Tariff Turbulence: How Trade Wars Are Reshaping Air Travel Costs & Future

The Ripple Effect of Tariffs on Air Travel

Are you wondering how this current tariff chaos will affect the cost of flight tickets going forward? Maybe the lower oil price will make your dream trip more affordable. So, is now a good time to book or should you wait a little bit? Well, as it turns out, it's complicated. But I wouldn't wait too long to book that trip if I were you. Travel industry could also be disrupted. You see, trade barriers like the ones that the US government have recently rolled out is very, very bad news for anyone in the manufacturing industry. And that of course include giants like Airbus and Boeing, but also hundreds of their suppliers worldwide, as I mentioned recently. But in this article, I will take a closer look at what happens just down the line, the effects of these developments on the airline industry as a whole, and the tough decisions that airlines will now have to make. Now, as I said in my previous article on tariffs, I always try to stay clear of politics in my channels, but at the same time, I can't just ignore the biggest story affecting commercial aviation right now. And now, of course, crisis in aviation aren't anything new. The airline industry is a cyclic business with events like 9/11, the 2008 financial crisis, and of course, the pandemic all being devastating for the airlines. But even smaller events can quickly upset this industry. All it really takes is a bit of financial uncertainty.

The Looming Trade War: Impact on Airline Profitability

I say this because we are recording this in mid-April after the US president announced a 90-day pause on tariffs on imports from most countries. But crucially, tariffs on China remained in place along with more specific tariffs for products like cars and raw materials like aluminum and steel. Plus, there is still a 10% tariff on all countries except North Korea and Russia. The point here is that with the current flip-flopping, analysts and business leaders can't just predict what will come next and this prolonged uncertainty will only be bad for the industry. For example, a pretty big proportion of air travel is done for vacations or other forms of leisure. And that is generally one of the first expenses that people cut down on when trouble is looming ahead. That's why whenever there's a kind of crisis anywhere, air travel along with hospitality and leisure industries are kind of the canary in the coal mine, meaning the first to feel the effects of what will soon hit everyone else. So, let's look at some of the ways that the airlines and your tickets might be affected if this crisis continues long enough to turn into a full-blown trade war and a global recession. The reality is that almost all airlines around the world are operating with fairly thin profit margins in order to keep their prices competitive. So for them to remain profitable depends on well basically everything from careful fleet development planning, effective route networks, quick maintenance turnarounds as well as much more.

Tariffs and Aircraft Procurement: Legal Battles and Supply Chain Shifts

And if you have read our previous article on tariffs, well then the first problem that they will face should be quite obvious. Ordering and taking delivery of new aircraft. Now the US president has been talking about how he loves tariffs for a long time by now. But until a few months ago, Boeing and almost everyone else in the industry were hoping that he would actually exempt aircraft from this process once they got started. Having said that though, airline lawyers and accountants have been studying their existing new aircraft contracts for clauses on tariffs, import duties, and other small print for some time now, just to be on the safe side. Now, I'm not going to go into the differences between customs duties, levies, and tariffs here. They are very similar and for the purposes of this article I'll use tariffs to refer to all of them. But the lawyers are paid to unpick their differences and find any holes in these contracts which they can use to benefit their employers. Now, in theory, the importing company is responsible for paying the tariffs, but the air current quoted an airline executive that said that if you have a contract and it's priced and there is no tariff clause in it, well, then good luck passing it on to us. Similarly, Delta CEO Ed Bastian said that his airline will not pay tariffs on any new aircraft, but that just means that someone else will. Over the past several months, Delta has been taking delivery of mostly Airbus aircraft, but they will now postpone any flooded deliveries, even though that means having to pay penalties to Airbus for doing so. Now, I'm sure that the lawyers of aircraft manufacturers are just as good at researching these contracts and loopholes as their colleagues in the airlines are. So, if things start to get ugly, expect to hear much more about this. But in any case, all this only applies to existing aircraft contracts. You can be very sure that any new or very recent contracts will have these matters covered from every possible angle. But as I've explained before, aircraft delivery backlogs, especially for single aisle 737s and Airbus A320s, can be nearly a decade long. They used to be shorter, but still the contracts for aircraft being delivered right now were therefore very likely drafted half a decade ago, if not more. So anyway, if tariffs on aircraft go ahead, these kinds of disputes could keep lawyers busy for many, many years to come. And the same goes for contracts and agreements for spare parts. Such part contracts will impact aircraft manufacturers, but they will also affect airlines and maintenance facilities, many of whom have already been stressed by engine repairs and supply issues since the pandemic. Now, if we look more generally at the short-term effects of this looming trade war, we've already seen Airbus saying that they might well have to prioritize non US airline customers if tariffs on aircraft becomes a reality. And that also aligns with what the Delta CEO said. Airbus said this a few weeks before the tariffs were actually announced. But after the tariffs were put on hold for three months, the airlines could suddenly now rush to take delivery of any available aircraft before they are reinstalled again. That could actually drive some airlines towards used aircraft or to aircraft already on order from leasers. But frankly, it is unlikely that many leased aircraft due for delivery from Airbus or Boeing in this 3month period wouldn't already have an airline operator assigned to them. Now, there are also many more short-term challenges for the airlines caused by the tariffs or just the threat of them.

