challenges of high growth: global aviation outlook · source: mckinsey . is the problem a result of...

To represent, lead and serve the airline industry

Challenges of high growth: Global aviation outlook Brian Pearce, Chief Economist www.iata.org/economics

http://www.iata.org/pax-forecast

Challenges of high growth

• Meeting demand for air travel

• Attracting capital

• Wider economic benefits

• Climate impacts

IATA Economics www.iata.org/economics 2

http://www.iata.org/economics

Demand for air travel to double over 20 years

IATA Economics www.iata.org/pax-forecast 3

Source: IATA/Tourism Economics ‘Air Passenger Forecasts’

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2014 2019 2024 2029 2034

Outlook for worldwide O-D passenger trips, million

2014-2034

1.8-2.8x growth

2.3-5 billion additional O-D passenger trips

Currentpolicies

Liberalpolicies scenario

Closing borders scenario




Largest rise in numbers forecast in China



-200

-100

0

100

200

300

400

500

600

700

800

900

-200

-100

0

100

200

300

400

500

600

700

800

900

Drivers of additional passenger numbers, million

Living standards Demographics Price and other Overall growth




Living standards are one key driver


0.00

0.01

0.10

1.00

10.00

0 10 20 30 40 50 60 70 80 90 100 110 120

Flig

hts

per

cap

ita*

(2

01

3, l

oga

rith

mic

sca

le)

GDP per capita (2013, US$ '000s)

China

USA

UK Luxembourg

Norway

Qatar

AustraliaSwitzerland

Sweden

SingaporeHong Kong Iceland

BahamasMaldives

Seychelles

Uganda

FranceJapan

Russia

Brazil

New Zealand





Countries becoming ‘middle’ or ‘high’ income






Demographic change dramatically different



-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

India Indonesia Turkey US Brazil France China Germany Japan Russia

% c

han

ge 2

01

4-2

03

4

Demographic change, 2014-2034

Population change

'Flying' population change




Emerging market population much younger


0

10

20

30

40

50

60

2014 2019 2024 2029 2034

Old-age dependency ratio, % (65+/15-64)

Japan

Germany

US

China

Brazil

Turkey

Indonesia

India



Trend in cost of travel is still downwards


0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1970 1980 1990 2000 2010

US

$ in 2

013 p

rices p

er

tonne k

ilom

ete

r

US

$ in 2

013 p

rices to fly

a t

onne k

ilom

ete

r

Unit cost and the price of air transport, adjusted for inflation

Price (US$/RTK)

Unit cost (US$/ATK)





Scope for lower fares on a number of markets


0.05

0.07

0.09

0.11

0.13

0.15

0.17

0.19

0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000

Pass

enge

r yi

eld

s, U

S$ p

er R

PK

Average trip length (kms)

Passenger yields and average trip length

Within Africa

Within South America

Within ASEAN

WithinEurope

Middle East-rest of world

ASEAN-Europe

North Atlantic

Pacific

North-South America

Within East Asia

ASEAN-Africa

China-North America

ASEAN-North America

ASEAN-E Asia

Europe-Australia





Resulting in much change over next 20 years


0

1

2

3

4

5

6

7

8

9

10

0

1

2

3

4

5

6

7

8

9

10

20

13

20

14

20

15

20

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20

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20

18

20

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20

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20

22

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20

25

20

26

20

27

20

28

20

29

20

30

20

31

20

32

20

33

20

34

US

China

UK

Japan

Germany

Spain

France

Italy

India

Brazil

2013 rank 2034 rank

China

US

India

UK

Brazil

Indonesia

Spain

Germany

Japan

France


Rank by size of O-D passenger flows in, out & within country




Trans-Pacific

a 43m 83m

952m 2,541m

618m 1,003m

Trans-Atlantic

a

63m 110m

Passenger journeys by route (2014 & 2034, million)

542m 1,007m

North-South America

a

20m 44m

2014 passenger flow 2034 passenger flow

Within Asia-Pacific

Within Europe Within North America


Trans-Pacific

+40m 3.3%

+1,589m 5.0%

Within Asia-Pacific

+386m 2.5%

Within Europe

Trans-Atlantic

+48m 2.9%

Legend: +123m = the additional number of annual passenger journeys by 2034 (example) 5.0% = the corresponding average annual growth rate (2014-2034)

Growth and change in passenger journeys by route (% and million, 2014-2034)

+465m 3.1%

Within North America

North-South America

+20m 4.0%






• Climate impacts



Airlines will need to raise $5 trillion capital


Source: Boeing current market outlook


Airlines are not most attractive to investors!


Industry

Industry median ROIC, without goodwill

Percent

1 ROIC after tax, excluding goodwill; For charting purposes, ROIC values are cut off if beyond (-5%, 50%)

0 5 10 15 20 25 30 351965 – 2007 Average

1st

quartile

3rd

quartile

Median

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

Source: McKinsey


Is the problem a result of liberalization?


