air transport: performance, outlook and economic benefits · air transport: performance, outlook...

Airline Industry Economics Advisory Workshop 2016 1

Air transport: performance,

outlook and economic

benefits

Brian Pearce,

Chief Economist,

IATA

www.iata.org/economics

http://www.iata.org/economics


Connectivity is key to economic success

Source: SRS Analyser database direct routes to/from Germany May 2017


Ingredients for economic success

Connections to key cities and trading partners

…few delays

…cost-efficient for users

…frequencies that business need

…vital infrastructure for the economy

…generating flows of goods, people, investment, competition and ideas

…boosting non-inflationary economic growth potential

The industry has seen considerable success globally

Source: IATA Economic Performance of the Airline Industry, End-Year 2016 report

0.50

1.00

1.50

2.00

2.50

3.00

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

US$

/RTK

in 2

01

4U

S$

Nu

mb

er o

f u

niq

ue

city

-pai

rs

Unique city-pairs and real transport costs

Unique city-pair connections

Transport costs adjusted for inflation

But infrastructure costs have diverged


90

100

110

120

130

140

150

160

170

2000 2002 2004 2006 2008 2010 2012 2014 2016

Co

st/A

TK in

dex

ed t

o e

qu

al 1

00

in

20

00

Unit cost of infrastructure & airline non-fuel expenses

Unit cost of infrastructure use

Airline non-fuel unit cost

And delays are a big cost to Europe and Germany

Source: IATA Economics using data from SEO study on European Airspace Modernization

Germany would be a major beneficiary: • GDP up €45 billion • Jobs up 158,000 • Passengers +13 million

The wider economic situation is now improving

Source: IATA Economics using data from Markit

35

40

45

50

55

60

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

50

= n

o c

han

ge in

ou

tpu

t ex

pec

ted

Business confidence in developed and emerging economies

Developedeconomies

Emerging economies

Businesses and consumers more confident

Source: IATA Economics using data from Datastream

96

97

98

99

100

101

102

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Worldwide average consumer confidence

Donald Trump Vows to Rip Up

Trade Deals and Confront ChinaThe New York Times

28 June 2016

Perhaps surprisingly given political shocks

The IMF economic growth forecast may be right at last

Source: IMF World Economic Outlook databases

-3

-2

-1

0

1

2

3

4

5

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

IMF forecasts of global economic growth (using market exchange rates), % y-o-y

April 2013April 2014

April 2015April 2016

January 2017

Latest data point

But revival has not been because of monetary policy

Source: IATA Economics using data from Haver

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

0

1

2

3

4

5

6

7

8

9

10

1985 1990 1995 2000 2005 2010 2015

Bill

ion

US$

% in

tere

st r

ate

US federal funds target rate and balance sheet assets

US fed funds

US Federal Reserve Bank assets

Nor has the debt overhang been resolved

Source: Bank for International Settlement database

100

110

120

130

140

150

160

170

180

190

200

210

220

230

240

250

260

270

280

1999 2001 2003 2005 2007 2009 2011 2013 2015

% o

f G

DP

% o

f G

DP

Outstanding debt of non-financial sector, % of GDP

Developed economies

Developing economies

But fiscal policies recently became a stimulus to growth

Source: IATA Economics using data from the IMF World Economic Outlook

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

2011 2012 2013 2014 2015 2016 2017

Change in general government structural budget as % GDP

US Euro area China Tighter/ deflationary fiscal policy

Looser/ reflationary fiscal policy

Changes in trade competitiveness spread the recovery

Source: IATA Economics using data from the World Bank

60

70

80

90

100

110

120

130

140

2008 2009 2010 2011 2012 2013 2014 2015 2016

Real effective exchange rates

China

US

Germany

Brazil

Deteriorating competitiveness

Improving competitiveness

Economic growth converging and stronger overall

Source: IATA Economics using data from Oxford Economics

-8

-6

-4

-2

0

2

4

6

8

10

12

14

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

% c

han

ge v

ersu

s ye

ar a

go

Economic growth in key regions and countries

China

Brazil

United States

European Union

Giving a strong start to the year for European air cargo

Source: IATA Economics using data from IATA Statistics

-4.9%

3.4%

5.8%

10.5%

10.6%

11.8%

8.4%

-10.0% -5.0% 0.0% 5.0% 10.0% 15.0%

Freight tonne kilometres (% year-on-year) February 2017

Industry

Asia Pacific

Africa

Europe

N. America

Middle East

L. America

European air travel growth is also strong

Source: IATA Economics using data from IATA Statistics

1.7%

3.9%

5.4%

7.3%

9.5%

11.4%

7.0%

0% 2% 4% 6% 8% 10% 12% 14%

YTD Feb 2017

Revenue passenger kilometres (YTD, % year-on-year)

