Meet 125 Mgmt Teams
Long Story Short: Continued Trade Pressures May Send Airline Profits Plummeting
How Will Rising Trade Tensions
Impact the Aerospace Industry?
Last July, US President Donald Trump imposed a large number of tariffs on China, hoping to strike up a deal for better trade practices. So far, the US has implemented tariffs on $250 billion of Chinese products and China has responded with about $185 billion on US goods. At this point, neither side is willing to back down, and many industries are starting to feel the effects. As trade has been the biggest sector affected, airlines are planning for lowered overall profits.
Opportunity for the Outsider. Although airline companies in China and the US have been negatively impacted by the recent conflict, entities in Canada have been able to benefit. Companies such as Interglobe Aviation and Air Canada were some of the only members of the Bloomberg World Airlines Index that grew last month. With the industry giants taking a hit, Canadian airline companies, especially the smaller entitles attempting to expand, now have more ability to do so.
Flexible and Resilient. Airlines have learned how to adapt during times with weak trading environments since they no longer send the industry into a crisis as they have found a way to create value for their shareholders without putting too much risk on profitability. Shareholders will still see above cost-of-capital returns, but they should expect narrowing margins.
Profit Forecast Downgraded. With global trade tensions elevating, top participants are predicting a major drop in next year’s profits. The International Air Transport Association on Sunday cut its forecast to $28 billion, which is down from the expected $33.5 billion. The association’s director said global trade is likely to weaken as the US-China trade war intensifies, further decreasing overall industry profits. Shares of Atlas Air Worldwide Holdings fell nearly 25% on Thursday, which was their steepest one-day drop since November of 2008. The biggest sector affected is the cargo business, but regular passenger travel could also see an impact if tensions continue to rise.
Rising Costs. The airline industry is not only suffering from reduced travel, but their overall costs are also increasing. Their expenditures are expected to expand by 7.4% this year, contracting net margins down to 3.2%, which stems from soaring costs, particularly fuel and wages resulting from the lengthy trade war.
An Upside to Everything. With trade tensions increasing every day, industries all over the world are waiting with anticipation to see who will make the next move. The airline sector has taken a hit, especially regarding cargo shipments, and are expected to see a considerable drop in profits. Although the major companies are expecting a negative impact on the trade war, Canadian airlines have been able to step in and gain market share. The affected airlines have been able to acclimate to the reduced demand and increased costs to ensure their shareholders still see minimal returns.