This report does not constitute a rating action.
(Editor's note: S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and responses--specifically with regard to tariffs--and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential shifts and reassess our guidance accordingly (see our research here: spglobal.com/ratings).
Key Takeaways
- Diverging trends are emerging across the global airline industry given heightened geopolitical and macroeconomic uncertainties amid intensifying trade conflicts and market volatility.
- The U.S. airline market is reporting weaker-than-expected demand trends, particularly for domestic travel, compared to other regions, and we are seeing signs that inbound air travel bookings to the U.S. are down overall.
- We think downside risks have materially increased for the wider sector as softer global economic growth could weigh on consumer confidence and cut down demand for air travel.
- Most of our rated issuers have built up a ratings buffer to withstand some pressure on earnings and cash flow this year, but we cannot rule out potential negative rating actions for airlines with tighter headroom.
It's early days, but demand for air travel to, from, and within the U.S. appears weaker. Reports of U.S. domestic demand being down started to emerge in late February, with several U.S. airlines lowering their earnings expectations for the first quarter. The latest data from the International Air Transport Association (IATA) show U.S. domestic travel declining 4.2% year-on-year in February, while North American international traffic contracted by 1.5%. That said, we note that February 2024 was exceptionally strong for the global airline industry and a leap year, with the extra day meaning a strong comparison month. (February also included Chinese New Year.) However, airline industry trends in early 2025 show a clear divergence, geographically, with U.S. market trends weaker than elsewhere (see charts 1 and 2, showing revenue passenger kilometer [RPK] growth trends, a measure of the volume of passengers carried by an airline accounting for distance flown).
Macroeconomic uncertainty is being commonly cited as a key reason for lower-than-expected bookings over the past month or so. This is perhaps no surprise given fast-changing U.S. tariff policies and it contrasts notably with the exuberant industry-wide tone we saw in much of 2024. Government spending cuts have also been highlighted. The first quarter of the calendar year is naturally the weakest for this seasonal industry, and airline revenue visibility is typically low as most air passenger travel bookings occur within a couple of months of travel. We are therefore closely monitoring these trends, particularly in the run-up to the aviation sector’s most profitable summer season. We will soon have a clearer picture of crucial summer bookings. However, with several U.S. airlines now planning to reduce previously planned capacity, it is becoming clearer that 2025 will be a softer-than-expected period of passenger demand.
Chart 1
Chart 2
Trade Tensions Are Adding Uncertainty And Complexity
Global trade tensions are weighing on global credit conditions and will likely result in rising inflation and further pressure on consumer spending, as well as more challenging financing conditions. If tariffs are fully implemented as per the U.S. administration's April 2 announcement, they could weigh on global GDP growth. President Trump’s 90-day pause on most tariffs (while a 10% blanket tariff for all trading partners remains, except for China, which is subject to a much higher rate) means high uncertainty persists. This is likely to further undermine business and consumer confidence and consumer spending, particularly in North America but also for many countries (see "Global Credit Conditions Special Update: Ongoing Reshuffling," April 11, 2025).
Heightened political tensions and stricter border requirements could dissuade people from travelling to and from the U.S. Air Canada has reported that it is reducing capacity on some routes to the U.S. (by about 10%), particularly leisure destinations. WestJet noted a shift in bookings from the U.S. to other leisure destinations, such as Mexico. Stricter border requirements in the U.S. have also been reported. As aircraft are mobile assets, airlines are constantly monitoring route profitability and can protect margins somewhat by shifting route networks as necessary. Delta Airlines (BBB-/Stable/--) has stated that it will eliminate unprofitable flying, and this will likely disproportionately impact its off-peak service. That said, this can lead to capacity changes or imbalances on certain routes, which could impact air fares. Foreign exchange rates could also influence travel decisions; a weakening U.S. dollar would make travel more costly for U.S. consumers, and cheaper for those travelling to the U.S. Furthermore, many non-U.S. airlines still have material exposure to U.S.-dollar-denominated costs (such as aircraft purchases or lease, fuel, and maintenance costs), which could offer them some cost relief. For some emerging economies, and particularly Latin America, exchange rate dynamics could differ and have the opposite effect.
We understand that aircraft could be subject to tariffs if sold cross-border, but not if they are made and sold on the same continent. There is significant uncertainty and complexity surrounding the impact of tariffs on aircraft, component parts, and supply chains, particularly as aircraft are mobile assets, but aircraft costs could materially increase (particularly given the U.S.’s 25% tariffs on all steel and aluminum, which are used to make aircraft). Furthermore, most airlines currently have large order books as they seek fleet renewal in favor of significantly more fuel-efficient aircraft (enabling substantial future cost savings and lower carbon dioxide emissions) and while they are catching up on capital expenditure (capex) post-pandemic. U.S. airline orders for Airbus aircraft could be impacted in some cases, although some airlines have already said they won’t buy aircraft (or may delay orders) with tariffs. It has also been reported that Chinese airlines will not take any further deliveries of Boeing aircraft.
