Challenges of high growth:
Global aviation outlook
Brian Pearce, Chief Economist
www.iata.org/economics
To represent, lead and serve the airline industry
Challenges of high growth
•
•
•
•
Meeting demand for air travel
Attracting capital
Wider economic benefits
Climate impacts
IATA Economics www.iata.org/economics
2
Demand for air travel to double over 20 years
Outlook for worldwide O-D passenger trips, million
9,000
Liberal
policies
scenario
8,000
2014-2034
7,000
Current
policies
6,000
1.8-2.8x growth
2.3-5 billion
additional O-D
passenger trips
5,000
Closing
borders
scenario
4,000
3,000
2,000
2014
2019
2024
2029
2034
Source: IATA/Tourism Economics ‘Air Passenger Forecasts’
IATA Economics www.iata.org/pax-forecast
3
Largest rise in numbers forecast in China
Drivers of additional passenger numbers, million
900
800
900
Living standards
Demographics
Price and other
Overall growth
800
700
700
600
600
500
500
400
400
300
300
200
200
100
100
0
0
-100
-100
-200
-200
Source: IATA/Tourism Economics ‘Air Passenger Forecasts’
IATA Economics www.iata.org/pax-forecast
4
Living standards are one key driver
10.00
Maldives
Bahamas
New Zealand
Hong Kong
Flights per capita* (2013, logarithmic scale)
Seychelles
Iceland
Singapore
Australia
UK
Brazil
1.00
USA
Switzerland
Norway
Luxembourg
Sweden
Qatar
Japan France
Russia
China
0.10
0.01
Uganda
0.00
0
10
20
40
50
60
70
80
GDP per capita (2013, US$ '000s)
Source: IATA/Tourism Economics ‘Air Passenger Forecasts’
IATA Economics www.iata.org/pax-forecast
30
90
100
110
120
5
Countries becoming ‘middle’ or ‘high’ income
Source: IATA/Tourism Economics ‘Air Passenger Forecasts’
IATA Economics www.iata.org/pax-forecast
6
Demographic change dramatically different
Demographic change, 2014-2034
25%
Population change
20%
'Flying' population change
15%
% change 2014-2034
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
India
Indonesia Turkey
US
Brazil
France
China Germany Japan
Russia
Source: IATA/Tourism Economics ‘Air Passenger Forecasts’
IATA Economics www.iata.org/pax-forecast
7
Emerging market population much younger
Old-age dependency ratio, %
(65+/15-64)
60
Japan
Germany
50
40
US
30
China
Brazil
20
Turkey
Indonesia
India
10
0
2014
2019
2024
2029
2034
Source: IATA/Tourism Economics ‘Air Passenger Forecasts’
IATA Economics www.iata.org/economics
8
Trend in cost of travel is still downwards
Unit cost and the price of air transport, adjusted for inflation
1.5
1.4
2.6
1.3
2.4
1.2
2.2
Unit cost (US$/ATK)
1.1
2.0
1.0
1.8
Price (US$/RTK)
0.9
1.6
0.8
1.4
0.7
1.2
0.6
1.0
0.5
0.8
1970
1980
1990
2000
US$ in 2013 prices per tonne kilometer
US$ in 2013 prices to fly a tonne kilometer
2.8
2010
Source: IATA/Tourism Economics ‘Air Passenger Forecasts’
IATA Economics www.iata.org/pax-forecast
9
Scope for lower fares on a number of markets
Passenger yields and average trip length
0.19
Passenger yields, US$ per RPK
0.17
Within Africa
Within South America
Within East Asia
Within ASEAN
0.15
0.13
0.11
Within
Europe
0.09
North-South
America
ASEANE Asia
Pacific
Middle Eastrest of world
0.07
North
Atlantic
China-North America
ASEAN-North America
ASEAN-Africa
EuropeAustralia
ASEAN-Europe
0.05
0
2,000
4,000
6,000
8,000
10,000
12,000
Average trip length (kms)
14,000
16,000
18,000
Source: IATA/Tourism Economics ‘Air Passenger Forecasts’
IATA Economics www.iata.org/pax-forecast
10
Resulting in much change over next 20 years
Rank by size of O-D passenger flows in, out & within country
0 rank
2013
0
2034 rank
1
1
China
China
2
2
US
UK
3
3
India
Japan
4
4
UK
Germany 5
5
Brazil
Spain
6
6
Indonesia
France
7
7
Spain
Italy
8
8
Germany
India
9
9
Japan
Brazil
10
10
France
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
US
Source: IATA/Tourism Economics ‘Air Passenger Forecasts’
IATA Economics www.iata.org/pax-forecast
11
Passenger journeys by route (2014 and 2034, million)
Within North America
Within Europe
542m
1,007m
Trans-Pacific 43m
a
952m
2,541m
Within Asia-Pacific
83m
618m
1,003m
Trans-Atlantic 63m
a
110m
North-South 20m
America
44m
a
2014 passenger flow
2034 passenger flow
Growth and change in passenger journeys by route (% and million, 2014-2034)
Within North America
Within Europe
+465m
3.1%
Trans-Atlantic
Trans-Pacific
+1,589m
5.0%
Within Asia-Pacific
+48m
2.9%
+40m
3.3%
North-South
America
+20m
4.0%
Legend: +123m = the additional number of annual passenger journeys by 2034
(example) 5.0% = the corresponding average annual growth rate (2014-2034)
+386m
2.5%
Challenges of high growth
•
•
•
•
Meeting demand for air travel
Attracting capital
Wider economic benefits
Climate impacts
IATA Economics www.iata.org/economics
14
Airlines will need to raise $5 trillion capital
Source: Boeing current market outlook
IATA Economics www.iata.org/economics
15
Airlines are not most attractive to investors!
