Demand for air travel

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2 Global Market Forecast Demand for air travel Concentration of population, personal wealth and industry will drive air traffic growth. I 17

3 DEMAND FOR AIR TRAVEL Emerging economies lead growth Increasing propensity to travel in emerging nations Comments made by IATA, during a recent state of the industry address, highlight the potential for emerging markets: China and India have the potential to reshape the travel industry. Indeed, the two Asian giants have been in the midst of an economic transformation that is anticipated to turn them into the world s largest consumer markets within 25 years. Their combined purchasing power could be five times greater than that of the United States of America today. Today, every US citizen makes on average 2.2 air trips each year. The corresponding figures are just.2 trips per year for India and.6 for China. There is therefore huge potential for air travel growth by these and other emerging and developing countries, as wealth grows and air travel becomes affordable by more and more people. 22 million additional Chinese middle-class consumers per year Large potential for future growth in air travel 1 1,1,1,1,1 Trips* per capita Sri Lanka Vietnam Cuba Pakistan Egypt Poland Peru Indonesia China Brazil Ukraine India Slovakia Zimbabwe Cambodia Nigeria Malaysia Czech Rep. Thailand Colombia Mexico Oman Malta Portugal Kuwait Korea 5, 1, 15, 2, 25, 3, 35, 4, * Passengers carried by airlines domiciled in the country Brunei Spain Israel UAE Singapore Norway Iceland Switzerland UK Netherlands USA Australia Austria Sweden Denmark France Germany Japan World average Real GDP per Capita (US$) The Chinese route network HLH JMU HLD HRB HLD NDG HRB MDG KHG TGO CGQ CIF AAT SHE FYN KRY XIL YIN URC HET PEK DLC BAV TSN UYN AKU KRL TAO DNH TYN CHW TNA INC CIH HTM IQM ENY CGO FUG XNN IQN NKG SHA GOQ LHW SIA NNY HFE HZG HGH YIH AKA WUH TXN ENH JJN SHS JDZ CTU CKG KHN CSX FOC XIC LXA KOW KWE ZAT XIN KWL SWA HKG BSD CAN KMG NNG ZHA SYM HAK KHG AAT TCG YIN URC KRL AKU KCA IQM LXA CGQ YNJ JIL SHE XIL JNZ DDG PEK DLC HET TSN BAV YNT SJW DOY WEF TYN TNA TAO CHW UYN WEH DNH INC CIH LYI LYG ZGC CGO FUG XUZ YNZ NTG XNN LYA NKG SHA LHW XIY XFN CZX NNY HFE PVG HGH NGB HZG AKA WUH WXN YIH TXN YIW WNZ MIG JJN JNZ HSN ENH SHS CTU CKG KHN HYN BPX DYG WUS LZO CSX FOC KOW CGD DIG ZAT LLF KWE XIN XMN LJG KWL MXZ SWA DLU KMG LZH CAN HKG BSD SZX NNG MFM LNJ LUM SYM ZHA BHY JHG HAK SYX 18 I GLOBAL MARKET FORECAST

4 More wealth leading to more air travel In China, the two primary drivers of traffic growth are income, measured by GDP per capita, and exports. These two variables alone explain 99% of the traffic variations of the last 2 years. Other economic factors, more linked to social developments such as the very high Chinese personal saving rate, have limited the discretionary spending that would otherwise have been allocated to travel. However, private consumption has increased steadily over the last 5 years. Spending on cars and residential housing, for example, has grown threefold, and is continuing to grow at even higher rates. Transport and communications have become the fastest growing items in the Chinese household budget, representing 1% of their total consumption expenditure today. concentrated in the coastal provinces of the Beijing-Tianjin corridor, Yangtze River Delta and the Pearl River Delta. In many emerging nations there is often a disparity between regions and urban/rural populations in terms of wealth. For example, in China the top 5 regions, in terms of GDP, are responsible for about 4% of total Chinese GDP, in France this number is 22%. Chinese middle-class consumers per year % of total population million people According to the Chinese Academy of Social Science, middleincome consumers, defined as households with US$18,- 36, of assets, represent 25 million people, or 19% of the 24 population, and are forecast to reach the 4% level by 22. Already, 49% of the urban population are middle-income consumers. These emerging middle-class consumers are million people Source: Chinese Academy of Social Science. 22 Growing Chinese expenditure on transport % of total household expense Wealth concentration Regional GDP per capita as a % of the national average (National average = 1) Wealthiest region (Ile-de-France, Shanghai) France China Poorest region Food, clothing, medicine, others Recreation and education Housing Transportation and communication Source: INSEE & China Statistical Year Book 23. GLOBAL MARKET FORECAST I 19

