Challenges of high growth: Global aviation outlook Brian Pearce, Chief Economist www.iata.org/economics To represent, lead and serve the airline industry
Challenges of high growth Meeting demand for air travel Attracting capital Wider economic benefits Climate impacts IATA Economics www.iata.org/economics 2
Demand for air travel to double over 20 years 9,000 Outlook for worldwide O-D passenger trips, million 8,000 7,000 6,000 5,000 4,000 Liberal policies scenario Current policies Closing borders scenario 2014-2034 1.8-2.8x growth 2.3-5 billion additional O-D passenger trips 3,000 2,000 2014 2019 2024 2029 2034 Source: IATA/Tourism Economics Air Passenger Forecasts IATA Economics www.iata.org/pax-forecast 3
Largest rise in numbers forecast in China 900 Drivers of additional passenger numbers, million 900 800 700 600 500 400 300 200 100 0-100 -200 Living standards Demographics Price and other Overall growth 800 700 600 500 400 300 200 100 0-100 -200 Source: IATA/Tourism Economics Air Passenger Forecasts IATA Economics www.iata.org/pax-forecast 4
Flights per capita* (2013, logarithmic scale) Living standards are one key driver 10.00 New Zealand Maldives Bahamas Singapore Hong Kong Iceland Switzerland Seychelles Australia UK Brazil Sweden 1.00 USA Norway Qatar Luxembourg Japan France 0.10 Russia China 0.01 Uganda 0.00 0 10 20 30 40 50 60 70 80 90 100 110 120 GDP per capita (2013, US$ '000s) Source: IATA/Tourism Economics Air Passenger Forecasts IATA Economics www.iata.org/pax-forecast 5
Countries becoming middle or high income Source: IATA/Tourism Economics Air Passenger Forecasts IATA Economics www.iata.org/pax-forecast 6
Demographic change dramatically different % change 2014-2034 25% Demographic change, 2014-2034 20% 15% Population change 'Flying' population change 10% 5% 0% -5% -10% -15% -20% -25% India Indonesia Turkey US Brazil France China Germany Japan Russia Source: IATA/Tourism Economics Air Passenger Forecasts IATA Economics www.iata.org/pax-forecast 7
Emerging market population much younger Old-age dependency ratio, % (65+/15-64) 60 50 Japan Germany 40 30 20 10 US China Brazil Turkey Indonesia India 0 2014 2019 2024 2029 2034 Source: IATA/Tourism Economics Air Passenger Forecasts IATA Economics www.iata.org/economics 8
Trend in cost of travel is still downwards US$ in 2013 prices to fly a tonne kilometer US$ in 2013 prices per tonne kilometer Unit cost and the price of air transport, adjusted for inflation 1.5 2.8 1.4 2.6 1.3 2.4 1.2 2.2 Unit cost (US$/ATK) 1.1 2.0 1.0 1.8 Price (US$/RTK) 0.9 1.6 0.8 0.7 0.6 0.5 1970 1980 1990 2000 2010 1.4 1.2 1.0 0.8 Source: IATA/Tourism Economics Air Passenger Forecasts IATA Economics www.iata.org/pax-forecast 9
Scope for lower fares on a number of markets Passenger yields, US$ per RPK 0.19 Passenger yields and average trip length 0.17 0.15 0.13 0.11 0.09 0.07 0.05 Within Europe Within Africa Within South America Within East Asia Within ASEAN ASEAN- E Asia Middle Eastrest of world North-South America North Atlantic Pacific ASEAN-Africa ASEAN-Europe China-North America ASEAN-North America Europe- Australia 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 Average trip length (kms) Source: IATA/Tourism Economics Air Passenger Forecasts IATA Economics www.iata.org/pax-forecast 10
Resulting in much change over next 20 years 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Rank by size of O-D passenger flows in, out & within country US 2013 0 rank 1 2034 rank 0 1 China China 2 2 US UK 3 3 India Japan 4 4 UK Germany 5 5 Brazil Spain 6 6 Indonesia France 7 7 Spain Italy 8 8 Germany India 9 9 Japan Brazil 10 10 France Source: IATA/Tourism Economics Air Passenger Forecasts IATA Economics www.iata.org/pax-forecast 11
Passenger journeys by route (2014 & 2034, million) Within North America Within Europe 542m 1,007m 618m 1,003m 952m 2,541m Within Asia-Pacific Trans-Pacific a 43m 83m North-South America a 20m 44m Trans-Atlantic a 63m 110m Source: IATA/Tourism Economics Air Passenger Forecasts 2014 passenger flow 2034 passenger flow