1st
quartile
Median 3rd
quartile
Industry median ROIC, without goodwill
Percent
1965 – 2007 Average
Industry
Pharmaceuticals
Software
IT Services
Beverages
HH & Personal Products
Apparel Retail
Broadcasting
Restaurants
Health Care Equipment
Computers & Peripherals
Food Products
Machinery
Chemicals
Movies & Entertainment
Aerospace & Defense
Auto Components
Building Products
Energy Equipment & Services
Health Care Facilities
Integrated Oil & Gas
Department Stores
Trucking
Construction Materials
Metals & Mining
Paper Packaging
Paper & Forest Products
Integrated Telecom
Electric Utilities
Airlines
1 ROIC after tax, excluding goodwill; For charting purposes, ROIC values are cut off if beyond (-5%, 50%)
Source: McKinsey
IATA Economics www.iata.org/economics
16
Is the problem a result of liberalization?
Airline industry profit margin, after debt interest and tax
8%
After liberalization
6%
4%
2%
Average
0.2%
0%
-2%
-4%
-6%
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Source: IATA, ICAO
IATA Economics www.iata.org/economics
17
Is the problem a lack of scale?
Average invested capital and return on capital 1997-2011
Average invested capital (IC), $ billion
25
-10%
Delta
United
American
20
ANA
AF-KLM
15
JAL
10
Lufthansa
BA
SIA
Emirates
Qantas
5
Malaysian
Aerolineas
-5%
0%
Source: IATA, McKinsey
IATA Economics www.iata.org/economics
LAN
Ryanair
Easyjet
COPA
5%
10%
15%
Return on invested capital (ROIC), % of IC
Allegiant
20%
25%
18
Is the problem legacy business models?
ROIC for worldwide average legacy and LCCs versus WACC
9%
8%
WACC
% invested capital
7%
6%
ROIC 'LCCs'
5%
ROIC 'Legacy'
4%
3%
2%
1%
0%
2004
2005
2006
2007
2008
2009
2010
2011
Source: IATA, McKinsey
IATA Economics www.iata.org/economics
19
Is the problem with airlines’ supply chain?