5 DEMAND FOR AIR TRAVEL China takes off First domestic, now international Income is directly related to urbanisation, due to the higher concentration of employment opportunities and the higher salary levels in large cities. Industrial production in volume and especially in value is concentrated in the coastal areas and around the 3 major Chinese cities. Therefore, not only is the population concentrated, but their own wealth, as well as the wealth they generate through the country s industrial production, is concentrated in urban areas. on raising personal income and consumption, and its focus on foreign trade as a major vehicle for economic growth, have served to increase demand for air transport dramatically. Between 198 and 1998 demand for travel on China s domestic air routes, fed by a sharp increase in disposable income, multiplied nearly twenty times, growing at an average 16.5% per year. The propensity to travel in emerging economy countries typically starts with domestic trips, when income reaches a certain threshold, and then develops into international trips when another, higher, threshold is reached. Chinese disposable income has grown tenfold in two decades and reached the first domestic travel threshold in 199. The Chinese government s emphasis China to follow the more efficient hub and spoke system Concentration of population, wealth and manufacturing activities China steady traffic growth driven by domestic routes Passengers transported (millions) 1 8 Average 16.5% per year 6 GDP/capita ($US) 4 > 2, 1,5-2, 1,-1,5 75-1, < Total Regional International Domestic Source: China Statistical Year Book I GLOBAL MARKET FORECAST

6 Planes, trains and more planes Hubs will be key Faced with this booming growth, the Chinese transport authorities recognized that it was necessary to restructure the domestic route network on the more efficient hub and spoke system, with Beijing, Shanghai and Guangzhou as the three major mainland hubs. Today, some of the high density Chinese routes have already become air shuttle type operations, with a departure every hour. Anticipated international and domestic growth will be challenging for the Chinese hub airports. Aircraft movements at Beijing airport will grow from 25, today to about 7, by 223, making it one of the world s busiest airports. It is anticipated that, within the next 1 years, the Chinese network could resemble the Japanese system, with its busy hubs and high density routes. Today in Japan, as many as 1 domestic flights per day are operated by aircraft with more than 47 seats. It is thought unlikely that high-speed trains will divert a significant portion of air traffic, as in Japan or Europe, due to the much greater distances between China s main cities. The rail/air competition experience in Japan and Europe suggests that rail trip time in excess of 3 hours does not significantly divert traffic from air to high-speed train. At best, the high-speed train from Beijing to Shanghai will take 5 hours to cover the 1,1 km, whilst Beijing to Guangzhou will take more than 9 hours. More than 7, aircraft movements at Beijing Airport by 223 High Speed train competition decreasing with trip time Rail market share (%) 1 Paris-Brussels Paris-Lyon Tokyo-Osaka 8 Madrid-Seville 6 Paris-London Stockholm-Gothenburg Tokyo-Akita 4 Paris-Amsterdam Tokyo-Aomori 2 Rome-Milan 1 1,25 1,5 1,75 2 2,25 2,5 2,75 3 3,25 3,5 3,75 4 4,25 4,5 4,75 5 Rail travel time (hours) GLOBAL MARKET FORECAST I 21

