Tariff turmoil causes issues for carriers amid global uncertainty

Zawya

4 days ago

AIRLINES worldwide are grappling with the trade whiplash initiated by the U.S., and operators are preparing for various types of scenarios. The global economy faces much more uncertainty than before the Trump administration's tariff announcements.
For those attempting to plan, the range of possibilities is broad. When average tariffs were low and change, when they happened, were only minimal, businesses could work within a more predictable range of possibilities.
That world is in the past
Businesses must attempt scenario planning for an unprecedented range of future tariff outcomes. These could be positive or negative, but the key point is that the much wider range of uncertainty makes planning for the future challenging. An obvious consequence is that investment decisions will be delayed or even cancelled.
For aviation, the outlook is deteriorating. Tariffs and trade wars do not boost economic growth. Risks of an economic slowdown, possibly a recession, are growing. Inflationary pressures and higher borrowing costs add to the uncertainties. These economic concerns are likely to mean lower demand for air travel and for air cargo transport, which is faster but costlier than road, train or maritime options.
For aerospace manufacturers, the imposition of increased tariffs will lead to higher costs of production. This will ultimately feed through to higher fares. Aviation supply chains are complex and global, with components arriving from suppliers and subcontractors all over the world, regardless of the location of final assembly. Raised prices and a consequent reconfiguring of global aviation supply chains are likely to lead to even more delivery delays and capacity constraints for airlines.
A more fundamental impact is likely to be felt by airlines in the form of weaker demand, both in passenger and cargo traffic. Passenger demand is linked to GDP growth, and the outlook for the global economy has deteriorated. This reflects a number of factors that include reduced trade flows; the impact of falling stock markets on individual wealth; increased bond yields signalling higher government borrowing costs; and concerns about rising inflation. All these can lead to economic downturns.
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The consequences for flag carriers/long-haul airlines are likely to be more challenging than for LCCs or those with less exposure to the U.S. market. Major U.S. airlines warned in March about weaker domestic demand, both corporate and consumer, because of growing economic uncertainty.
Airlines exposed to the North Atlantic market face particular demand uncertainty. There is already evidence that recent actions by the Trump administration are leading people to put off booking travel to the U.S. Tighter border and immigration controls, new tariffs on imports into the U.S., and expansionist territorial claims are unlikely to be seen as positives by non-American visitors.
Premium cabins drive long-haul profitability, especially in markets like the North Atlantic, but filling them could become more difficult. Reduced trade flows lead to lower business traffic and falling demand for business class.
Demand for premium cabins from private leisure travelers has helped to make up for lower business traffic in the recovery from the pandemic. However, this demand is vulnerable to the falling net worth of individuals resulting from stock market declines. This also typically has a negative impact on consumer spending.
In the latest update of its World Economic Outlook, the International Monetary Fund cut its global growth forecasts. The U.S. and Europe are forecast to have weaker GDP growth than any other major world region, which is likely to mean weakening demand for North Atlantic air traffic. Indeed, there was a 17% year-on-year fall in visitors by air from Western Europe to the U.S. in March. Schedules for the 2025 second quarter indicate that airlines are starting to trim North Atlantic capacity.
Air cargo traffic growth, closely linked to trade flows, is also correlated to GDP growth. A trade war is bad news for air cargo demand and for those airlines with significant cargo operations. Tariffs, regardless of level, will add to the downward pressure on demand.
LCCs, which tend to be more focused on short- or medium-haul, the economy cabin and passenger traffic, are better placed than flag carriers. Nevertheless, a softer economic outlook is not welcomed by any airline.
There are two factors that may provide some relief to airlines, particularly those outside the US.
One is a weaker dollar, which will lower the cost to non-U.S. airlines of USD-denominated costs, the most significant being aircraft and oil. However, airlines with significant U.S.-originated sales will suffer from a negative revenue impact in their own currency.
The second positive factor is the recent fall in oil prices, which leads to lower jet fuel prices. The cost of Brent crude has fallen. For non-U.S. airlines, the fall in the dollar further lowers the cost of jet fuel in their own local currency. However, the fall in crude oil prices is itself a signal of a weaker global economic outlook.
In the U.S., there was a hope among some in the airline industry that the second Trump term could be positive for aviation, with the president expected to reduce regulation. Senior airline executives and other U.S. aviation leaders said at the CAPA Airline Leader Summit Americas in Grand Cayman in April that dialogue between the industry and government officials had significantly improved under the new leadership.
Now, U.S. airlines arguably find themselves stuck in a psychological tug of war in which they remain optimistic that Trump will initiate positive changes for the industry but are reeling from a whiplash of the trade policies that are upending their financial forecasts.
It is a safe bet to assume that airlines are not as concerned about transportation policy as they are about their profitability for 2025 and beyond. There's an argument to be made that if the tariff turmoil continues, there could be fewer airlines.
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