The optimism in the air since the presidential election—at least for the aviation industry—is it warranted?
Since the presidential election, the stock market has been exuberant, and the general sense within the economy has been one of optimism. In this newsletter, we do not endorse or favor any particular political party or candidate. Our job is to look at the facts as they are and make accurate assumptions or predictions about the future, helping readers navigate what is to come. Therefore, we deal in facts and leave opinions and political punditry to others more qualified in that area.
That said, while there may be optimism—which, by the way, seems to be slackening over the past couple of weeks—there are serious economic challenges ahead. These challenges are “baked into the cake,” so to speak, and it doesn’t matter who is at the helm; these factors must play out over time. When and how exactly, we do not know, but they must. For the aviation industry, some of the challenges moving forward include:
- Airlines’ Debt Burdens: Their ability to deal with economic shocks given these burdens will determine which airlines survive and which do not.
- Weakening Job Markets in Other Sectors: Particularly in tech and grocery industries, this could affect aviation significantly.
- Fiscal and Monetary Policies: Federal government and Federal Reserve actions will play a critical role in the sustainability of the aviation industry given the current and expected economic climate.
Get Involved: Do you believe 2025 will be a good year for the aviation industry, or do you expect things will continue to get more challenging? Please share your thoughts in the comments below.
Airlines’ Debt Burdens and Economic Challenges
It’s no secret that airlines are heavily indebted. As a result, their balance sheets are weighted toward debt. It comes as no surprise that, as the Federal Reserve seeks to reduce interest rates after approximately two years of increases, airlines have found this favorable. Improved lending conditions might allow them to take on additional debt at better rates to sustain operations. However, there are “flies in the ointment.”
- Market Interest Rates Are Stubborn: While the Federal Reserve has been lowering rates since mid-to-late last year, market interest rates for bonds and credit instruments have seen little movement. Mortgage rates, for instance, remain above 6%, even spiking over 7% at times. Airlines expecting market rates to drop in tandem with Federal Reserve actions are facing significant disappointment.
- Airlines Facing Bankruptcy: In previous editions, we discussed Spirit Airlines and its financial troubles. Despite its restructuring efforts under Chapter 11 bankruptcy, Spirit’s situation underscores broader issues in the industry. Airlines filing for Chapter 11 seek to restructure debt and operations, aiming for profitability—but not all airlines may survive such efforts.
On Aviation™ Note: Let us not be fooled—90% of airlines globally are technically insolvent, with liabilities exceeding assets. Some manage to offset these deficits through strategic revenue streams or access to credit facilities.
Weakening Job Market and Its Impact on Aviation
The job market in sectors like tech and grocery has been shaky, with significant layoffs over the past two years. This affects aviation in two critical ways:
- Aviation Relies on Adjacent Sectors: The industry doesn’t operate in a vacuum. Economic slowdowns in related industries upstream, downstream, or adjacent to aviation can significantly impact its operations.
- Massive Job Losses Spill Over: Struggles in other industries may push workers to enter aviation, potentially straining the job market. Conversely, layoffs in sectors like tech reduce demand for business travel, one of aviation’s key revenue streams.
On Aviation™ Note: Industries outside of aviation will always have ripple effects, positively or negatively, on aviation.
Fiscal and Monetary Policies
Fiscal policy (government spending) and monetary policy (interest rate management by the Federal Reserve) significantly influence indebted industries like aviation. Key considerations include:
- The Lowering of Interest Rates: While the Federal Reserve’s lowering of interest rates may be seen as beneficial for the aviation industry in the short term, as it allows borrowing at potentially lower rates, it can lead to long-term challenges. Specifically, the methodologies employed by the Federal Reserve to reduce rates often result in increased inflation over time.
- The Effects of Higher Inflation: There is a common allegation that companies, including those in the aviation industry, engage in price gouging during inflationary periods. However, the truth is that 90% of companies are not gouging customers but instead responding to prevailing market conditions. As inflation begins to rise again—already showing signs of trending upward—airlines and other aviation players will inevitably face pressure to increase prices. While this may temporarily boost revenues, it does not necessarily translate into higher real earnings. Over the long term, higher inflation typically results in reduced real earnings for these companies.
- Fiscal Policy: The federal government periodically undertakes programs that increase spending in the economy. A case in point is the Inflation Reduction Act, which is a significant spending bill. Such initiatives, while addressing specific goals, inherently contribute to inflation. Regardless of the type of fiscal policy, if it involves increased government spending—whether through borrowing or printing money by the Federal Reserve—it tends to drive inflation higher.
- The Double Whammy: As highlighted above, two primary factors are impacting market viability. First, monetary policy from the Federal Reserve is largely inflationary. Second, fiscal policy from the federal government has also been inflationary in recent times. Together, these dynamics create compounded challenges for the aviation industry, necessitating innovative strategies to mitigate the negative effects and maintain stability.
On Aviation™ Note: Regardless of which party controls the White House or Congress, fiscal and monetary policies often lean toward expansion, increasing inflation risks. Let us hope this time is different.
Conclusion
While it is important to remain optimistic about the future, we must also stay pragmatic. Numerous factors will impact the aviation industry, and we must be prepared to face them in 2025. Following the last presidential election in November 2024, there was a wave of optimism, though that high level of optimism has begun to moderate. It is crucial to remember that this optimism may not align with the realities we face.
The truth is that existing conditions and the actions currently being taken by market players are paving the way for even more challenging times ahead—challenges that are already deeply ingrained in the economic landscape. Therefore, the aviation industry must be ready to navigate these difficulties effectively. If not, many players within the industry may simply cease to exist.
Thank you for reading this week’s On Aviation™ full article. Do you believe that 2025 will be a good year for aviation? Or do you expect challenges to persist? Please share your thoughts in the comments below. Remember to check out our On Aviation™ Podcast and continue the conversation on our Twitter and Instagram.
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