Global economy and aviation do we have room to grow? 18 January 2017 Brian Pearce Chief Economist, IATA Airline Industry Economics Advisory Workshop 2016 1
Room to grow? Looking through the cycle Potential constraints The cycle Airline Industry Economics Advisory Workshop 2016 2
Trip frequency still low in many important markets Australia Spain United Kingdom Canada United States Italy France Germany Saudi Arabia Korea, Republic Of Japan Thailand Turkey Chile Colombia Russian Federation Mexico Brazil Indonesia South Africa China Egypt India Nigeria 0 0.5 1 1.5 2 2.5 3 3.5 4 Propensity to fly (total passengers/population) Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016 Airline Industry Economics Advisory Workshop 2016 3
Living standards still have much room for catch-up % CAGR (2015-2035) 5.5% Growth in per capita incomes over the long run 5.0% 4.8% 4.7% 4.5% 3.9% 4.0% 3.5% 3.0% 2.5% 2.5% 2.0% 1.5% 1.4% 1.5% 1.3% 1.2% 0.9% 1.0% 0.8% 0.8% 0.8% 0.7% 0.7% 0.5% 0.0% Airline Industry Economics Advisory Workshop 2016 4 Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016
Multiplier effect of development on some key travel markets Airline Industry Economics Advisory Workshop 2016 5 Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016
Demographics strong in some key markets, adverse in others % change 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% The UN's projected change in population (2015-2035,%) UN projections adjusted for demographic factors Airline Industry Economics Advisory Workshop 2016 6 Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016
Long-term travel growth even in gloomy macro scenario Global O-D passenger journeys (billion) 9 8 7 6 Reflation/open borders scenario Constant policies scenario 5 4 3 Pick-up in Protectionism scenario 2 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 Airline Industry Economics Advisory Workshop 2016 7 Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016
Centre of gravity for aviation moving rapidly East 1914 2004 2015 2035 Airline Industry Economics Advisory Workshop 2016 8 Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016
Biggest growth is in EM-EM travel % of total O-D journeys (12m rolling sum) 70% 65% 60% 55% Within developed markets 50% 45% 40% 35% 30% Within emerging markets 25% 20% 15% 10% Between developed and emerging markets 5% 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Airline Industry Economics Advisory Workshop 2016 9 Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016
China largest increment, but don t dismiss the US China United States India Indonesia Vietnam Turkey Brazil Philippines Australia Mexico Corresponding CAGR 5.2% 2.6% 6.7% 3.5% 8.2% 5.2% 2.6% 6.0% 3.0% 4.2% 0 100 200 300 400 500 600 700 800 Change in domestic O-D markets (millions, 2015-2035) Airline Industry Economics Advisory Workshop 2016 10 Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016
Significant change in top-10 in air travel over next 20 years US China UK Japan Spain Germany India Italy France Indonesia China US India UK Indonesia Japan Spain Germany Brazil Turkey 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016 Airline Industry Economics Advisory Workshop 2016 11
% Surely infrastructure will not be a long-run constraint 16 14 12 10 US 10 year Treasury yield and 10 year TIPS real yield 8 6 4 2 0-2 1982 1986 1990 1994 1998 2002 2006 2010 2014 Source: Haver 10-year Treasury yield 10-year TIPS real yield Airline Industry Economics Advisory Workshop 2016 12
Climate change policy more of a potential constraint ICAO agreement for cap on net CO 2 is good progress Longer-term low carbon fuels need to succeed Airline Industry Economics Advisory Workshop 2016 13
% of invested capital Airlines financial health less of a constraint 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Return on capital invested in airlines 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: IATA Economic Performance of the Airline Industry end year 2016 report Cost of capital (WACC) Return on capital (ROIC) Airline Industry Economics Advisory Workshop 2016 14
% ATKs Structural change in approach to asset utilization Breakeven and achieved weight load factor 68 Achieved LF 67 66 65 64 63 62 61 60 Breakeven LF 59 58 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: IATA Economic Performance of the Airline Industry end year 2016 report Airline Industry Economics Advisory Workshop 2016 15
