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Trump tax reform to spur competition on transatlantic routes


US President Donald Trump's tax reforms could shake up the transatlantic air-travel market in the mid- to long-term by giving US carriers some extra lift in a lucrative segment where competition with European and Middle East rivals is increasingly fierce.

"Tax cuts and investment stimulus might be a game changer in the mid- to long-term," says Sebastian Zank, director at Scope Ratings. The three large US carriers together generate more than USD 15bn per annum on transatlantic routes. For the U.S. carriers, these flights are responsible for 15% to 20% of revenue, similar to European rivals or 70% for niche player Virgin Atlantic.

The Trump reforms now promise a double boost for the US sector, at least in the medium term.

The corporate tax reform cut promises significant theoretical savings. For Delta, American Airlines and United, plus the domestically focused Southwest, Scope estimates the amount at around $500m to $1bn a year. In the short-term, only smaller US carriers will benefit, as the three carriers with intercontinental routes have carried forward tax losses.

Secondly, Trump's investment-friendly reforms are particularly attractive for companies which spend large sums on big-ticket items like passenger aircraft. Aircraft purchases can now be expensed immediately rather than depreciated over several years.

Delta, AA and United could use the tax benefits to enhance their transatlantic market position in two ways: Cut fares and buy new planes.

While a near-term transatlantic price war isn't likely as the full benefit of the tax cuts will kick in after existing net operating loss carryforwards have been used, having more room to lower fares could be a welcome longer-term boost for the US airlines. They face new no-frills, low-price competitors such as Norwegian, WOW and Air Europa, as well as hybrid operators like Air France's Joon, IAG's LEVEL and Lufthansa’s Eurowings.

The US carriers also need new aircraft. “Long-haul US airlines also have among the oldest fleets after years of eschewing heavy investment in new planes, certainly relative to many foreign rivals. They now have more leeway to upgrade their fleets with more economical and comfortable jets,” says Zank.

Any loss of competitiveness for European airlines - in terms of transatlantic market share, shrinking load factors, or thinner margins-could put pressure on their own balance sheets.

Even if US carriers opt instead for more generous cash returns to shareholders, the sector looks better braced for future shocks, such as spikes in oil prices. For that reason alone, Trump's fiscal reforms hold the promise of clearer skies for a notoriously turbulent part of the US economy.

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