Aircraft manufacturers and component suppliers are still finding it difficult to attain pre-pandemic production levels. Production delays, labor strikes, and quality issues in the supply chain, particularly at Boeing, but also at Airbus, have already led to higher costs as aircraft lease rates have hit record highs and older, less efficient aircraft continue to be utilized. Aircraft deliveries remain about 30% below the pre-pandemic peak, with lead times of more than five years in 2024, and a global order backlog of 17,000 aircraft or 50% of the current fleet (source: IATA). Further supply chain disruptions caused by tariffs could lead to capacity constraints for certain players, given there are only two key commercial aircraft manufacturers, and that aircraft order books are lengthy. Conversely, if airlines delay capex plans this could mitigate potential pressure on near-term credit metrics given reduced cash outlays.
A key risk for Europe's network airlines is reduced travel on premium transatlantic routes, which is a key profit driver. Europe’s leading network airlines International Consolidated Airlines Group S.A., Air France-KLM S.A., and Deutsche Lufthansa AG rely heavily on profitable North Atlantic routes. That said, we understand that premium customers are typical on these routes, a segment likely to be better shielded from a potential downturn. Furthermore, our base case currently assumes continued robust underlying demand for leisure travel within Europe, despite high geopolitical and macroeconomic uncertainties, as European consumers continue to prioritize spending on experiences including travel. We think that an increase in real incomes and high employment rates in the EU will also support consumer spending. We believe that European low-cost carriers, like easyJet PLC and Ryanair Holdings plc, which focus on short-haul leisure travel, will therefore be more protected. Furthermore, falling fuel costs may give some relief to all players; we recently revised our oil price assumptions down by $5 per barrel (/bbl) for the rest of 2025 to $65/bbl for Brent and $60/bbl for West Texas Intermediate crude.
European airlines also face increasing carbon costs and pressure to reduce greenhouse gas emissions. The EU's "Fit for 55" package and similar schemes in the U.K. and Switzerland, which aim to end free carbon allowances by 2026, will increase costs related to flights within the European Economic Area. Furthermore, the "ReFuelEU Aviation" Regulation has introduced a sustainable aviation fuel blending mandate in jet fuel taken on board at EU airports that increases every five years (starting with 2% in 2025, 6% in 2030, and 20% in 2035). A tax has also been proposed on aviation fuels used on intra-EU flights (set to be introduced in 2028).
Our outlook for the airline industry in Latin America is cautiously steady, though the effects of a more complex global macro environment may vary significantly across the region. Demand in key markets has been resilient, with still-healthy booking trends beyond the peak travel season in South America. However, risks differ by country, with short-term challenges primarily stemming from trade tensions that particularly affect Mexico given its close economic ties with the U.S. While Brazil and other South American nations appear less exposed to these trade risks, all markets are likely to feel the repercussions of a global economic slowdown in the near term. Nevertheless, long-term growth prospects remain promising, fueled by the region's underpenetrated air travel market.
Exchange-rate volatility presents an additional challenge for Latin American carriers given their U.S. dollar-denominated expenses such as fuel and leases, as well as debt burdens and interest rates. Capital outflows may intensify in this uncertain environment, and the risk of declining commodity prices could lead to the depreciation of domestic currencies.
Our ratings on major players Aeroméxico and LATAM Airlines reflect improved operational performance and financial stability, and these companies have some headroom in their financial metrics. While these two face lower exchange-rate risk due to their large share of international business, they, particularly Aeroméxico, are more exposed to fluctuations in travel demand between the U.S. and Latin America. On the other hand, Azul is a mostly domestic player and is therefore largely insulated from the direct effects of trade tensions. It remains vulnerable, however, to currency depreciation or lower demand, for example, which could lead to unsustainable cash flows.
Amid Strong Global Air Passenger Traffic, Our Outlook Is Clouded
Global air passenger traffic reached record levels in 2024, with continued growth in leisure travel and increasing international travel. Many airlines built up ratings headroom during this period of strong growth. In our current base-case forecasts we typically assume ongoing industry-wide supply-chain issues (including air traffic control, aircraft/engines, and maintenance issues) will still support relatively stable fares (which remain on average 20%-30% up on 2019 levels on a nominal basis). However, we are closely monitoring pricing trends, as there have been some reports of recent fare cuts on U.S. inbound routes. We note that, since the pandemic, global unemployment levels have remained low, and spending on travel has typically held up well and appeared a priority for consumers. However, we now see greater downside risk to our base-case forecasts than we considered at the beginning of the year.
