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Lucrative year for airline industry; passenger demand to double over 20 years

Published on 26th Dec, Edition 52, 2016

 

The airline industry is expected to have its most lucrative year 2016 in history with global profits of almost $40 billion (£30 billion), driven by a combination of cheaper oil and fuller planes.

The International Air Transport Association (IATA) the trade body for airlines said its forecast for a fifth consecutive year of improving profits meant it was now a “normal business”, providing decent returns to investors after years of being propped up by wealthy backers and governments.

The forecast would mean a 12 percent rise in profits from last year to $39.4 billion with more than half of the total ($22.9 billion) made in North America. European airlines’ profits are expected to stay almost static at $7.5 billion, with demand dampened by terror attacks.

Speaking at IATA’s annual meeting in Dublin, the IATA Director General, Tony Tyler, said lower oil prices were helping, although tempered by hedging and exchange rates and he warned: “We are probably nearing the peak of the positive stimulus from lower prices.” But he said performance was being bolstered by “the hard work of airlines”. “Load factors are at record levels. New value streams are increasing ancillary revenues. And joint ventures and other forms of cooperation are improving efficiency and increasing consumer choice while fostering robust competition,” said Tyler. “Consumers are getting a great deal and investors are finally beginning to see the rewards they deserve.”

He sounded a note of caution about the profits: “It sounds a big number but it’s shared around hundreds of airlines and the industry has struggled with profitability. It means airlines should be taken seriously as business, but there are still challenges.”

Tyler said many airlines would still need years of profits to pay down debt and fix balance sheets, but things were now looking up after years of precarious finances, exacerbated by the 2008 financial crash. “Simply put, we are beginning to be a normal business.”

IATA said global airfares were due to fall by 7 percent this year, mirroring the fall predicted in Europe’s short-haul, low-cost sector by Ryanair last week.

Tyler said: “Consumers are getting a great deal and investors are finally beginning to see the rewards they deserve.”

However, some in the industry have voiced concern about the sustainability of the current boom, with demand pinned to lower average fares, or yields, made possible by cheap oil.

According to analysis from Iata, the industry’s growth comes in the face of sluggish global trade, which it normally mirrors.

Brian Pearce, the chief economist for Iata, said recent indicators were worrying. “Air travel appears to be defying economic gravity,” he said.

Bernard Gustin, the chief executive officer of Brussels Airlines, said: “Demand is strong and the profit margins are there, but we know when the [cost of] fuel goes back up we won’t be able to put [ticket prices back up], so we have to prepare for that.”

Jayne Hrdlicka, the chief executive of the Jetstar group of Australian and Asian low-cost airlines, admitted that the growing number of services could look irrational if the trend continued.

She said: “Capacity is growing ahead of underlying demand which is driving down yields … [but] costs are well managed. The industry went through a very difficult period when every discretionary dollar was being taken out of airlines, so we were as fit as we’d ever been and we got the benefit of the falling oil price.”

Although high fuel bills hobbled the industry for years, with Brent crude costing more than double the current $50 a barrel between 2011 and 2014, airlines at the premium end of the market said the lower oil price had also lost them custom.

Sir Tim Clark, chief executive of Emirates, said: “With oil prices going down, we all said ‘hallelujah’, but what we didn’t foresee is that the corporate segments that drive the upper echelons of the yield, such as [business flyers] in the oil and gas sector, also [travel less].”

Andrés Conesa, the chief executive of Aeromexico and chairman of IATA, said high profits were needed for a sustainable business and airports were still making higher margins than airlines.

IATA executives have in previous years called for airports to lower costs and charges, but unions for airport workers called on airlines to end the “race to the bottom”, publishing research showing that wages had declined while workload was increasing at many airports.

A report by Airports United found that airlines’ labour costs, such as ground handling, fell 5.5 percent last year, while profits boomed.

It warned: “Despite their strong financial performance, airlines have created a race to the bottom that is placing airport workers – and airport safety and service quality – under immense pressure.”

Around 80 percent of aviation revenue was controlled by airlines, which have demanded cheaper deals from airports. Airport workers from the US, Germany, the Netherlands and Sweden spoke outside the airlines’ summit in Dublin to highlight working conditions.

Josefine Dalby, 34, a security officer at Stockholm airport, said many of her colleagues had experienced ill health and stress, with more passengers to process and fewer staff. “We have a big responsibility but the wheels are turning faster and we are getting worn out.”

IATA’s Pearce said: “Labor costs are probably the biggest cost for many airlines after fuel.” He said productivity deals had helped ensure that “unit labour costs don’t get out of control.”