30
Return on invested capital in the air transport value chain, 2002-2009
25
ROIC
WACC
20
15
10
5
0
Source: IATA, McKinsey
IATA Economics www.iata.org/economics
20
Supplier ‘excess’ profit not large in $ terms
-0.6
-0.2
0.3
0.5
0.2
-3.7
0.7
-17.0
IATA Economics www.iata.org/economics
Total
Travel
agents
CRS
Airlines
ANSP
Airports
Catering
Groundhandling
MRO
Lessors
Manufacturers
Source: IATA, McKinsey
Freight Forwarders
1.3 -16.0-18.0
0.5
21
Costs typically passed through to prices
Unit cost and the price of air transport
4.0
7.0
3.5
6.0
3.0
5.0
1973
oil
crisis
2.5
4.0
US deregulation
2.0
3.0
1.5
EU deregulation
Unit cost
(US$/ATK)
1.0
2.0
1.0
0.5
US$ in 2013 prices per tonne kilometer
US$ in 2013 prices to fly a tonne kilometer
Boeing 707
Price
(US$/RTK)
0.0
1950
1960
1970
1980
1990
2000
2010
Source: IATA/Tourism Economics ‘Air Passenger Forecasts’
IATA Economics www.iata.org/economics
22
In fact yields have fallen faster than unit costs
Breakeven and actual load factors
70%
Load factor achieved
65%
% ATKs
60%
Breakeven load factor
55%
+15%
points
50%
45%
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: IATA, ICAO
IATA Economics www.iata.org/economics
23
Inadequate returns on invested capital
Return on capital invested in airlines
10.0
9.0
Cost of capital (WACC)
8.0
% of invested capital
7.0
6.0
5.0
4.0
Return on capital
(ROIC)
3.0
2.0
1.0
0.0
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Source: IATA, McKinsey
IATA Economics www.iata.org/economics
24
Challenges of high growth
•
•
•
•
Meeting demand for air travel
Attracting capital
Wider economic benefits
Climate impacts
IATA Economics www.iata.org/economics
25
This is aviation’s unique economic benefit
Source: SRS Analyser
IATA Economics www.iata.org/economics
26
City-pairs doubled – transport costs halved
Unique city-pairs and real air transport costs
4
16,000
Unique city-pairs
14,000
3.5
3
12,000
2.5
10,000
8,000
2
6,000
Real air transport costs
4,000
1.5
US$/RTK in 2014US$
Number of unique city-pairs
18,000
1
2,000
-
0.5
1994 1997 2000 2003 2006 2009 2012
Source: IATA, ICAO, OAG
IATA Economics www.iata.org/economics
27
Global Value Chains – diversification and development
An opportunity for SIDS?
Source: ATAG
IATA Economics www.iata.org/economics
28
How do we measure the degree of air connectivity?
IATA air connectivity measure, seats to weighted destinations as % GDP
Poland
Nigeria
Papua New Guinea
Solomon Islands
South Korea
Brazil
China
Germany
UK
Norway
Trinidad and Tobago
Spain
US
Dominican Republic
Singapore
Mauritius
Vanuatu
Barbados
Grenada
Jamaica
Seychelles
Antigua and Barbuda
Fiji
St. Lucia
Maldives
0.00
1.00
2.00
3.00
4.00
5.00
6.00
Source: IATA, World Bank, SEO
IATA Economics www.iata.org/economics
29
Challenges of high growth
•
•
•
•
Meeting demand for air travel
Attracting capital
Wider economic benefits
Climate impacts
IATA Economics www.iata.org/economics
30
CO2 up despite strong efficiency gains
Worldwide RTKs, CO2 and fuel efficiency
300
RTKs
2.7x
Indexed to equal 100 in 1994
250
200
CO2
1.5x
150
100
Fuel use/RTK
0.4x
50
0
1994
1996
Source: IATA, Datastream
1998
IATA Economics www.iata.org/economics
2000
2002
2004
2006
2008
2010
2012
2014
31
Carbon neutral growth policy key for aviation
Global vs aviation CO2 emissions
60 000
50 000
1050
Current
climate
policies
+1.4% pa
45 000
40 000
New
policies
+0.7% pa
35 000
950
850
750
650
30 000
450ppm
scenario
-1.7% pa
25 000
20 000
Aviation CO2, million tonnes
55 000
Global CO2 from fuel burn, million tonnes
1150
Aviation CO2 after pillar 1-3
measures, inc. 12% biofuels
+2.5% p.a.
550
450
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
Source: IEA 2013 World Energy Outlook, IATA Aviation Carbon Model
IATA Economics www.iata.org/economics
32
But further cost-effective CO2 cuts possible
215 million tonnes CO2
cuts cost-effective in
2030
Source: McKinsey, IATA
IATA Economics www.iata.org/economics
33
Challenges of high growth
• Meeting demand for air travel
– OD pax flows on US markets likely to double in next 20 years
– Fastest growth on N-S American and trans-Pacific markets
– Largest increase in numbers within N America and trans-Atlantic
• Attracting capital
– $5 trillion new capital needed by airlines over 20 years but returns inadequate
– Mergers/JVs driven by network economics and the need to pay capital providers
• Wider economic benefits
– Connecting US to markets/cities worldwide is the unique economic value
– Bigger markets, access to efficient resources, specialization, competition
– How does a measure of connectivity best capture this (generalized costs?)?
• Climate impacts
– One of best fuel efficiency improvement records of all industries
– But success with Carbon Neutral Growth policy will more surely enable growth
– ATM improvements can offer some of the largest cost-effective CO2 reductions
IATA Economics www.iata.org/economics
34