- Oil and jet fuel prices are an important component in airline operating costs, with their relatively low levels playing a large part in the improved airline profitability during the period. Airlines had an operating result of $58.3 billion in 2016. In the short to medium term, forecasts suggest that oil and jet fuel prices will recover over time, although may not reach the peak levels of the past.
- Passenger traffic grew impressively again in 2016, with 6.3% year over year growth, supporting an increase in the passenger fleet of aircraft over 100 seats to over 19,000 aircraft, and also supporting record levels of deliveries from the manufacturers.
- At time of writing, leading indicators for the industry remain positive, with aircraft more productive and the share of stored aircraft in the fleet continuing to fall. Combined with record load factors all are positive signs that supply and demand are currently well balanced and that the airlines and fleet continue to operate more efficiently.
Whilst GDP remains an important driver for air transport, it is not the only factor that drives air traffic growth. In its traffic forecast, Airbus uses as many as 15 different explanatory variables:
- Private Consumption
- Working Age Population
- Crude Oil Price
- Labor Force
- Imports/ Exports
- Domestic Investment
- Disposable Personal income
- Total Population
- Government Consumption Industrial Production Index
- Urban Population
- Industrial Production Index
- Fixed Investment
- Employment Nominal Chango in Inventory.
By examining some real world examples, it can be seen how these drivers can shape and influence markets, and will ultimately determine what characteristics such as range and size will be delivered in the future by manufacturers:
THE TRANS-ATLANTIC EXAMPLE
- The trans-Atlantic market is a good example of how several drivers can stimulate growth even on a market which is considered mature. In fact, this market has grown 50% in the last 15 years.
- Whilst many of the routes have their origins at the start of the air transportation era, significant growth was enabled by bi-lateral agreements on both sides of the Atlantic. A second period of growth has been enabled by economic growth in both the US and Europe where real GDP has grown ~30% in the last 20 years, but also as new business models like the Low-Cost Carriers (LCCs) have entered the market.
- Taking the London New York route as an example, origin and destination traffic has grown by 25% in the last 3 years. In the first half of 2016, low cost carriers transported 7% of the passengers.
- Interestingly the incumbent carriers and alliances have also grown the number of passengers they are carrying.
- These additional passengers, at least in part, have chosen to travel due to the lower prices on offers, which have also resulted in lower yields and a greater focus on operational efficiency and equipment by the airlines in recent years.
LIBERALISATION & TOURISM
- As well as growth on existing routes, positive political activity between states can also lead to growth, due to the fact that organic growth has been constrained. Two recent examples are Iran and Cuba.
- Already the agreement with Iran has led to more capacity being added from 2015 to 2016, with 10% more international capacity being added, with double digit growth to many destinations.
- The Iranian government would like to grow tourism, another key driver for aviation growth. Reports have stated that they would like to grow the number of tourism arrivals from 4.8 million in 2014, to 20 million by 2025.
- Already today, tourism infrastructure is being built with three new hotels opening in Tehran since 2015. One major hotel chain’s CEO has said given the size of population and economy he sees capacity for a hundred hotels for their chain alone.
- Cuba is another example where improving geo-politics has allowed for enhanced air links with ten US airlines starting operations in 2016, and more than 300,000 monthly seats offered today, twice that offered in 2008. Market dynamics will continue to evolve as airlines match capacity to demand, infrastructure for visitors to the island develop and as geo-politics in the region evolves further.
- Aviation mega-cities are an important component of the world’s aviation network today and will be a more important part in the future. It is no surprise therefore that Euromonitor data published in 2017, show all but one of the top ten cities in 2015, by visitor numbers is either an Aviation Mega-city today, or in the future.
Source: Airbus Global Market Forecast 2017-2026, 2017.
Tuesday Aug 15, 2017