The outlook for the aviation industry seems optimistic for 2020 after a disappointing 2019. Keep in mind that the sector, which is trying to set a course amid fluctuating trade wars, is one of the few seeing consistent profits since 2010. We need to underline the role and importance of developing economies in the equation of the aviation sector within the past 10 years.
According to data from the International Air Transportation Association (IATA), airline companies may increase their operating profit margins by 6% next year. The net income after tax will reach almost $30 billion. This will allow the sector to catch an upward trend again following a decline in 2018 and 2019. Aviation companies' effective management of operational costs is based on the gradual settling of Brent oil prices following the regression of trade wars.
Analysts focusing on the aviation industry under the scope of passenger transportation are making a grave mistake. In an era when online retail sales reach 30% worldwide, the impact of the commercial cycle beyond the borders of cargo transportation has reached enormous levels.
The idea that companies like Alibaba and Amazon – who make billions of dollars worth of monthly sales – have extended their transportation fields by air transport using DHL, FedEx, ChinaPost and THY Cargo is quite significant.
The most critical point about this is the changing consumer preferences and the decrease of middlemen in the supply chain thanks to the expanding network. Of course, a product that can reach Buenos Aires from South Korea in 32 hours rather than 45 days by ship provides serious advantages for buyers and sellers.
The costs, which regressed by 20% in comparison to previous years, happened as a result of the increase in trade volume. Finding more affordable, fast solutions amid rising demand may determine the future of the sector in the coming years. Even though needs and preferred products vary in Maslow's hierarchy of needs pyramid, the demand for the transportation and logistics of products continues to grow.
When we analyze the risk reports of the sector, we can see that the main titles are similar. Countries with established, productive transportation and logistics networks come to the fore in global competition. This demonstrates that their customs processes, infrastructure, international posts, logistics quality and competence are sorted according to tracking and monitoring, and they receive a share in the sector. Here too, competence and proper planning are keywords like in all sectors, while the competition is expected to increasingly rise between 2020 and 2025.
While Germany's logistics performance has been top in the world since 2010, the addition of Belgium to the top five alongside Singapore, the Netherlands and Sweden has resulted in a minor regression in profit. While the world trade volume grew 4.7% in 2017, it fell to 3.3% in 2018, showing signs of an apparent slowdown. In 2019, the volume grew 2.5%, naturally resulting in disappointment.
In addition, the revival of the Baltic Dry Index, the pioneering indicator of global trade, saw it restored to its old glory after improvements in the U.S.-China trade talks. We know that air cargo activities are revived in all periods when the dry cargo indexes show an upward tendency.
However, the aviation sector has yet to create a proper structure regarding operational costs. The problems rooted in poor management of the sector's cash flow projections that lead to the sector's high fixed investment expenditures cause them to make long-term investments.
Following France's second-largest airline Aigle Azur, global giant Thomas Cook, Flybmi and Wow declaring bankruptcy in 2019, Slovenian flag carrier Adria Airways and Air Berlin also succumbed to the same fate. We know that problems will continue in Europe in the near future, as Boeing still remains unable to solve its problems regarding the 737 MAX.
Airline companies in developing countries need to carry out cross-border flights and establish hub points to prevent the spread of the Europe-based crisis. They should unite strategically when necessary to decrease capital needs.
While plans and goals look good on paper, the actual numbers do not reflect the situation. In 2019, experts predicted that some $919 billion – equal to 1% of the global GDP – would be spent on airline transportation. This number is expected to stay at $850 billion by the end of 2019. Considering a 10-12% increase in 2020, we see that the market is around $900 billion.
In short, the European aviation market will make little headway in 2020, and it looks like the trend will continue in the coming period as we will see Asia lead the way and make aviation companies happy. We are nearing a period when the domestic market will rise again. I believe that Istanbul and Doha will lead Europe and Middle East-based flights. It is also likely airports in Antalya, Istanbul and Izmir, which welcomed over 45 million tourists in 2019 alone, will see significant air traffic in 2020.
* Ph.D. researcher in the Private Company Economic Research Department MENA at Swiss Business School
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