Air Travel Industry: A Real-World Proof Of A Growing Economy

For the most, analysts want you to believe that the economy isn’t growing. And the fact that the Fed didn’t say in particular when it would hike interest rates in its last press briefing further strengthens the believe that the economy is struggling. At such a time, I believe it would help if investors would look around for more hands-on metrics – things that feel realer than GDP and unemployment metrics – to judge the state of the economy. After all, if the stories that financial metrics tell are true, then we should see evidences all around us. The air travel industry is one place to look. I touch on this in my last article, but we're going deeper here.

For the record, transportation is one of the pillars of any economy. When the economy is growing, it is inherent that transportation demand will be on the up, since growth is naturally unachievable without movement. On the other hand, when the economy is struggling or regressing or in recession, the demand for transportation will decline. And for a sophisticated economy like US, the air travel space would always be a pointer to the state of the economy. That said, here are two ways the air travel space is showing that the economy is heading north.

Improving air traffic

The first quarter of this year quite tells the entire story of the growth of the economy. For the record, the first quarter is traditionally the weakest in any given year. However, airlines posted record results for the quarter, most of which broke the records set during the first quarter of last year.


Source: travel.trade.gov

The chart above looks at international travel data to and from the US. As it says, US international air traffic during the first quarter was up five percent year-over-year. In 2014, US domestic traffic was up 1.7 percent. The above is a result of one of two things – or both. First, more people had reasons to take to the sky for business reasons. Second, more people can afford travelling for leisure. One sure thing is that both of these scenarios indicate a positive vibe in the economy.

Like I said in my last article, another pointer that the US economy is growing is a recent report from IATA, forecasting record profit in 2015 owing to strong US economy. IATA says the airline industry will report about $29.3 billion in net income in 2015, with about $15.7 billion coming from North America. This is somewhat echoed by Airline for America’s (A4A) prediction that the US will see the highest summer air traffic since 2007 in 2015. A4A also said a growing economy is behind the excepted growth.

Improving air freight volume

Air freight volume is also on the up. Global air cargo rose 4.5 percent in 2014, according to JJL, forecasting a 5 percent increase in 2015. In the US, total air cargo revenue ton-miles – one ton of revenue cargo (freight or mail) carried for one mile – went up 7.36% in the first quarter of 2015, according to figures from Bureau of Transportation Statistics. In 2014, total air cargo revenue ton-miles went up 5.19 percent on 2013 figures, the first improvement since the recession.

Since air freight is mostly used for time-sensitive and high-value goods, improving air freight volume suggests that people and businesses are dealing with more sophisticated goods -- compared to the recession period. It wouldn’t be wrong to say a favorable economic landscape makes this possible. Moreover, you have to consider that the air freights usually cost more than ocean freights, a pointer to improved spending power on the part of businesses and individuals.

The growth in air freight has also led to increased real estate investments in areas surrounding the airport, with O’Hare Airport leading on this front. This again implies a positive vibe about the economy, as this kind of investment hardly performs in a declining economy.

By the way, the real estate space also gives a real world proof of a growing economy, which will be the focus of my next article. In brief, though, the fact that distressed home inventories are on the decline across US – according to RealtyTrac – also points to an improving economy. The simple reason is that decreasing distressed homes inventories suggests that consumers are doing well with their mortgages, which signals a favorable economic landscape. Atlanta, which has been the fastest growing real estate market in the past year, is testament to this trend, with distressed home sales in the three months to May in the City accounting for 11.8 percent of the overall sales, down from 22.3 percent. I’ll go into details in the next article.

Investor takeaway

While analysts are trying to interpret the interest hike delay to mean a struggling economy, the air travel industry actually says the economy is improving. I believe that the rate hike delay is more linked to a target the Fed has set for itself, which it is yet to attain, rather than a sign that the economy is struggling. In fact, investors need to be aware that the Janet Yellen-led Fed is focused on improving labor market conditions to a certain level before raising rates. So the most possible reason for the rate hike delay is that the labor market isn’t yet at the level it wants. This doesn’t mean the economy isn’t improving.