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  1. 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? 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 Source: IATA Economics The aggregated figure shows this emerging trend clearly, as the seasonally adjusted line tracked down since late 2018. Freight Tonne Kilometre growth 2014-2019 Source: IATA Economics 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* *by airline region of registration Source: IATA Economics 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 Source: google 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. https://centreforaviation.com/analysis/reports/whats-going-on-in-the-world-economy-and-where-is-aviation-heading-488084
  2. https://blueswandaily.com/capa-it-remains-to-be-seen-how-yields-are-faring-in-chile-with-the-lccs-market-stimulation/ May 7, 2019 CAPA – Centre for Aviation, in a report entitled: ‘Chile‘s LCCs JetSMART, Sky, spread across Latin America‘, stated (07-May-2019) that a quick snapshot of Chile’s domestic aviation market data shows that JetSMART’s thesis of passenger stimulation could be occurring in Chile. SKY Airline‘s domestic passenger levels grew 10.5% year-on-year in 2018 and LATAM Airlines Group‘s total passenger growth in Chile was 10.6%. Chile’s domestic passenger levels have expanded and even as LATAM‘s passenger share has decreased, its dominance remains intact. But it remains to be seen how yields are faring at Chile’s three largest airlines.
  3. Aviation is ‘trapped in a web of protectionism’, is ‘not punching above its weight’ and ‘represents 35%-40% of global trade by value’ – more insights from the CAPA Qatar Aviation Aeropolitical and Regulatory Summit February 8, 2019 It is now 75 years since the aviation regulatory framework was established, and with the evolution of the industry many believe it is time for a serious global review of its relevance today. The “business of freedom” underpins 10% of global GDP and it is too important to be constrained by economic regulation that was designed to meet entirely different conditions. What trends and opportunities await our industry? What strategic challenges and risks are we set to face in the year ahead? Discussions will cover Europe’s aviation relations with the world, a post Brexit world and its repercussions, North America’s approach to open skies, how open skies have helped Asia’s emerging markets, Africa and SAATM, airport privatisation and infrastructure, air cargo and industry sustainability. CAPA – Centre for Aviation attempted to address those questions with its Qatar Aviation Aeropolitical and Regulatory Summit, which had more than ten hours of agenda content designed to address the latest development in aviation regulation both within the Gulf Cooperation Council countries and globally. Here’s some more insights and observations from delegates during the event at the Sheraton Grand Doha Resort and Convention Hotel in Qatar. National University of Singapore professor: ‘aviation remains trapped in a web of protectionism’ National University of Singapore professor of aviation law Alan Tan stated “aviation remains trapped in a web of protectionism”, noting “most states are enamoured by the outdated, archaic idea that flagship carriers are spreading the brand of the nation”. AFRAA secretary general calls for establishment of SAATM ‘executive agency’ African Airlines Association secretary general Abderahmane Berthe stated Africa needs to prepare its airlines for “huge growth.” Mr Berthe called for the establishment of an “executive agency” on the Single African Air Transport Market (SAATM) to “enforce mechanisms” and maintain the level of aviation safety in Africa. European Commission DG mobility & transport: ‘Aviation is not punching above its weight’ European Commission director general mobility and transport Henrik Hololei stated “aviation is not punching above its weight when it comes to government importance. It is not necessarily seen on a political agenda to the level its statistics suggest”. RwandAir CEO: ‘We need to get the idea that protectionism will not work’ RwandAir CEO Yvonne Manzi Makolo stated “with 13 land locked countries, we need to get the idea that protectionism will not work – we need to open our skies, reduce taxes and allow for free movement of goods and services”. MAVCOM director: 25% of traffic rights allocated are ‘not utilised’ Malaysian Aviation Commission (MAVCOM) director aviation development Germal Singh Khera stated “the representation of traffic rights that have been granted to Malaysian carriers that operate both domestic and international amount 97%”. Mr Khera added, “out of this 97% allocated… about 25% are not utilised”. TIACA secretary general: ‘aviation represents 35%-40% of global trade by value’ The International Air Cargo Association (TIACA) secretary general Vladimir Zubkov stated “aviation represents 35%-40% of global trade by value”. RwandAir CEO: SAATM is a ‘flagship agreement’ RwandAir CEO Yvonne Manzi Makolo, commented on the Single African Air Transport Market (SAATM) as a “flagship agreement”, noting “we are seeing a change in mindset”. Ms Makolo stated “there is a level of optimism”, however SAATM will only succeed through liberalisation. Ms Makolo added, “there is a ‘not in my backyard mentality’ but they will see the benefits eventually”. Cambodia SSCA: Dependence on ASEAN ‘alone might take some time’ Cambodia State Secretariat of Civil Aviation director of air transport Chanty Vann stated the Cambodian government formulated it’s own policy framework to prioritise the growth of aviation in Cambodia. Mr Vann stated: “To depend on ASEAN alone might take some time…” the formulation of a “special policy” by the government is in order to enhance aviation industry in Cambodia. UFTAA president calls for collaboration between travel agencies and airlines United Federation of Travel Agents Associations (UFTAA) president Sunil Kumar stated “we can add value to content and offer more services” through collaboration between travel agencies and airlines. https://blueswandaily.com/aviation-is-trapped-in-a-web-of-protectionism-is-not-punching-above-its-weight-and-represents-35-40-of-global-trade-by-value-more-insights-from-the-ca/
  4. 14-Aug-2018 4:00 AM World air freight traffic, measured in freight tonne kilometres (FTKs), grew by 2.7% year-on-year in Jun-2018 (the most recent month for which global figures are available). This was slower than the 3.8% recorded for May-2018 and the 4.7% year to date growth rate for the first six months of the year. The strong upturn in air cargo demand enjoyed in 2017 has eased, but the outlook remains fairly healthy. This year is expected to be only the second time since 2011 when both cargo traffic and cargo yield increase together. Air freight yields are buoyed by rising jet fuel prices, although yield growth is easing and never matches fuel price growth. There is a gathering cloud on the horizon for air cargo in the guise of increasing rhetoric and action on protectionist trade policies prompted by US President Trump. Air freight traffic growth is slowing (but still above the long term average)FTK growth of 2.7% in Jun-2018 was slower than the 3.8% recorded for May-2018 and the 4.7% year to date growth rate. Moreover, air freight traffic growth is not matching the rate of capacity growth. Jun-2018 growth in available freight tonne kilometres was 4.1%, while year to date capacity growth was 5.1%. This meant that freight load factor fell by 0.6ppts in Jun-2018 to 44.3%, and by 0.2ppts YTD to 44.7%. IATA's Jun-2018 forecast of the traffic and financial performance of the world's airlines in 2018 predicts a further slowdown to an FTK growth rate of 4.0% for the full year (a forecast reiterated in Aug-2018). Nevertheless, this is still a healthy rate by comparison with the 10-year average cargo traffic growth rate of 3.0%, based on IATA data for 2008 to 2017. Last year was a bumper year for cargo traffic, with growth of 9.7%, the highest since the 19.9% expansion achieved in 2010, which was itself a bounce back from two years of decline in the global financial crisis. World air freight traffic growth (%): 2003 to 2018f Source: CAPA - Centre for Aviation, IATA. Air freight yield is enjoying its second successive year of positive growthAlthough air cargo traffic growth is slowing this year, 2018 looks set to be only the second year since 2011 in which both cargo traffic and cargo yield experience positive growth rates. Cargo traffic growth has been positive every year since 2011, but cargo yield growth was zero or negative from 2012 to 2016 and its average growth over the past 10 years (2008 to 2017) was -1.1%. Cargo yield growth turned positive in 2017, climbing by an impressive 8.1%. Yield growth is slowing this year, but IATA forecasts an increase of 5.1% for 2018 – still a healthy rate. The combination of traffic growth and yield growth leads to a forecast for cargo revenue growth of 9.3% in 2018 (slightly