Trade tariff concerns are clear, but Delta sees positive corporate trends through early 2019

Although large US corporations are warning of higher prices of consumer goods triggered by tariffs imposed on Chinese imports, and a potential recession looms in 2020, Delta Air Lines sees positive corporate travel trends continuing into early 2019.


Summary:

  • Despite warnings of higher prices of consumer goods triggered by tariffs, Delta Air Lines sees positive corporate travel trends continuing into early 2019;
  • Results from Delta’s most recent survey show 90% of corporate travel managers expect to maintain or increase their spend into 2019;
  • The airline says corporate revenues grew 12% year-on-year in 3Q2018 and has recovered roughly 40% of decline in corporate fares it has experienced since 2014;
  • Despite the airline’s positive outlook, many economists believe the USA could enter a recession in late 2019 or early 2020.

The US has levied USD250 billion in tariffs on Chinese goods, and China has retaliated with USD110 billion in tariffs on US goods.

According to Money magazine, a gamut of retailers including Walmart and Target have warned the tariffs would result in rising prices for goods. The publication also stated Office Depot has warned tariffs could disrupt its supply chain, noting if one component of a furniture collection is not priced competitively, then that product could affect the purchase of larger, coordinated collections of furniture.

Those warnings have not resulted in a major hit to consumer confidence, which has been at record highs in 2018 partially due to recently enacted tax cuts. According to CNBC, The University Of Michigan’s monthly survey of consumers had a preliminary reading of 99 for Oct-2018, which below expectations of 100.4. However, the results for Oct-2018 remained above the average reading for 2018.

Business travel demand also appears to be holding steady, for now.  The US Travel Association forecast (see image below) shows the leading travel indicator (LTI) for US domestic business travel is 51.7 for the next six months (any reading over 50 signals growth).

Delta was the first US airline to report 3Q2018 earnings in early 2018, and company management stated its total corporate revenues grew 12% year-on-year in the quarter. Airline executives remarked that has recovered roughly 40% of the decline in corporate fares it has experienced since 2014.

Results from Delta’s most recent survey show 90% of corporate travel managers expect to maintain or increase their spend into 2019.

Responding to a query about changes in corporate behaviour or booking trends as a result of the tariffs in Delta’s Asia markets, company President Glen Hauenstein stated so far the airline has not seen any meaningful impact from changing trade policies.

“Our Pacific based revenues and China specifically have done quite well in the quarter especially given some of the added capacity that we had put into the market with our recent launch of Atlanta-Shanghai doing well within our range of expectation. So we haven’t seen it,” Mr Hauenstein stated.

Delta’s Pacific unit revenues increased 5% year-on-year in 3Q2018 on a 11% rise in stage length. The airline’s routes to Japan and Korea both produced double digit unit revenue growth, and routes to China posted a 9% rise in unit revenues on 18% capacity growth.

Many economists believe the US could enter a recession in late 2019 or early 2020. A recent poll conducted by the National Association of Business Economics of 51 forecasters showed 10% believe a recession could begin in 2019 while 56% stated 2020 as a start date for an economic decline, according to Bloomberg.

The publication stated the association concluded that trade issues were influencing the forecasters. Economists also expect the US Federal Reserve to raise interest rates three times in 2019. Those types of moves can cause volatility in the stock market, which has ripple effect on business sentiment that could lead to a slowing of economic growth.

For now, US GDP is forecasted to grow at roughly 3% in 2018, before dropping to approximately 2% in 2020.

Although the US economy remains robust for now, consensus among a number of the country’s economists is that the country’s more aggressive trade policy will ultimately trigger a period of slowing economic growth.

If the forecasts of a recession occurring in 2020 come to fruition, the travel industry needs to start thinking about it will cope with changing economic fortunes.