Industry

Middle East

Asia Pacific

Europe

Africa

L. America

N. America


But longer-term prospects look like relative decline

2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035

US

China

UK

Japan

Spain

Germany

India

Italy

France

Indonesia

China

US

India

UK

Indonesia

Japan

Spain

Germany

Brazil

Turkey



Air travel still has lots of potential to grow globally

2

3

4

5

6

7

8

9

2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034

Global O-D passenger journeys (billion)

Constant policies scenario

Reflation/open borders scenario

Pick-up in Protectionism scenario



But air trip frequency already high/mature in Germany

0 0.5 1 1.5 2 2.5 3 3.5 4

NigeriaIndia

EgyptChina

South AfricaIndonesia

BrazilMexico

Russian FederationColombia

ChileTurkey

ThailandJapan

Korea, Republic OfSaudi Arabia

GermanyFrance

ItalyUnited States

CanadaUnited Kingdom

SpainAustralia

Propensity to fly (total passengers/population)



And Germany’s demographics are poor

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%% change

The UN's projected change in population (2015-2035,%)

UN projections adjusted for demographic factors


Centre of gravity of air travel shifting away from Europe

Source: IATA Economics using data from PaxIS+

1914 2004 2015 2035


More is needed to preserve wider economic benefits

Connections to key cities and trading partners

…few delays

…cost-efficient for users

…frequencies that business need

…vital infrastructure for the economy

…generating flows of goods, people, investment, competition and ideas

…boosting non-inflationary economic growth potential


Including 1m high quality jobs and $85bn value added

Source: The Importance of Air Transport to Germany, 2017, IATA/Oxford Economics


BACK UP SLIDES


But airline profit margins are now being squeezed

Source: IATA using data from PaxIS+ and Haver

60

65

70

75

80

85

90

95

100

105

110

0

20

40

60

80

100

120

140

2011 2012 2013 2014 2015 2016 2017

Ind

exed

to

eq

ual

l 1

00

in J

nau

ary

20

11

US$

per

bar

rel

Airline passenger yield and crude oil prices, indexed

Oil price

Passenger yield


So airline industry profitability peaked a year ago

Source: IATA Economic Performance of the Airline Industry – end year 2016 report

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2011 2012 2013 2014 2015 2016 2017

EBIT

as

% r

even

ues

Quarterly profile for airline industry operating profits (EBIT)

Seasonally adjusted margins

Unadjusted margins

Airlines’ return on capital lower this year but still good


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

% o

f in

vest

ed c

apit

al

Return on capital invested in airlines

Cost of capital (WACC)

Return on capital (ROIC)


It’s partly fuel prices

Source: IATA Economics using data from Platts and IATA

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

2000 2002 2004 2006 2008 2010 2012 2014 2016

Jet

fuel

pri

ce, U

S$/b

arre

l

RO

IC, %

of

inve

sted

cap

ital

Airline industry ROIC and jet fuel prices

ROIC

Jet fuel price


But also better asset utilization relative to break-even

58

59

60

61

62

63

64

65

66

67

68

2000 2002 2004 2006 2008 2010 2012 2014 2016

% A

TKs

Breakeven and achieved weight load factor

Achieved LF

Breakeven LF



And airlines are trying to sweat their assets more

0.8

0.9

1.0

1.1

1.2

1.3

1.4

-6

-4

-2

0

2

4

6

8

10

2000 2002 2004 2006 2008 2010 2012 2014 2016

Cap

ital

pro

du

ctiv

ity,

rev

enu

e/in

vest

ed

cap

ital

, US$

Op

erat

ing

mar

gin

, % r

even

ue

Airlines' operating or EBIT margin and capital productivity

Capital productivity

Operating margin


But good airline profits driven almost entirely by US


-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

N America Europe Asia Pacific Midle East L America Africa

Net post-tax profit margins

2015 2016 2017

air transport: performance, outlook and economic benefits · air transport: performance, outlook...

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