Operating margin, % revenue Capital productivity, revenue/invested capital, US$ Solid improvement in capital productivity 10 8 6 4 2 0-2 -4 Airlines' operating or EBIT margin and capital productivity Capital productivity Operating margin 1.4 1.3 1.2 1.1 1.0 0.9-6 0.8 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: IATA Economic Performance of the Airline Industry end year 2016 report Airline Industry Economics Advisory Workshop 2016 16
Still a wide spread of performance by region Adjusted net debt/ebitdar 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 Adjusted net debt/ebitdar by region 2.0 2011 2012 2013 2014 2015 Source: IATA calculations using data from The Airline Analyst Latin America Asia Pacific Europe North America Airline Industry Economics Advisory Workshop 2016 17
Short-run economic momentum has turned up % year-on-year Growth in RPKs and the level of business confidence Diffusion index 16% 65 12% 8% 4% 0% -4% -8% Growth in industry RPKs Global PMI index (adv. 2 months) 60 55 50 45 40 35-12% 30 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: IATA statistics, Markit Airline Industry Economics Advisory Workshop 2016 18
But which direction now for the global economic cycle? 5 4 3 2 1 0 IMF forecasts of global economic growth (using market exchange rates) April 2013 April 2014 April 2015 Jan 2016 July 2016 Trade restrictions scenario -1-2 -3 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: IMF World Economic Outlook Airline Industry Economics Advisory Workshop 2016 19
Million barrels production per day Days of supply How strong will up-trend in oil prices be? 3.5 3 2.5 2 1.5 OPEC spare capacity and OECD crude oil inventories OECD crude oil inventories (right scale) OPEC spare capacity (left scale) 1 2011 2012 2013 2014 2015 2016 Source: Haver Airline Industry Economics Advisory Workshop 2016 20 68 66 64 62 60 58 56 54 52 50
ROIC, % of invested capital Jet fuel price, US$/barrel High fuel prices not always bad for airlines Airline industry ROIC and jet fuel prices 10.0 ROIC 160.0 9.0 140.0 8.0 7.0 120.0 6.0 100.0 5.0 80.0 4.0 60.0 3.0 2.0 Jet fuel price 40.0 1.0 20.0 0.0 0.0 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: IATA, Platts Airline Industry Economics Advisory Workshop 2016 21
To sum up A look through the cycle is positive, even with gloomy macro Potential for multiplier on trip frequency, for some Good demographics, for some Centre of gravity moving rapidly East Some potential constraints to overcome Airline financial health better overall but patchy Near-term turbulence from the economic cycle and oil prices Airline Industry Economics Advisory Workshop 2016 22
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% CAGR 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 600 500 400 Passenger flows 300 to and from (Millions) Rank (2014) 200 100 0 Country 3.2% Total passenger market growth 559 Total passenger absolute growth (millions) 0.8% 0.2% 0.8% 1.4% Main drivers 31.4% 68.6% Absolute growth by foreign and domestic 5 year 10 year 20 year 2014 2019 2024 2034 2014-2019 2014-2024 2014-2034 Passenger numbers ('000s) CAGR % 1 US Domestic 438,252 554,280 636,662 822,051 4.8% 3.8% 3.2% 2 Canada 23,733 27,166 30,809 39,084 2.7% 2.6% 2.5% 3 Mexico 21,011 24,531 28,762 41,011 3.1% 3.2% 3.4% 4 UK 13,946 18,283 20,628 26,145 5.6% 4.0% 3.2% 5 Japan 9,557 10,214 10,550 11,485 1.3% 1.0% 0.9% 6 Germany 8,369 9,726 10,997 13,975 3.1% 2.8% 2.6% 7 China 6,334 7,004 8,423 12,358 2.0% 2.9% 3.4% 8 France 6,026 7,166 8,284 11,005 3.5% 3.2% 3.1% 9 Dominican Republic 5,836 6,698 8,171 12,288 2.8% 3.4% 3.8% 10 Brazil 5,659 6,071 7,542 11,739 1.4% 2.9% 3.7% 11 India 4,516 6,035 8,070 13,565 6.0% 6.0% 5.7% 12 Korea 4,512 5,729 6,982 9,289 4.9% 4.5% 3.7% 13 Italy 4,344 4,865 5,537 7,103 2.3% 2.5% 2.5% 14 Colombia 3,195 3,769 4,785 7,539 3.4% 4.1% 4.4% 15 Jamaica 3,053 3,838 4,662 6,782 4.7% 4.3% 4.1% 16 Australia 2,813 3,125 3,423 4,106 2.1% 2.0% 1.9% 17 Spain 2,580 3,243 3,912 5,197 4.7% 4.2% 3.6% 18 Bahamas 2,536 3,265 3,930 5,513 5.2% 4.5% 4.0% 19 Ireland 2,298 2,678 3,315 4,350 3.1% 3.7% 3.2% 20 Switzerland 2,233 2,572 2,930 3,796 2.9% 2.8% 2.7% Air Passenger Forecasts October 2014 The United States air passenger market is forecast to grow at an average annual growth rate of 3.2% per annum over the next 20 years. This puts the United States in the 28th percentile of fastest growing markets in our forecast during the