Gripped by worldwide economic uncertainty, the aviation industry currently finds itself in a difficult position, divided by two contrasting trends.
On the one hand, passenger numbers are growing, with recent Airport Council International (ACI) World figures estimating 8.8 million people chose air travel in 2018, making up for a 6.4% increase compared to the previous year.
Yet on the other hand, air freight demand is struggling to keep pace, with some arguing that is has been hindered by a rise in protectionist and isolationist policies among some of the most influential powers in the world.
Protectionist rhetoric is currently flourishing in countries led by populist governments such as Brazil, Italy and Hungary, and is a common denominator of the US and China’s ongoing trade war, as well as the UK’s imminent withdrawal from the European Union.
Antithetical to previously dominant policies like free trade and liberalism, protectionism is defined by the Collins Dictionary as ‘the policy some countries have of helping their own industries by putting a large tax on imported goods or by restricting imports in some other way’.
According to ACI World director general Angela Gittens, such a strategy is starting to signal bad business for the global aviation industry, hitting airlines and airports equally.
“Protectionist rhetoric – fuelled by isolationist policies – has swept several major economies in recent times and this has translated into a dismantling of established open trade relationships and regimes,” she said in a statement earlier in September.
Despite witnessing relatively high growth in passenger traffic, Gittens commented that limiting the potential of air cargo exports through protectionist policies is likely to hamper the industry, trade and tourism, especially in emerging economies. But how dramatic is the situation and is it really getting worse?
The impact of political and economic uncertainty
The success of air transportation is tied to two major sources of revenue, namely passengers and cargo shipments. Over the past couple of years, these two seem to have followed inversely proportional paths.
While passenger numbers rose consistently in 2018, recent ACI World data showed freight volumes fell 1.7% in December 2018 compared to the previous year, making for a growth of 3.4% against a previously registered 6% increase year-on-year.
According to ACI World head of airport business analytics Patrick Lucas, the fact that these drops occur at the same time as rising trade tensions between the US and China is anything but coincidental.
The so-called trade war currently hitting America and China – two of the most powerful economies in the world – has been dominating headlines ever since March 2018, when US President Donald Trump announced plans to put a 25% tariff on steel imports from China, to which China itself responded with increased levies on US goods such as pork, wine, fruit and nuts.
As Lucas explains, these tensions are inevitably impacting cargo exports: “There has been a contraction with respect to the volumes that are traded, and that’s as a result of the tariff hikes,” he says.
Slumping demand has affected business confidence, triggering a potentially damaging chain reaction that could hit investment and employment, leading, as Lucas says, ”to signals of recession”.
“There are certain indicators, especially in places like the US, where things are not as bad as they seem, in the sense that the unemployment rates are still relatively low,” he adds. “But there are other indicators that potentially point toward the recession.”
Across the ocean, the UK is also experiencing a similar – if not more intense – period of economic uncertainty shaped by the
From aviation’s point of view, this uncertainty has materialised itself in the form of trade ambiguity – with the UK still looking to define its future trade relations with the European Union, amid controversy on the so-called Irish backstop – as well as lack of guidance on what measures airports and airlines will need to put in place to maintain business as usual once Brexit takes place.
“Britons face – and this coincides with their policy of isolationism – a lot of airlines having to mitigate the risks of a hard line Brexit and have registered themselves outside of the UK,” Lucas continues.
“But that’s a bit more challenging for airports because they’re fixed assets. So, one of the repercussions of Brexit on airports will be more macroeconomic, and because of this uncertainty, you could have a potential slowdown.”
Does the industry have a say?
As uncertainty persists and populist rhetoric continues to shape current geopolitical status quo, signs of discontent have been emanating loud and clear across the industry.
In September this year, for example, the International Air Transport Association (IATA), which represents worldwide airlines, expressed concerns slumping on air freight demands earlier in the year.
Commenting on the figures in a press release, IATA CEO and director general Alexandre de Juniac said: “While current tensions might yield short-term political gains, they could lead to long-term negative changes for consumers and the global economy. Trade generates prosperity. It is critical that the US and China work quickly to resolve their differences.”
In addition, Lucas says that ACI World is advocating towards a more liberalised market by cooperating with the International Civil Aviation Organization and its member states “to push forward the liberalisation of air transport”.
“We do that because the benefits are extended,” he adds. “We see aviation as a major contributor to a given country’s output and employment, so it has a multiplier effect. Air transport liberalisation is not just good for the industry, but it’s good for the broader economy and society.”
Resilient air transport will eventually bounce back
Despite these concerns, Lucas concedes that protectionist policies will likely have a limited impact on the sector compared to past cases like the Great Recession of 2008.
And even during that period, which witnessed a dramatic decrease in passengers, “traffic was relatively quick to bounce back after a year,” following the recovery of the business cycle.
“If we do have a recession,” Lucas continues, “I don’t think it will be as pronounced as what we saw in the previous recession and the credit crisis.”
The reason behind this is that people ultimately need to travel, especially encouraged by the rise of budget airlines and an overall decrease in fares, which will trigger new commercial opportunities.
As Lucas puts it: “Once investment starts to pick up, and business confidence starts to pick up along with consumer confidence, then you will see the air transport sector pick up as well.”