slower than passenger revenue growth of 10.5%). This would be a decline from 18.7% cargo revenue growth in 2017. Nevertheless, it would be the second highest since 2010, when cargo revenues increased by 25.5%, and strong compared with the 10-year average of 2.1%. World air freight traffic, yield and revenue growth (%): 2003 to 2018f Source: CAPA - Centre for Aviation, IATA. Typically cargo revenue underperforms passenger revenue growth2017 was a rare example of air freight revenue outgrowing passenger revenue. Its 18.7% growth in 2017 compared with passenger revenue growth of 7.2%. Typically, however, cargo revenue underperforms. From 2010 – which marked the revenue bounceback from the global financial crisis – to 2017, cargo revenue grew by just 8% (according to CAPA calculations from IATA data). Over the same period, passenger revenue grew by 20%, other airline industry revenue leapt by 308%, and total airline revenue increased by 34%. Cargo revenue is estimated by IATA at 12.7% of industry revenue in 2017, down from 15.7% in 2010 (it was as high as 17.9% in 2003). World airline revenue (USD billion): 2003 to 2017e Source: CAPA - Centre for Aviation, IATA. Cargo yield growth does not match the increase in jet fuel pricesA major factor in the strong performance of cargo yield in 2017 and 2018 is the increase in fuel prices. Jet kerosene averaged USD66.7 per barrel in 2017, which is an increase of 28.0% year-on-year, and is forecast by IATA to average USD84.0 in 2018, an increase of 25.9%. Historically, airlines have increased their prices – both for passenger and cargo – when fuel prices have been rising. However, although the curve of cargo yield growth moves up and down broadly in synch with that of fuel price growth, yield typically rises and falls at much slower rates. This demonstrates that cargo price increases, whether through underlying prices or through fuel surcharges, fall well short of matching fuel price increases. On the flip side, when oil prices drop, airlines typically do not lower their prices as quickly as the fall in fuel prices. World air freight yield growth and jet kerosene price growth (%): 2003 to 2018f Source: CAPA - Centre for Aviation, IATA. IATA: "the best of the upturn in air freight demand is well behind us"IATA said in Jul-2018, "the best of the upturn in air freight demand is well behind us", noting that the underlying world trade backdrop was weakening and that the inventory restocking cycle had run its course. The new export orders component of the manufacturing Purchasing Managers' Index (PMI) is a good leading indicator of air freight traffic. This has fallen to a 21-month low and suggests further slowing of FTK growth ahead. World air freight traffic growth (%) and global new export orders: 2000 to 2019f Note: FTK = freight tonne kilometres. Source: CAPA - Centre for Aviation, IATA. Export orders have been softening in all the major trading nations, indicating a structural slowdown in trade conditions. Other modes of cargo transport, such as container trade, have also been slowing. However, global economic growth remains healthy, and this is usually a fundamental positive for air freight. Moreover, surveys of both business confidence and consumer confidence are at relatively high levels. Increased protectionism may be affecting world trade as air freight passes its peakThe relative softening of the growth in demand for air freight and other forms of trade, in spite of positive fundamentals, suggests that other factors are applying the brakes. The end of the restocking cycle, which drove air freight demand in 2017, is an important factor, but IATA flags a global trade war as an important risk in the outlook for aviation (while it does not regard it as a central scenario). IATA's caution is not without foundation. The protectionist stance adopted by the Trump administration in the US has moved from rhetoric to action. Tariff measures have been implemented, including between the US and China and between the US and the European Union. In addition to these more visible tariff actions, there are frictional barriers to trade that are less headline-worthy, but which also hinder trade flows (whether intentionally or not). Air freight remains a growth sector, but most of the key indicators look to be past the peak in the current cycle. https://centreforaviation.com/analysis/reports/air-freight-passes-cyclical-re-stocking-peak-protectionism-threatens-432055
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