan-2019 to 15-Aug- 2019

Asia’s largest international airline by passenger numbers is being affected by stern competition in the marketplace.

AirAsia share price performance 1-Jan-2019 to 15-Aug- 2019

Meanwhile, China’s major airlines are being impacted by slowing overall economic growth in the country. They have however not been greatly affected by the overnight falls on Wall St.

Air China share price performance 1-Jan-2019 to 15-Aug- 2019

China Eastern share price performance 1-Jan-2019 to 15-Aug- 2019

The major airline in the South Pacific, Qantas, dominates its domestic market and until now economic conditions have held up well. But here again, investor fragility in the face of growing uncertainty is evident with its post-Wall Street performance, on 15-Aug-2019.

Qantas share price performance 1-Jan-2019 to 15-Aug- 2019

LATAM is spread across several Latin American countries and tends to reflect not only the growing level of competition, but also the strength of the region’s economy. Argentina’s rapid slump manages to pollute some of its neighbours too, notably Brazil, its largest trading partner.

The size of the airline’s share price fall on 14-Aug-2019, more than twice the Dow’s drop, illustrates the sensitivity of investors towards the region’s airline market.

LATAM share price performance 1-Jan-2019 to 14-Aug-2019

Preparing for stormy weather

It may be that the markets will rebound quickly. Recent performance would suggest something of a rebound on Wall Street.

But the volatility of the share market and a growing degree of pessimism, especially outside the US, means that any prudent airline will be looking to create a buffer in the event of a slowing in demand.

As outlined in the 15-point CAPA Survival Toolkit report these are some of the pointers for airline strategy in case of a downturn:

  • An intensifying competitive environment and complex operational changes call for a level of corporate agility like never before
  • Retaining customer loyalty is elusive but vital, as frugality prevails
  • Ancillary revenues tend to be more resilient than up front air fares
  • Maintaining or growing a frequency benefit will be most effective where competitors don’t have the flexibility to downgauge
  • Where an airline operates a group of carriers, ensure resources are deployed effectively across each group member airline
  • A comprehensive re-assessment of alliance and partnership strategies is needed
  • The worst possible time to be levering up the balance sheet with expensive new aircraft is during a recession
  • Airlines are always surprised at how much ‘waste’ there is!
  • The ability to bounce back once conditions improve will be rewarded by longer term market strength
  • Review what fixed costs can be turned into variable costs
  • Ensure open communication with unions

And CAPA has also prepared a 12-point Toolkit specifically for LCCs. It can be downloaded here.

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