Insights

January 2020 Market Recap

Gold had a solid start to the decade, rising due to growing geopolitical tension and risks globally, such as the coronavirus, Iran missile attacks and Brexit.  Meanwhile, the airline industry remained under pressure, led by news of more trouble at Boeing and the spread of coronavirus halting flights. Click below to read our recap of the airline sector and gold market from January 2020.

Strengths
  • London Heathrow, Europe’s busiest airport, has implemented a drone-blocking system to detect threats entering its airspace. The airport had a string of attempts by drones to enter the area in 2019. The new system, designed by France’s Thales SA, can detect and identify drones as far as 5 kilometers away and is already in use at Paris’s Charles de Gaulle airport.
  • Delta Air Lines reported stronger-than-expected fourth quarter earnings, with revenue from business cabin tickets and other premium products rising 9 percent. The carrier was boosted by strong ticket sales and robust domestic demand. Delta has benefited from not flying the Boeing 737 Max, which has negatively impacted other major carriers.
  • JetBlue increased the cost for travelers checking a first and second bag by $5 to $35 and $45, respectively. Bloomberg reports that other airlines will likely follow suit and raise prices too. JetBlue was the first major U.S. carrier to charge as much as $30 for checking a single bag, and other airlines quickly copied the move. Although negative for consumers, it is positive for carriers in potentially helping boost ancillary revenues.
Weaknesses
  • Kyviv-bound Ukraine International Airlines Flight 752 was accidentally shot down by the Iranian military shortly after taking off from Tehran on January 8 – just days after Iran fired more than a dozen missiles at two Iraqi military bases housing U.S. forces. It took several days for Iran to confirm that two missiles struck the plane and said it was due to human error. All 176 people on board were killed and were mostly Canadian or Iranian nationals. The incident led to several countries diverting flights in the area.
  • According to internal communications at Lion Air, the Indonesian airline considered putting its pilots through simulator training in 2017 before flying the Boeing 737 MAX, but abandoned the idea after Boeing convinced them it was unnecessary. Just a year later, a Lion Air 737 Max crashed into the sea and killed all on board, partially due to the pilots’ inexperience with the aircraft. This is another big blow to Boeing who sought to prevent pilot training on the new model, as one of the big selling features was that pilots would not need to undergo such training. Bloomberg reports that internal communications at Boeing showed some employees calling Lion Air “idiots” for requesting the expensive simulator training.
  • In late January Boeing unveiled the 777X, a twin engine jet capable of flying 426 passengers with wings so long that the wingtips fold. The plane is longer than the 747 and is the priciest model at $442.2 million each. The successful test flight was a bright spot for the troubled plane maker. However, sales of the 777X have stalled since the Dubai Airshow in 2013 and expected orders from China haven’t materialized. Bloomberg Intelligence aviation analyst George Ferguson says “it is feeling like the plane is too big for most markets, for most airlines.”
Opportunities
  • Bloomberg reports that the International Air Transport Association (IATA) formed a partnership with Xpansiv CBL Holding Group to develop the Aviation Carbon Exchange, which aims to limit airline emissions. Commercial aviation accounts for 2 percent of the world’s greenhouse emissions and has faced growing scrutiny to adopt greener practices. Xpansiv is an emissions marketplace and saw millions of tons of carbon traded on its platform in January alone. Several airlines have already taken steps to reduce their carbon footprints, with JetBlue announcing that it hopes to become carbon neutral on all domestic flights by July through using an alternative fuel source.
  • Norwegian Air is now improving profitability after years of high debt. The airline said its unit revenue rose by 21 percent in December – the ninth straight monthly increase – and 2019 unit revenue was up 7 percent. Bloomberg reports that the company turned around its strategy of aggressive growth and now vows to reduce capacity and focus on profitability.
  • India continues to be one of the fastest growing aviation markets and competition is heating up in the country. Singapore Airlines is preparing to add more Boeing jets in India to compete with Emirates. Bloomberg writes that Vistara, which is Singapore Air’s Indian joint venture, is considering adding more 787 Dreamliner jets to add flights to destinations as far away as the U.S.  Singapore Airlines is also facing growing competition from budget carriers in Southeast Asia.
Threats
  • The biggest threat to emerge for the airline sector in January 2020 was the spread of the coronavirus, declared a global health emergency. In attempting to prevent the disease from spreading further outside of China, many airlines suspended flights to the country for several weeks. This could hurt global travel demand for several months.
  • U.K. airline Flybe Group Plc struck a rescue deal with the government to keep the airline from bankruptcy and liquidation, reports Bloomberg. The airline serves more British towns and cities than any other and would leave many routes without flights. Flybe is one of the largest operators of Q400 turboprop planes and employs around 2,400 people. Industry consultant John Strickland says many of the routes have marginal economics and small airports, so other carriers such as British Airways or EasyJet might be hesitant or unable to fill the void due to their larger airplanes.
  • Boeing’s troubles continue and airlines don’t expect the 737 Max jet to return to service until summer or later. Southwest, which is the most impacted by the groundings because it flies the most jets, said growth has been stalled and didn’t give a 2020 capacity outlook. The airline said in a statement that the cost to fly each seat a mile will increase 6 percent to 8 percent in the first quarter of 2020 due to reduced flights and seat capacity. The carrier reached a confidential settlement with Boeing after incurring $828 million in 2019 damages, reports Bloomberg.

Southwest faces expansion questinos amid 737 max uncertainty

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Ancillary fees/revenue, in the airline industry, is revenue from non-ticket sources, such a baggage fees and on-board food and services, and has become an important financial component for low-cost carriers.