7 DEMAND FOR AIR TRAVEL From the US to China 9% of final destinations are concentrated on 3 major cities International tourism will grow Although the income threshold that should have accelerated the propensity to travel internationally was reached in the late 199s, the level of such travel has been constrained by the limited number of countries in the Approved Destination Status (ADS) at that time. Today, with the rapid increase in countries on the ADS list, together with the growing number of air service agreements, such as those with the US and UK in 24, a large pent-up demand for international travel exists. In September 24, an additional 27 European countries were added to the list of approved destinations, ringing the total number of countries to 55. According to the Worldwide Tourism Organization, as many as 1 million Chinese tourists will travel internationally by 22. China will become the 4th largest country in terms of outbound tourists. France, for example, anticipates as many as one million Chinese tourists by 28, a threefold increase over 23. The Paris Tourism Office expects China to become either the first or second nation in terms of tourists, ahead of the UK, the US and Japan. The economic benefit is expected to be significant as Chinese tourists spend an average of $43 compared with $35 for a visitor from the US, although a Japanese tourist spends $65. Chinese long-haul international tourists are less interested in visiting Manchester, Denver or Houston, than Paris, London, Rome, San Francisco or New York. Today Chinese travel agencies are concentrating their European travel packages on France and Italy because of the high interest in these destinations. Similarly, the final destination of 9% of passengers travelling from the US to mainland China is concentrated on the three largest cities, with as many as 5 cities making up the remaining 1%. Very few of these 5 cities will have a demand large enough to justify a non-stop service to North America or Europe. Similarly the origin of US passengers is concentrated on major cities, 7% of travellers true origins being either Los Angeles, San Francisco or New York. China s Approved Destination Status (ADS) Macau Hong Kong Thailand Philippines Singapore Malaysia Laos Vietnam Australia New Zealand Korea Cambodia Myanmar Brunei Japan Indonesia Turkey Nepal India Maldives Malta Egypt Morocco Cuba Colombia Sri Lanka South Africa Croatia Hungary Pakistan Seychelles Kenya Ethiopia Tanzania Tunisia Zambia Zimbabwe Mauritius Austria Belgium Finland France Germany Greece Iceland Italy Luxembourg Lichtenstein Netherlands Norway Portugal Romania Spain Sweden Switzerland Pace of international travel to accelerate 22 I GLOBAL MARKET FORECAST

8 13 weekly A38 frequencies to China by 21 Demand is simply where people want to go Air travel in China is no longer the preserve of elite or business travellers. It is attracting an increasing number of international price-sensitive leisure travellers, from fast-growing urban areas, who want to visit large tourism centres in Europe and North America. These factors are driving the major airlines serving China to introduce the A38. Two years before the A38 s entry into service, current A38 customers have already announced flight plans that will result in 13 weekly A38 frequencies to China by 21. The geographical concentration of population, consumers, wealth and industry, including high-value manufacturing, in major urban centres is driving demand for air transportation in this dynamic Asian market. Bulk of passenger first origin and final destination concentrated on major cities Origin/destination passengers to mainland China from USA Guangzhou Beijing Shanghai Seattle Washington Boston Chicago Honolulu San Francisco Los Angeles New York Mainland China Final destination cities USA First origin cities Source: MIDT. GLOBAL MARKET FORECAST I 23