Fuel Hedging and Cargo Concerns Amidst Trade Uncertainty

Another short-term dilemma for airlines is fuel and fuel hedging. In general, fuel hedging is kind of a financial strategy that airlines use to cover themselves against volatile fuel prices. Depending on where you are in the world, jet fuel may be around 20 to 30% of an airline's operating cost, if not even more. And airlines really don't want to worry about oil price spikes affecting their fuel costs, which is where fuel hedging comes in. With this process, airlines lock in a specific price for a given quantity of fuel and for a specific period. And if an airline has made such an arrangement for say half of the fuel that it expects to need in a given period, well then this airlines fuel is 50% hedged. These deals could have durations of months or even years. And the catch here is that if the price of fuel then suddenly drops, which it has done since the threat of terrorists became serious early in April, well then airlines might not be able to take full advantage of that since their price is already locked in. But the airlines could still rush to hedge even more fuel and lock in a lower price now. But should they? Well, the reason oil prices are falling is because whenever there is any kind of recession, analysts in aviation and other industries expect that demand for fuel will drop. And like I said at the very start, aviation is the canary of the world's financial coal mine. So the airlines could decide to increase their fuel hedging, but they have to be really confident that they will then actually end up using all of this fuel. Otherwise, they might be stuck with a fuel bill for fuel that they can't use. Another headache for many airlines, especially those flying long haul, is what they can do with cargo. Something that is actually key to the profitability of many of their routes. You see, one interesting discovery that many airlines made during the pandemic was that the cargo that they could carry in the spare space in the hold turned from a nice side hustle over to a very important strategic revenue stream. About half of the world's air cargo capacity depends on passenger jets, not cargo planes. So, when passenger airlines stopped flying in 2020, the freight industry suddenly lost half of its capacity. Now, you would think that this would be over by 2025, and you would be right. Except airlines everywhere really learned a lot on how to take advantage of this revenue stream. So, even after passenger travel restarted in most of the world, rates for air cargo remained high enough for passenger airlines to make otherwise unprofitable flights profitable. So, what could happen with that now then? Well, as soon as tariffs were announced, many airlines would have reasonably expected hold cargo demand to drop dramatically. Shippers would want to consult with production facilities and customers to evaluate how tariffs affects them before committing to any large long-term orders and transportation contracts. And since cargo revenue is now a factor when airlines designed their route network, this drop in cargo demand could make them cancel routes that were already on the verge of profitability.

Short-Term Disruptions and the Cargo Race

And after all of those considerations, then came the US president's 90-day tariff stand down. That announcement created a window for any ready to ship products to be flown into the United States, which was obviously good news, but that also kind of created a cargo race. Even before the 90-day stand down was announced and just before the tariffs were first supposed to take effect, Apple reportedly flew five cargo planes full of iPhones from India over to the United States. Now, arranging such a last minute shipment couldn't have been cheap to do, but if Apple thought it was worth it, then their cost was obviously lower than the effect of 26% tariffs for shipments from India. So, expect to hear much more of these kind of stories over the coming 90 days or however long this ends up taking. Now, not everyone will be able to make such arrangements, but the point is that a lot of cargo that would normally travel inside containers at sea could well end up getting flown now in order to beat the tariffs. Again, I'm referring to the short-term effects of this crisis. And crucially, since a lot of high value cargo routes are between the US and China, with tariffs still in place as we record this, a very big proportion of US imports obviously won't benefit from this 90-day grace period. On top of all of this, it's worth remembering that any changes in the way goods and logistics are handled will affect everyone involved. This includes the airlines, cargo forwarders, and any officials at the borders. and all of them will need some time to adjust to these changes. That means that we can expect short-term delays as people adjust to their new work routines. And we actually have a relatively recent example of this, which isn't very promising. When BREXIT came into effect at the end of 2020, thousands of trucks ended up stuck at both ends of the border and do and Cal, many of them with perishable goods on board as border officials try to make sense of how the new red tape should be interpreted. As Scott Hamilton explains in Liam News, as tariff loom, there are still quite a few unknowns regarding the movement of aircraft spares, reciprocal tariffs, treatment of leased planes and parts, as well as the treatment of shipments from different sources. All of which suggest that delays will likely be the rule here, not the exception.

Strategies for Airlines: Price Hikes and Route Adjustments

So, what can airlines do about all of this in the short term, then? Well, all of the issues that I've talked about so far, uncertainty over travel demand, aircraft delivery delays and postponements, uncertainty over fuel prices, over cargo and related disruptions, plus other uncertainties like the supply of parts will end up increasing the airlines operating costs by quite a lot. Now, there are a few ways for an airline to guard against this, and the easiest and most direct is, of course, to just increase ticket prices. Now, bear in mind here that airlines publish routes and sell tickets months in advance, and they can't really increase prices for tickets already sold. So, even this relatively direct approach won't cancel out those increased short-term operating costs. The airlines might also consider modifying or eliminating any routes that already looked problematic, but remember, the fluid nature of what's happening right now means that this is basically a guessing game. The airlines will have to react to what may happen months ahead when those future flights take place. And even with no looming trade barriers, airlines frequently get those kind of guessing games wrong. So this will definitely not help.

