Air transport demand continues to soar but headwinds threaten to throw it off course
People are becoming wealthier and moving closer to cities with convenient access to air transport hubs, two key structural elements that will result in an increased propensity to travel. But aviation is a cyclical industry with question marks hanging over where it is in the current cycle and how geopolitical issues such as protectionism and trade wars could affect demand for air travel going forward.
Wendy Sowers, market & product forecasting, Boeing
Addressing delegates at GAD World in Dublin, Wendy Sowers, who leads Boeing Commercial Airplanes’ market and product forecasting unit, said it was important to consider both the structural and cyclical drivers to get a clearer sense of what the future might hold.
“The question I get asked most often is: Where are we in the cycle?” said Sowers. “But, for me, there are some really key elements on the structural side of our business. The numbers say that as GDP grows we are seeing more and more households in the middle income level and above class.”
As disposable incomes rise, people tend to want to fly more, which Sower said “suggests the pie is getting bigger for all of us”.
“Over time, more and more folks are living closer to big cities, so they not only have the means to travel but they have better access to airports.”
Airlines are responding by providing more direct routes, finding ways to better fill their aircraft and boosting profitability through ancillary revenues. On the last two points, however, there are questions over how much further airlines can go.
“Since the last downturn, we’ve delivered 6,700 airplanes into the market,” said Sower, noting that airlines have been putting more seats on those aircraft in order to carry more passengers. “If airlines were operating at the same level of productivity as they did in 2009, we would have needed another 7,000 airplanes. But how much longer can these trends go on for? Maybe we’ve got to the edge of where we can go with densification.”
Similarly with ancillary revenues, airlines have already tapped into onboard food sales, baggage charges and a whole host of other new income streams but, as Sowers explained, ancillary revenues are showing signs of having reached a plateau and it will be “really interesting to watch” where things go from here.
On the cyclical side, capacity is a key indicator of what is happening in the wider world.
“One of the places we watch closely is what airlines are doing with capacity,” said Sower, acknowledging the impact that the grounding of the Boeing 737 MAX fleet in the wake of two fatal crashes involving the aircraft type has had. In the fourth quarter of 2018, single-aisle aircraft capacity expanded by 8.3% whereas in the same three-month period in 2019 capacity growth was a much smaller 3.1%.
“With the MAX grounded, 400 airplanes that were planned to be delivered to the marketplace aren’t there and that’s had an impact,” said Sower. However, she also pointed to a recent spate of airline bankruptcies which have resulted in the grounding of 250 aircraft – three-quarters of them single-aisle models.
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Despite this, Sower said it was important to keep an eye on aircraft load factors, which are showing no signs of dipping.
“The key thing we continue to see is that load factors are steady and rising. If we start to see load factors coming down this says there is a challenge with demand, but we’re seeing load factors rising and this is a good indicator.”
Sower also pointed to shifts in the way in which airlines are deploying single- and twin-aisle aircraft. The new generation of narrowbodies can fly further than their predecessors, the result being that airlines are deploying them on ever longer routes and moving widebodies to ultra-long-haul routes which cannot be operated with smaller aircraft.
Another key trend is the continuing growth of low-cost carriers. These airlines now account for 32% of the market share in North America and 42% in Europe, but much larger percentages are seen in Asia where 57% of capacity in South Asia is operated by low-cost carriers, rising to 62% in Southeast Asia.
On the airline side, the International Air Transport Association (IATA) is holding firm to its belief that demand will double over the next two decades. During a keynote address to GAD World attendees, IATA senior economist Kate Markhvida said: “Over the next 20 years we expect robust growth in air travel.”
Kate Markhvida, IATA
However, she warned that the airline industry is “facing challenging times” and that trade wars could hamper demand for air transport. “In a world where governments retreat to protectionist policies, demand will grow at a slower pace,” said Markhvida.
“We’ve seen challenges with the global economy recently but it hasn’t tipped us into recession. Over the next five years the global economy will continue to grow, although at a slower pace.”
Nevertheless, the risk of recession “shouldn’t be dismissed”. Nor should the risk that globalisation and consumerism as we know it could be curbed, according to Merryn Somerset Webb, editor-in-chief of MoneyWeek, who also spoke at GAD World.
Merryn Somerset Webb, MoneyWeek
“The evidence is beginning to tell us that globalisation and consumerism might not last forever. Whether you like it or not, globalisation and support for the capitalist instincts that drive it are beginning to retreat,” said Webb, pointing to what she described as the “pushback” against globalisation that led to the election of US President Donald Trump and the UK’s vote to leave the European Union.
“The politically benign period we’ve lived through over the last 30 years is over and you can’t expect anything to stay the same,” said Webb. She ended her speech by wishing the aviation industry luck in dealing with the headwinds created by populism, protectionism and “the wild card” of climate change.