Source: IATA, ICAO

-6%

-4%

-2%

0%

2%

4%

6%

8%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Airline industry profit margin, after debt interest and tax

Average0.2%

After liberalization


Is the problem a lack of scale?


-

5

10

15

20

25

-10% -5% 0% 5% 10% 15% 20% 25%

Ave

rage

inve

sted

cap

ital

(IC

), $

bill

ion

Return on invested capital (ROIC), % of IC

Average invested capital and return on capital 1997-2011

Delta

United

American

ANA

AF-KLM

BALufthansa

Emirates

Ryanair

Allegiant

LAN

JAL

EasyjetCOPA

SIA

Qantas

Aerolineas

Malaysian

Source: IATA, McKinsey


Is the problem legacy business models?


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2004 2005 2006 2007 2008 2009 2010 2011

% in

vest

ed c

apit

al

ROIC for worldwide average legacy and LCCs versus WACC

ROIC 'LCCs'

ROIC 'Legacy'

WACC



Is the problem with airlines’ supply chain?


0

5

10

15

20

25

30Return on invested capital in the air transport value chain, 2002-2009

ROIC WACC



Supplier ‘excess’ profit not large in $ terms



-0.6

Trav

el

agen

ts

CR

S

0.5

Air

lines

-17.0

AN

SP

0.7

Air

po

rts

-3.7

Cat

erin

g

0.2

Gro

un

dh

and

ling

0.5

MR

O

0.3

Less

ors

Frei

ght

Forw

ard

ers

-16.0-18.0

Tota

l

1.3

-0.2

Man

ufa

ctu

rers


Costs typically passed through to prices


-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1950 1960 1970 1980 1990 2000 2010

US

$ in 2

013 p

rices p

er

tonne k

ilom

ete

r

US

$ in 2

013 p

rices to fly

a t

onne k

ilom

ete

rUnit cost and the price of air transport

Price(US$/RTK)

Unit cost(US$/ATK)

US deregulation

EU deregulation

Boeing 707

1973 oil crisis



In fact yields have fallen faster than unit costs


45%

50%

55%

60%

65%

70%

1970 1975 1980 1985 1990 1995 2000 2005 2010

% A

TK

s

Breakeven and actual load factors

Breakeven load factor

Load factor achieved

+15%points

Source: IATA, ICAO


Inadequate returns on invested capital



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

% o

f in

vest

ed c

apit

al

Return on capital invested in airlines

Cost of capital (WACC)

Return on capital (ROIC)






• Climate impacts



This is aviation’s unique economic benefit


Source: SRS Analyser


City-pairs doubled – transport costs halved


Source: IATA, ICAO, OAG

0.5

1

1.5

2

2.5

3

3.5

4

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1994 1997 2000 2003 2006 2009 2012

US$

/RTK

in 2

01

4U

S$

Nu

mb

er o

f u

niq

ue

cit

y-p

airs

Unique city-pairs and real air transport costs

Unique city-pairs

Real air transport costs


Global Value Chains


Source: ATAG


How do we measure air connectivity?


0.00 1.00 2.00 3.00 4.00 5.00 6.00

MaldivesSt. LuciaFijiAntigua and Barbuda

SeychellesJamaicaGrenada

BarbadosVanuatu

MauritiusSingapore

Dominican Republic

US

Spain

Trinidad and Tobago

Norway

UK

GermanyChinaBrazil

South Korea

Solomon Islands

Papua New Guinea

Nigeria

Poland

IATA air connectivity measure, seats to weighted destinations as % GDP

Source: IATA, World Bank, SEO






• Climate impacts



CO2 up despite strong efficiency gains


0

50

100

150

200

250

300

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Ind

exed

to

eq

ual

10

0 in

19

94

Worldwide RTKs, CO2 and fuel efficiency

RTKs2.7x

CO2

1.5x

Fuel use/RTK0.4x

Source: IATA, Datastream


Carbon neutral growth policy key for aviation


450

550

650

750

850

950

1050

1150

20 000

25 000

30 000

35 000

40 000

45 000

50 000

55 000

60 000

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035

Avi

atio

n C

O2

, mill

ion

to

nn

es

Glo

bal

CO

2 f

rom

fu

el b

urn

, mill

ion

to

nn

es

Global vs aviation CO2 emissions

Aviation CO2 after pillar 1-3 measures, inc. 12% biofuels+2.5% p.a.

Currentclimate policies+1.4% pa

New policies+0.7% pa

450ppm scenario-1.7% pa

Source: IEA 2013 World Energy Outlook, IATA Aviation Carbon Model


But further cost-effective CO2 cuts possible


215 million tonnes CO2 cuts cost-effective in 2030

Source: McKinsey, IATA




– 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


– $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


– 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



challenges of high growth: global aviation outlook · source: mckinsey . is the problem a result of...

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