- With heightened macro uncertainty and weakened consumer and corporate sentiment, US domestic travel demand has softened. Meanwhile, budget cuts have prompted a decline in government travel. International travel demand may also be at risk, given the increasingly uncertain economic backdrop
- Although global cargo demand rose modestly in Feb 2025, growth is decelerating. Tariffs, the upcoming end of US De Minimis exemptions, and the normalisation of shipping routes threaten to reduce air freight volumes from 2H25
- Mounting demand concerns and cargo headwinds increasingly cloud the prospects for airlines. However, we believe certain carriers are positioned to fare better
Tariff headwinds denting consumer and corporate confidence. Heightened macro uncertainty and subdued sentiment appear to be weighing on US domestic travel demand and corporate bookings, alongside a reduction in government travel due to budget cuts. This has prompted various US airlines such as Delta, American, and Southwest to lower their 1Q25 guidance. While the premium and international segments remain more resilient for now – likely supported by less price-sensitive and loyalty-driven travellers, potential downside risks are emerging amid a weakening economic backdrop, with several airlines also flagging early signs of softness on US–Canada and transatlantic routes. More airlines may revise their guidance downward in the coming months, along with the street trimming earnings estimates, which could impact share prices.
Trade disruptions and potential easing of shipping disruptions could also temper air cargo momentum. Global air cargo demand, as measured in cargo-tonne-kilometers (CTKs), rose by 3.0% y/y (seasonally adjusted) in Feb 2025, though the pace of growth is slowing. Looking ahead, we anticipate air cargo headwinds stemming from tariffs and the imminent elimination of De Minimis tax exemptions in the US. This poses a risk to China–US e-commerce flows, and the boost from customers front-running tariffs are likely to subside over the coming quarters. With the Middle East situation stabilising, air freight (which had benefitted from a shift from sea to air due to shipping disruptions), traffic may gradually return to maritime transport as conditions normalise. As a result, global air cargo volumes could contract from 2H25, partly mitigated by the resilient demand for Chinese e-commerce goods on price advantage and possible diversion of trade flows as vendors relocate to tax-exempt countries like Malaysia, Thailand, and Vietnam.
We temper our optimism on the sector as a whole, though select airlines are better-positioned. A more cautious stance on the airline sector may be warranted, as growing demand concerns and cargo headwinds increasingly cloud the outlook. Nonetheless, United is poised to outperform US peers thanks to a larger international market share, expanding loyalty programmes, and limited cargo exposure. IAG stands out with its higher-end customer focus, relatively low cargo exposure, and compelling valuation. Over in APAC, Qantas is supported by an increasingly favourable yield environment and a robust cost reduction plan. Although Cathay has higher cargo exposure, we expect passenger revenue growth, reduced fuel cost, and efficiency gains to bolster profitability, with valuations remaining attractive.
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