period 2014-2034. Improvements in livings standards contribute 1.4 percentage points to annual growth. Favourable population and demographic factors are forecast to contribute 0.8 percentage points to annual growth. Other factors, mainly future technological gains, will contribute 0.8 percentage points per year. Explanation of the main drivers of growth (for more details, see the Global Report) Living standards: We proxy a country s standard of living by its level of Gross Domestic Product per capita (ie, the total amount of output produced in an economy each year divided by its population). The living standards channel captures the clear relationship between the number of trips taken on average by inhabitants of a country each year and that country s standard of living. Population and demographics: Forecasting air passenger markets requires a further understanding of how many people there will be to demand air travel in the future. This will depend on changes in total population sizes over time as well as changes in demographic structures ; given that older people tend to fly less often than people in working-age groups, air market growth in countries whose populations are projected to age considerably over the coming 20 years is likely to face headwinds. Trade flows: A high correlation is observed between a country s trade openness measured by exports and imports as a proportion o an economy s total output and its propensity to travel. We therefore include Oxford Economics forecasts of trade intensity over time into our modelling. Price and liberalisation: The decline in the price of air travel that is the cost of air travel in both monetary terms and the time saved by more direct routes has been a notable feature of the industry over the past 60 years or so. We expect the downward trend in the unit cost of air travel to resume in the future, mainly reflecting new technologies and efficiencies being realized The introduction of new longer-range mid-size aircraft will connect many more city and country pairs too and lead to considerable time savings for passengers. Future potential for reductions in travel times will also be driven by changes in regulatory regimes. The United States is forecast to gain an additional 559 million passengers by 2034, compared to 2014. Whilst the United States is in the 28th percentile in terms of fastest growing markets over the next 20 years, it is forecast to be ranked as the 2nd largest markest based on the total number of passengers in 2034. Domestic passengers will represent 68.6% of total growth over this period, accounting for 384 million addittional passengers. Foreign passengers will contribute less to overall growth, representing 31.4% of total growth, equal to 175 million addittional passengers. US Domestic The United States domestic market is ranked 1st in 2014, and is forecast to remain as the largest market in 2034; taking 70.6% of the total market in 2034, down from 76.5% in 2014. Whilst the United States domestic market is the largest market in 2014; the 2nd largest market is Canada, accounting for 3% of total passengers which is forecast to rise marginally to 3.4% by 2034. The biggest three markets in 2014 are the US Domestic, Canada and Mexico, while in 2034 they are forecast to become the US Domestic, Mexico and Canada respectively. The largest riser in the 20 year period is forecast to be India rising 5 places to be ranked 6th largest market in 2034. Whilst the biggest faller in the period 2014-2034 is forecast to be Australia falling 6 places to be ranked 22nd largest market in 2034. Canada Mexico UK Japan Germany China France Dominican Republic Brazil India Korea Italy Colombia Jamaica Australia Spain Bahamas Ireland Switzerland 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Air Passenger Forecasts US Domestic Mexico Canada UK Germany India China Dominican Republic Brazil Japan France Korea Colombia Italy Jamaica Bahamas Spain Costa Rica Netherlands Ireland Global Report Country Reports Online database/webtool United States - Passenger Market Overview Decomposition of growth, 2014-2034 Living standards Population & Demographics Trade Price & Liberalisation Change in passenger numbers, 2014-2034 Domestic Foreign United States - Top Country Pairs October 2014 Top US country pairs ranked by passenger numbers, 2014-2034 www.iata.org/pax-forecast Airline Industry Economics Advisory Workshop 2016 24