9 DEMAND FOR AIR TRAVEL Expansion through both fragmentation and consolidation Profitable new routes to open We anticipate intercontinental traffic to continue growing, partly through the development of new services between major cities (fragmentation), and through the further development of traffic on existing hub to hub routes (consolidation). The future pace and share of fragmentation and consolidation varies from region to region, largely depending on the evolving equilibrium of a wide range of factors. These factors not only include the passengers penchant for non-stop flights but also, and most importantly, factors such as passenger route selection based on ticket price and convenient schedule, demographics, location of trade centres, real origin and destination demand, aircraft, airline and hub economics, liberalisation, airline alliances, congestion and the environment. Opportunities will continue to emerge for profitable new routes to develop, with aircraft like the A33 and A34. These new long-haul routes are largely centered on the Trans-Pacific, with some on the more developed Europe to Asia markets, helped by the growth of Asian economies and the strong expansion of the international traffic to and from emerging economies. This development also coincided with the availability of aircraft with better range and economics, such as the A33 and A34, which offer airlines new market opportunities. Indeed, over the last 1 years, the A34 alone has been used to open 32 new routes on the Europe to Asia flow. On July 1st, 24, for example, a new Trans-Pacific polar route was opened between Hong Kong and New York with the A34-6, whilst at the same time maintaining existing 747 and A34-3 service to Vancouver with same airline. More ground breaking A34 Family flights to be inaugurated in 24, included non-stop flights using the A34-5 from Singapore to New York and Los Angeles. Over the next 1 years, Airbus forecast that up to 6 long-haul routes could be opened profitably on the transpacific market and between Europe and Asia, these in addition to the 25 routes in operation today. Almost all of these potential new routes will involve a major hub airport at either one end or the other. International air traffic will grow through fragmentation and consolidation FRAGMENTATION Hub by-passing Market development Frequency on thin routes The business traveller s preference CONSOLIDATION More cost-effective Hub dominance Global network Linking major hubs The logic behind alliances 24 I GLOBAL MARKET FORECAST

10 Hubs key to new routes success We anticipate that overall new route development will also continue to follow its historical pattern, which is characterised by a substantial amount of churning, or the addition and removal of routes. From the 39 new city-pairs across the Pacific opened by North American airlines since 199, 29 have been from their hubs. Of the remaining 1 non-hub routes, only one has survived. Over time, many such new routes opened on the transpacific market have subsequently been dropped, leading to a relatively stable total number of routes in recent years. Routes linking smaller cities have a higher failure rate. From the 75 routes opened during the past twenty years between a primary city in Asia and a primary city in Europe, almost 9% have proved successful and are still in operation today. Conversely, of the 47 routes opened between secondary or tertiary cities, only 4% have been lucrative enough to survive. This has also been the case on the Europe-Asia market, where almost 8% of traffic is carried to and from a total of 17 primary cities. These are major centres of population and business, whose relative importance, from an air travel perspective, has hardly changed over time. 8% of Europe-Asia traffic carried to and from 17 primary cities Number of city pairs served maturing on the Trans-Pacific High failure rate on routes linking smaller cities Number of routes Total city pairs New city pairs Dropped city pairs Total city pairs Source: OAG. Number of routes 5 Primary Primary (7%) Primary Secondary (21%) Routes tried in the last 2 years Routes operated in 23 Primary Tertiary (9%) (%) represent share of transpacific seats Not linked to a primary city (%) % share of transpacific seats GLOBAL MARKET FORECAST I 25

11 DEMAND FOR AIR TRAVEL but bulk of traffic growth from consolidation The largest routes will grow According to the US Department of Transportation, the Trans- Atlantic deregulation of the 199s promoted airline alliances, stimulated new, rather than diverted existing traffic, reduced fares and encouraged traffic through hubs to a greater extent than point to point. Indeed, large routes between primary cities, such as New York London or Paris Chicago, have easily maintained a stable share of capacity over 4%. Once established, new routes not linking primary to primary cities have grown at a much slower pace (+21% over 1994 to 24) than those linking primary to primary cities (+87%). Airline alliances have also influenced consolidation over the Trans-Atlantic, as the top 1 carriers have increased their share of capacity by 5 points since the first US-European bilateral agreement. Although new routes will open, network development has been largely driven by growing O&D markets between major population centres, with future growth making these flows even more important. Deregulation and alliances resulted in consolidation on transatlantic market North Atlantic network evolution Consolidation of the Atlantic market % of seats growth Cumulative share of seats Europe USA % of additional seats (+14,5 monthly seats per route) 21% of additional seats (+2,7 monthly seats per route) 47% of additional seats Consolidation & Alliance effect year growth structure of Primary-Primary routes 32% of lost seats 1-year growth structure of other routes Number of airlines Seats lost when routes are dropped Seats offered at the opening of a new route Seats added after the route is opened 26 I GLOBAL MARKET FORECAST