We think airlines that manage potentially more volatile costs and adapt to changing consumer preference--toward more premium leisure travel for example--will be somewhat more resilient to softer demand. Moreover, fuel prices, while unpredictable (and largely unhedged in the U.S. versus European and Latam players that typically hedge fuel and foreign currency) have eased and for now at least provide some margin relief. Labor shortages and new contracts across the industry have put upward pressure on labor costs. Other cost pressures have stemmed from longer routes imposed by airspace restrictions, increasing airport charges, and higher interest costs, although many carriers have significantly reduced debt following increased borrowing during the pandemic.
Widescale uncertainty remains as to how global trade conflicts might further evolve. Visibility is currently extremely limited given unprecedented, fast-changing trade policy announcements. Furthermore, events could evolve differently than in past cycles due to the structural changes that have occurred within the airline industry. For example, post-pandemic there is now somewhat less dependence on corporate travel, which tends to be affected early in a downturn. The premium leisure segment (typically very profitable for airlines) should continue to outperform others and may be more resistant to a downturn. Delta Airlines noted in its first-quarter 2025 earnings call that its premium, loyalty, and international business is continuing to show greater resilience than its main cabin sales.
Ratings headroom has returned, post-pandemic, as debt deleveraging has exceeded our expectations and airlines have recovered well. As a result, most ratings are at, or only one notch below, where they were pre-pandemic. However, ratings remain sensitive to relatively modest variations in our base-case assumptions, given the sector's typically high operating leverage, and therefore we assess industry risk as high. Unit costs are also now higher than pre-pandemic levels and fixed to a large degree. Furthermore, financing conditions have become more challenging globally and market volatility poses the most immediate credit risks, particularly for our lower rated airlines.
| Global airlines rated by S&P Global Ratings: speculative-grade ratings outnumber investment-grade ratings | ||||
|---|---|---|---|---|
| European airlines | ||||
| Ryanair Holdings PLC | BBB+/Stable | |||
| easyJet PLC | BBB/Positive | |||
| International Consolidated Airlines Group S.A. | BBB/Stable | |||
| British Airways PLC | BBB/Stable (bbb-) | |||
| Deutsche Lufthansa AG | BBB-/Stable | |||
| Air France-KLM S.A. | BB+/Stable | |||
| Finnair Oyj | BB+/Stable (bb-) | |||
| Turk Hava Yollari A.O. (Turkish Airlines) | BB/Stable (bb+) | |||
| Transportes Aereos Portugueses S.A. | BB-/Stable (b+) | |||
| Pegasus Hava Hasimaciligi A.S. | B+/Stable | |||
| Air Baltic Corp AS | B+/Stable (b-) | |||
| North American airlines | ||||
| Southwest Airlines Co. | BBB/Negative/-- | |||
| Delta Air Lines Inc. | BBB-/Stable/-- | |||
| Air Canada | BB/Stable/-- | |||
| United Airlines Holdings, Inc | BB/Stable/-- | |||
| Alaska Air Group Inc. | BB/Negative/-- | |||
| Rand Parent LLC (Atlas Air) | BB-/Stable/-- | |||
| American Airlines Group Inc. | B+/Stable/-- | |||
| Allegiant Travel Company | B+/Negative/-- | |||
| WestJet Airlines Ltd. | B/Stable/-- | |||
| JetBlue Airways Corporation | B-/Stable/-- | |||
| Spirit Airlines, LLC | CCC+/Stable/-- | |||
| Latin American airlines | ||||
| Latam Airlines Group S.A. | BB/Stable/-- | |||
| Grupo Aeromexico, S.A.P.I. de C.V. | B+/Stable/-- | |||
| Azul S.A. | CCC+/Positive/-- brBB+/Positive/-- | |||
| Ratings as of April 22, 2025. Note: Ratings in brackets are stand-alone credit profiles before group/government uplift. | ||||
Related Research
- Global Credit Conditions Special Update: Ongoing Reshuffling, April 11, 2025
- EETC Ratings Flying Higher For North American Airlines, March 12, 2025
- North American Airlines Patient Ahead Of Looming Debt Maturities, March 12, 2025
- Industry Credit Outlook 2025: Transportation, Jan. 14, 2025
- Transportation Companies Face Increasing Cyber Risks, Dec. 12, 2024
| Primary Contacts: | Rachel J Gerrish, CA, London 44-20-7176-6680; rachel.gerrish@spglobal.com |
| Jarrett Bilous, Toronto 1-416-507-2593; jarrett.bilous@spglobal.com | |
| Amalia E Bulacios, Buenos Aires 54-11-4891-2141; amalia.bulacios@spglobal.com |
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