Kroll Bond Rating Agency (KBRA) releases The Latest Trends in the Global Airline Industry research report, which provides an overview of the challenges facing the global airline sector as well as outlines key themes in the space.

The global airline industry experienced good growth over the past year and is expected to maintain positive momentum in 2019. However, the industry faces heightened structural and macroeconomic challenges and uncertainties, which are expected to negatively impact fundamentals over the intermediate to long term. Some key themes discussed in the report are listed below:

Strong Demand Momentum Maintained: Despite economic and political headwinds in many geographic locations around the world, passenger demand fundamentals in 2019 will continue to benefit from positive momentum, supported by incremental growth in global GDP and favorable capacity trends.

Stable Operational Metrics: Less volatile and lower fuel prices have led to profit margins becoming largely stabilized, following sizable increases in jet fuel prices during the first half of 2018. Positive operating fundamentals since the trough have also complemented airlines’ improved financial flexibility.

Solid Access to Capital: Airlines across all regions have been proactive in opportunistically refinancing debt to take advantage of the low interest rate environment over the past few years, which will help insulate coverage metrics from any uptick in interest rates.

Volatile Fuel Prices: During volatile fuel prices, airlines typically adopt financial flexibility through a combination of ticket price increases and cost-cutting measures. Although relatively lower fuel prices in the last few months will act as a tailwind into most of 2019, KBRA’s view on the airline sector takes into account the longer-term unpredictability of fuel prices and distinguishes airlines’ credit performance by favoring those carriers whose strong financial metrics can withstand spikes in fuel prices.

FX Volatility: The effects of a stronger U.S. dollar had a greater impact across emerging markets, where key costs for airlines—primarily fuel, maintenance, overhaul expenditures along with aircraft purchase and lease payments—are typically priced in U.S. dollars, making operations more expensive.

Pilot Shortage: Boeing estimates that nearly 800,000 additional cockpit crew members will be needed over the next 20 years to satisfy demand for the global airline industry expansion underway. But efforts may be stymied by a critical shortage of pilots due to a change to the retirement age to 65 years that came into force in 2009.

Labor Negotiations: Labor relations across the airline industry are becoming more contentious, with negotiations between labor unions and airlines taking longer to complete—which exposes the industry to potential strike and non-strike actions over the intermediate term.

Growth of Low-Cost Carriers: Low-cost carriers (LCC), in particular non-U.S. airlines, are expected to benefit from another year of rapid growth. LCCs are expanding their operations beyond the traditional short-haul model through the development of global hubs and increased offerings of long-haul routes. Low-cost carriers’ aggressive expansion into the long-haul markets could challenge legacy carriers. The success of LCCs and ultra-low-cost carriers in Europe and Asia have been especially troublesome for both legacy and smaller carriers, who face a fiercely competitive pricing environment for popular routes.

Political Disruptions: The global nature of the airline industry makes it uniquely vulnerable to geopolitical changes. For example, the partial U.S. government shutdown earlier this year resulted in flight and security delays that reduced air travel demand and, in turn, required discounts to attract passengers.

737 Max: Prolonged grounding of the 737 Max will have a far-reaching financial impact, with airlines and lessors potentially canceling and Boeing having to continue to delay or suspend deliveries. Interestingly, the 737 Max grounding has had a positive impact on both demand and pricing for other narrow-body aircraft. However, given large orderbooks for the aircraft, a prolonged grounding of the 737 Max could have a number of negative operational and financial consequences for airlines during the remainder of the year.

Cyclical Nature of Travel: Economic upward mobility in much of the world is still in its development stage and passenger demand fundamentals remain strong. However, the nature of both leisure and business travel are highly dependent on GDP health and growth rates, making the airline industry a cyclical business.

To read the full report, please click here.