Medium-Term Adjustments and Shifting Global Dynamics

As we move into the medium term, let's say a year after the new tariffs comes into effect, the airlines will then continue to adjust their networks and evaluate their profitability. And at the same time, air cargo demand will hopefully begin to sort itself out, making those profit projections and route plans a little bit easier for the airlines to organize and predict. But that might still be a moving target because global supply chains will likely try to move some productions away from countries like China and the US. So the routes that will have high cargo demand in a year or two won't necessarily be the same ones that we have today. Going further, radical changes like these will very likely upset competition between different airlines. And one area where we could see some disruption is in the global alliances and their co-chairs and other key agreements. Airlines within the same alliance might not agree on strategy as they all try to balance themselves in the post tariff market. Those that are based in the US might have different priorities from those based elsewhere where the attitude of each airline around the world could start to depend on national policies rather than profitability as it is right now. And then there's the question of new aircraft orders and fleet procurement strategies where a lot will depend on the issues that we raised in our previous article on tariffs which you should definitely check out.

Long-Term Scenarios: Block Alignment and Industry Shake-Up

If no exemptions are made for aircraft and aircraft parts and Boeing and Airbus are forced to start bringing their supply chains closer to home, well then we might begin to see how US-based airlines start to switch orders over to Boeing if Airbus aircraft are subject to costly tariffs. But this might not be the first step in this process. Initially, airlines might simply decide to hold on to older aircraft rather than replace them with new ones, which would obviously be just a temporary fix. Older aircraft will still need spare parts since just like with our cars, the older they get, the more spares they need. And with these spares now subject to tariffs, the point at which it no longer makes any sense to keep using an older, less efficient aircraft might actually be brought forward. But that's assuming that the cost of new planes remains the same, which it won't. So we're basically back to square one again. Depending on the size of the tariffs, it might simply make sense for the airlines to keep older planes around for longer despite higher maintenance costs, especially if new planes will be 25% or more expensive. On the other hand, this drop in demand for new aircraft will further stress the finances of Airbus and especially Boeing. And at the same time, players like COMAC could push ahead with the certification of their aircraft internationally to try and put their foot into the door as a possible boring alternative. Now, this plus scaling up production rates for the C919 in particular will likely take longer than a year for COMAC to accomplish. But something that China can do quicker is to completely cut their ties with Boeing and stop ordering Boeing aircraft. This is something that we could actually see quite soon within, you know, the next couple of months or so, as they will use that as a bargaining move in their escalating tariff war with the United States. But in practice, Chinese airlines have already been extremely slow in picking up new boring aircraft for years by now. basically ever since the first Trump administration again because of those trade tensions with time if tariffs persist we don't know if other countries might also do that same thing either as an outright freeze on Boeing orders or as a gradual shift over to Airbus and in the very long term meaning in the next decade or so well then this already fussy picture becomes even fussier the nuclear scenario is that The entire aviation industry could fully become block aligned, meaning that the airlines in the United States could mostly fly Boeing aircraft while those in Europe, Asia, and elsewhere shift over to Airbus or even to COMAC. For that to happen, COMAC will need not only to certify its aircraft internationally, but also replace a lot of American parts in it. And that is realistically several years away. Embraer could also come into play as I've suggested in articles before, but that will depend on whether they can finance development of a larger aircraft in the middle of a global trade crisis, which won't be easy.

Unpredictable Future: Costs, Efficiency, and Traveler Impact

Now, all of these radical changes could also have even more knock-on effects. Rising ticket prices everywhere could give a new lease of life to low cost carriers in the United States where there has been a shift away from them in the recent years as travelers have been going t
owards more premium forms of travel. But tariff hit ticket prices could once again favor low cost carriers if they can differentiate themselves on price which is a big if in such a volatile environment. Obviously, all of this is highly speculative, getting harder to predict as we go further and further into the future. And personally, I would be really, really happy if this article is outdated by the time you see it, and the world has returned back to a saner and friendly place. But even if this international standoff ends tomorrow, some irreparable damage might already have been done. It won't necessarily be obvious immediately, but the very realization that these type of tariffs and other trade barriers can come at basically any time could force airline route planners, fleet development strategists, part suppliers, maintenance and part network providers to rethink what they do and how they do it. Aviation is the global industry and it has evolved that way that it has in order to maximize efficiency. But these developments could force all sorts of companies to think less globally in order to mitigate future unpredictable barriers to trade even if that will ultimately make them less efficient and raise cost including the cost on your flights. Now tariffs may be political but their effects on airlines and other aviation companies are very real and very expensive. So, like I mentioned in the beginning, if you have a nice long trip that you want to take, take it soon because it's unlikely that this will end up with anything else than more expensive flights for everyone. But what do you think? Do you see any possible benefits from this crisis?