12 Growing urbanisation Bulk of air travel generated by concentration of populations Today, only five cities worldwide have more than 2 million inhabitants. Based on current projections, by 22 this number will have grown to sixteen including ten in the dynamic Asia- Pacific region. GDP in the countries where these mega-cities are located is expected to double by 22. The bulk of air travel will continue to be generated by these concentrations of population and the associated business and industry in and around them. This is where most of the people with a high propensity to travel are and where they want to go. The concentration of the demand on large O&D markets will even accelerate as Asian urbanisation continues. For example, the urban share of the Chinese population evolved from 2% in 199 to 3% in 2. By 21, more than 4% of the anticipated 1.4 billion people will be concentrated in urban areas. By 23, the Chinese urbanisation rate could be approaching Japan s. GDP per capita in the 3 major Chinese cities is 3 to 4 times greater than that of the country as a whole. By 22, 5% of Chinese population will be concentrated in urban areas Acceleration in Chinese urbanisation Urban population as % of total Source: United Nations. Bulk of air travel generated by concentration of population Origin-destination traffic between Asia and London NEW YORK 2.4 ISTANBUL DELHI SEOUL Connecting 27% Connecting 24% 2.8 LOS ANGELES MEXICO 3.6 CAIRO 22 KARACHI KOLKATA MANILA TOKYO O&D 73% O&D 76% DACCA OSAKA Cities with population > 2 million 2.25 SAO PAULO MUMBAI JAKARTA Source: CAA survey. Hong Kong Tokyo GLOBAL MARKET FORECAST I 27

13 DEMAND FOR AIR TRAVEL Concentrated trade and commerce drive freight As well as the concentration of passenger demand, large centres of population are often a focus for wealth, trade and commerce. This in turn drives the need for international freight, which is also concentrated around the major population and industrial centres, particularly in Asia. In China for example, exports to North America have more than tripled in value since 1995, mostly driven by a sharp increase in high-technology goods. As much as three quarters of the high-value final assembly of computers and other electronics manufacturing is concentrated around the three main Chinese cities of Beijing, Shanghai and Guangzhou. Fivefold increase of high-tech goods transported by air China to North America exports: threefold increase in value, high-tech goods number one US$ BN % 1 5 Capital Consumer 1995 Food High tech Intermediate Primary 23 Other Source: MGI. 28 I GLOBAL MARKET FORECAST

14 When less is better than more Passengers prefer lower fares In mature markets, although economic growth remains the key driver, demand for air travel is increasingly driven by ticket price and consumer confidence. As markets have progressively matured and become more leisure-orientated, the GDP elasticity of air travel demand has declined. In the US for example, a 1% growth in GDP will typically result in a 1.2% growth in domestic air travel, compared with a growth of almost 2% in air travel some 2 years ago. In emerging markets, ticket price is obviously a key element, as the ratio of income to international ticket price is lower in developed countries. Independent surveys consistently show that what really matters to passengers is not necessarily whether the flight is direct or from a hub, but rather the ticket price. A factor which is becoming ever more apparent with the advent of the Internet, low-cost carriers and the increasing numbers of business travellers who either have their travel booked for them or are guided by corporate travel policy. A recent US Commerce Department survey shows that ticket price is the number one criterion for passengers when selecting a flight, well ahead of the availability of a non-stop service. The survey showed, for example, that for the Japanese market, six other factors were more important to passengers, with ticket price first. Another recent survey conducted by IATA showed that 41% of respondents identified lower fares as the factor that now motivates them to fly more often. Ticket price number one criterion when selecting flights Airline criteria of choice on transpacific flights Passengers motivated by lower fares % of respondents in % What would motivate you to fly more frequently? 3 3% What is your main reason for flying on this airline? % 14% 9% 7% Price Frequent flier Convenient schedule Non-Stop flights Previous good experience Upgrades Schedules Safety on ground Source: US Commerce Department survey (ITA). Source: IATA online survey 23. Lower fares FFP s Safety on board Other GLOBAL MARKET FORECAST I 29