Air Transport: An Engine to Prosperity Mark Smyth Senior Economist, IATA To represent, lead and serve the airline industry
Africa in a Global Economic Context Relatively low shares of GDP, trade and air travel Africa's Global Share Population 13.0 GDP - market exch rates 1.9 GDP - PPP 3.4 Exports 2.9 Air Passengers 3.3 International Air Freight 3.3 0 2 4 6 8 10 12 14 % share of global total Source: IMF, IATA
Equatorial Guinea Seychelles Botswana Mauritius South Africa Tunisia Namibia Algeria Gabon Cape Verde Swaziland Morocco Angola Ghana Sudan Mauritania Djibouti Guinea Zimbabwe Cameroon Lesotho Gambia Comoros Senegal Chad Côte d'ivoire São Tomé and Príncipe Uganda Togo Mozambique Congo Benin Rwanda Burkina Faso Kenya Mali Nigeria CAR Zambia Ethiopia Liberia Eritrea Madagascar Niger Sierra Leone DR Congo Tanzania Source: IMF Guinea-Bissau Malawi Burundi 0 GDP per Capita, 2006 (PPP values) 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 African Economies A long tail of countries with low per capita incomes
African Economic Prospects have improved Africa is set to enjoy above-average economic growth to 2010 10 9 8 Average Annual GDP Growth - 2006 to 2010 AAGR 2006 to 2010 7 6 5 4 3 2 1 Global Average 0 USA EU25 Japan India China Middle East Africa Latin America Source: EIU
Which should help to boost air travel demand Historically air demand has grown at 1.5 to 2 times GDP growth 7 6 5 4 3 2 1 0-1 -2 Source: IMF, ICAO 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006P 0-2 -4 World Real GDP growth (%) 14 12 10 8 6 4 2 Passenger Kilometre Growth (%) World GDP Growth Airline Passenger Km Growth (RHS)
While globalisation will boost cargo demand Increased economic links are leading to strong trade growth W orld trade and economic growth 20 350 15 W orld trade growth Ratio of world trade to GDP (r scale) 300 250 % change 10 5 200 150 Indexed to 1970 0 Econom ic growth 100 50-5 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Source: EIU
Steady growth is forecast to 2010 Freight traffic to Asia is set to see the highest growth 9% 8% 8.4% Passenger Volumes Freight Volumes Average annual % growth, 2006 to 2010 7% 6% 5% 4% 3% 2% 3.5% 3.1% 5.4% 5.1% 4.7% 2.7% 6.5% 5.0% 6.8% 5.4% 5.1% 5.0% 1% 0% n/a Within Africa Africa - Asia Africa - Europe Africa - Latin America Africa - Middle East Africa - North America Africa Total Source: IATA
The economy / air travel virtuous cycle Economic growth boosts air travel but also benefits from it Air transport is a key network asset for economic development, like banking or telecommunications. Network connections provide benefits over and above the sum of the benefits from point-to-point routes. Value is created not just by a new air service and the importance of the destination but also by connections provided within the network. A well-designed air transport network widens markets, improves the efficiency of production and encourages greater investment.
Aviation as an engine for economic growth Access to the global network creates significant wider economic benefits Greater Access to the Global Air Transport Network Widens the available market Facilitates efficiency improvements Fosters greater competitiveness Higher Revenues Higher potential returns from investment Access to a wider base of suppliers Access to new production techniques Increases inward and outward investment Ability to exploit economies of scale Source: IATA
Link between productivity and connectivity Improving connectivity has a greater marginal impact for developing countries Labour Productivity vs Connectivity/GDP Labour Productivity - GDP/Hour 60 50 40 30 20 Developed Asia North America and W estern Europe Developing Asia and Africa Emerging Europe Transitioning Asia and South America 10 0 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 Connectivity per $Billion of GDP Source: IATA
Creating large economic returns on investment Economic returns alone can recoup investment costs within six years Economic Rates of Return from Aviation Investment Kenya Cambodia Jordan El Salvador Jamaica Investment (US$ million) Increase in national connectivity / GDP Impact on GDP (%) Annual Economic Rate of Return (%) 409 786 360 802 191 59% 46% 55% 35% 28% + 0.42% + 0.32% + 0.39% + 0.25% + 0.20% 59% 19% 28% 16% 16% Source: IATA
Connectivity can also boost competitiveness Link between access to network and travel and tourism competitiveness Overall T & T competitiveness score vs connectivity, 2005 6 5.5 5 T & T index score 4.5 4 3.5 3 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 Connectivity per $Billion of GDP Source: WEF
Investment needs to be attracted to the industry Though this will require an improvement in the return on invested capital 9.0 8.0 7.0 Cost of capital 6.0 % invested capital 5.0 4.0 3.0 R eturn on invested capital 2.0 1.0 0.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007F 2008F Source: ICAO, IATA
How to improve returns on capital? High Capacity Utilisation match new supply to demand Further Cost Efficiency Improvements Reduce inefficiency / monopoly power among suppliers Liberalise airline market operations and exit Liberalise airline ownership
Liberalisation is not an easy process and is likely to involve higher competition, at least in the short run Scheduled departures from Morocco to Europe April 2005 April 2006 April 2007 Number of Airlines 19 20 27 Number of Routes 63 83 99 Departures per Week 452 522 692 Royal Air Maroc share 60% 54% 45% Source: SRS Analyser
But it can be beneficial creating benefits for consumers and flexible and efficient firms Improve capacity utilisation towards optimal levels (e.g. UK energy markets) Increase productivity for both incumbents and new entrants (e.g. Japanese telecoms) Facilitate a transfer of managerial and technological best practice (e.g. New Zealand media sector) Increase investment by providing firms with more efficient access to finance (e.g. Telecoms) Improve profitability through lower costs, improved efficiency and economies of scale (e.g. EU banking) Increase a firm s market value (e.g. Nestlé)
There is room for different business models Size is not the only influence, knowing competitive advantages is key 3000 2500 2000 Revenues Operating Profit Margin 30 25 20 US$ million 1500 1000 500 15 10 5 % margin 0 0-500 SAA Egyptair Royal Air Maroc Kenya Airways Tunis Air Ethiopian Airlines Air Mauritius Comair Safair Air Seychelles Air Botswana -5 Source: Company reports
Aviation in a global environmental context Sustainable and responsible growth, not artificial constraints World man-made CO 2 Aviation in context Aviation 2% Road transport 18% Other transport 4% Other sectors 10% Industry 18% Energy 5% Residential 8% Public electricity and heat production 35% Source: IEA
Decoupling emissions from future growth Industry-wide operational improvements can have a significant impact Traffic growth (5% pa) 200 Emissions growth (3% pa) ATM Operations Technology 100 Market Based Measures? Time Source: IATA
ATAG campaign Cross industry communications campaign Speak with one voice Provide balance in the environmental debate Provide politicians and decision-makers with a licence to support aviation Provide the general public with a licence to fly guilt-free www.atag.org
Summary Economic growth will help to boost air travel demand in Africa. But investing in and improving the aviation industry can also act as an engine to improve long-term economic growth Large economic returns, over an above those received directly by investors and users can be obtained Attracting investment will require structural changes, including greater airline liberalisation Important to place the environmental debate in context. Artificial constraints put at risk significant wider economic benefits
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