 

IATA forecasts passenger demand to double over 20 years

The International Air Transport Association (IATA) expects 7.2 billion passengers to travel in 2035, a near doubling of the 3.8 billion air travelers in 2016. The prediction is based on a 3.7 percent annual Compound Average Growth Rate (CAGR) noted in the release of the latest update to the association’s 20-Year Air Passenger Forecast.

“People want to fly. Demand for air travel over the next two decades is set to double. Enabling people and nations to trade, explore, and share the benefits of innovation and economic prosperity makes our world a better place,” said Alexandre de Juniac, IATA’s Director General and CEO.

The forecast for passenger growth confirms that the biggest driver of demand will be the Asia-Pacific region. It is expected to be the source of more than half the new passengers over the next 20 years.

China will displace the US as the world’s largest aviation market (defined by traffic to, from and within the country) around 2024.

India will displace the UK for third place in 2025, while Indonesia enters the TOP ten at the expense of Italy. Growth will also increasingly be driven within developing markets.

Over the past decade the developing world’s share of total passenger traffic has risen from 24 percent to nearly 40 percent, and this trend is set to continue.

The 20-year forecast puts forward three scenarios. The central scenario foresees a doubling of passengers with a 3.7 percent annual CAGR.

If trade liberalization gathers pace, demand could triple the 2015 level. Conversely, if the current trend towards trade protectionism gathers strength, growth could cool to 2.5 percent annual CAGR which would see passenger numbers reach 5.8 billion by 2035.

“Economic growth is the only durable solution for the world’s current economic woes. Yet we see governments raising barriers to trade rather than making it easier. If this continues in the long-term, it will mean slower growth and the world will be poorer for it. For aviation, the protectionist scenario could see growth slowing to as low as 2.5 percent annually. Not only will that mean fewer new aviation jobs, it will mean that instead of 7.2 billion travelers in 2035, we will have 5.8 billion. The economic impact of that will be broad and hard-felt,” said de Juniac.

Whatever scenario is eventually realized, growth will put pressure on infrastructure that is already struggling to cope with demand.

“Runways, terminals, security and baggage systems, air traffic control, and a whole raft of other elements need to be expanded to be ready for the growing number of flyers.

It cannot be done by the industry alone. Planning for change requires governments, communities and the industry working together in partnership,” said de Juniac.

The industry will also need to be able to grow sustainably. Earlier this month airlines supported the establishment of a Carbon Offset and Reduction Scheme for International Aviation (CORSIA).

This landmark agreement—the first among governments to manage the emissions growth of an entire global industrial sector—aims to cap net emissions with carbon neutral growth from 2020.

“Aviation is at the forefront of industries in managing its carbon footprint. Along with offsetting emissions through CORSIA, airlines are working with partners in industry and government to advance technology, improve operations and GENERATE more efficiency in infrastructure,” said de Juniac.

The five fastest-growing markets in terms of additional passengers per year over the forecast period will be China (817 million new passengers for a total of 1.3 billion). US (484 million new passengers for a total of 1.1 billion). India (322 million new passengers for a total of 442 million). Indonesia (135 million new passengers for a total of 242 million). Vietnam (112 million new passengers for a total of 150 million).

The TOP ten fastest-growing markets in percentage terms will be in Africa: Sierra Leone, Guinea, Central African Republic, Benin, Mali, Rwanda, Togo, Uganda, Zambia and Madagascar.

Each of these markets is expected to grow by more than 8 percent each year on average over the next 20 years, doubling in size each decade.

Routes to, from and within Asia-Pacific will see an extra 1.8 billion annual passengers by 2035, for an overall market size of 3.1 billion. Its annual average growth rate of 4.7 percent will be the second-highest, behind the Middle East. The North American region will grow by 2.8 percent annually and in 2035 will carry a total of 1.3 billion passengers, an additional 536 million passengers per year.

Europe will have the slowest growth rate, 2.5 percent, but will still add an additional 570 million passengers a year. The total market will be 1.5 billion passengers.

Latin American markets will grow by 3.8 percent, serving a total of 658 million passengers, an additional 345 million passengers annually compared to today’s standing.

The Middle East will grow strongly (4.8 percent) and will see an extra 244 million passengers a year on routes to, from and within the region by 2035. The UAE, Qatar and Saudi Arabia will all enjoy strong growth of 5.9 percent, 4.7 percent, and 4.1 percent respectively. The total market size will be 414 million passengers.

Africa will grow by 5.1 percent. By 2035 it will see an extra 192 million passengers a year for a total market of 303 million passengers.

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