Growth and change in passenger journeys by route (% and million, 2014-2034) +1,589m 5.0% Trans-Pacific +40m 3.3% Within North America +465m 3.1% Trans-Atlantic +48m 2.9% Within Europe +386m 2.5% Within Asia-Pacific North-South America +20m 4.0% Legend: +123m = the additional number of annual passenger journeys by 2034 (example) 5.0% = the corresponding average annual growth rate (2014-2034) Source: IATA/Tourism Economics Air Passenger Forecasts
Challenges of high growth Meeting demand for air travel Attracting capital Wider economic benefits Climate impacts IATA Economics www.iata.org/economics 14
Airlines will need to raise $5 trillion capital Source: Boeing current market outlook IATA Economics www.iata.org/economics 15
Airlines are not most attractive to investors! Industry median ROIC, without goodwill Percent 1st quartile Median 3rd quartile 1965 2007 Average Industry 0 5 10 15 20 25 30 35 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 1 ROIC after tax, excluding goodwill; For charting purposes, ROIC values are cut off if beyond (-5%, 50%) Source: McKinsey IATA Economics www.iata.org/economics 16
Is the problem a result of liberalization? Airline industry profit margin, after debt interest and tax 8% After liberalization 6% 4% 2% 0% Average 0.2% -2% -4% -6% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: IATA, ICAO IATA Economics www.iata.org/economics 17
Is the problem a lack of scale? Average invested capital (IC), $ billion Average invested capital and return on capital 1997-2011 25 20 United American ANA AF-KLM Delta 15 JAL Lufthansa BA Malaysian 10 5 Emirates Ryanair Aerolineas Easyjet COPA Allegiant - -10% -5% 0% 5% 10% 15% 20% 25% Return on invested capital (ROIC), % of IC Source: IATA, McKinsey SIA Qantas IATA Economics www.iata.org/economics 18 LAN
Is the problem legacy business models? % invested capital 9% 8% ROIC for worldwide average legacy and LCCs versus WACC 7% WACC 6% 5% 4% ROIC 'LCCs' ROIC 'Legacy' 3% 2% 1% 0% 2004 2005 2006 2007 2008 2009 2010 2011 Source: IATA, McKinsey IATA Economics www.iata.org/economics 19
Is the problem with airlines supply chain? 30 Return on invested capital in the air transport value chain, 2002-2009 25 ROIC WACC 20 15 10 5 0 Source: IATA, McKinsey IATA Economics www.iata.org/economics 20
Supplier excess profit not large in $ terms Manufacturers Lessors MRO Groundhandling Catering Airports ANSP Airlines CRS Travel agents Freight Forwarders Total 0.2-0.2 0.3 0.5-0.6-3.7 0.7-17.0 0.5 1.3-16.0-18.0 Source: IATA, McKinsey IATA Economics www.iata.org/economics 21
US$ in 2013 prices to fly a tonne kilometer US$ in 2013 prices per tonne kilometer Costs typically passed through to prices 4.0 3.5 3.0 2.5 2.0 1.5 1.0 Boeing 707 Unit cost and the price of air transport 1973 oil crisis US deregulation EU deregulation Unit cost (US$/ATK) 0.5 Price (US$/RTK) 0.0 1950 1960 1970 1980 1990 2000 2010 7.0 6.0 5.0 4.0 3.0 2.0 1.0 - Source: IATA/Tourism Economics Air Passenger Forecasts IATA Economics www.iata.org/economics 22
In fact yields have fallen faster than unit costs % ATKs 70% Breakeven and actual load factors 65% Load factor achieved 60% 55% Breakeven load factor +15% points 50% 45% 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: IATA, ICAO IATA Economics www.iata.org/economics 23
% of invested capital Inadequate returns on invested capital 10.0 Return on capital invested in airlines 9.0 8.0 Cost of capital (WACC) 7.0 6.0 5.0 4.0 3.0 Return on capital (ROIC) 2.0 1.0 0.0 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source: IATA, McKinsey IATA Economics www.iata.org/economics 24
Challenges of high growth Meeting demand for air travel Attracting capital Wider economic benefits Climate impacts IATA Economics www.iata.org/economics 25
This is aviation s unique economic benefit Source: SRS Analyser IATA Economics www.iata.org/economics 26
Number of unique city-pairs US$/RTK in 2014US$ City-pairs doubled transport costs halved Unique city-pairs and real air transport costs 18,000 4 16,000 14,000 12,000 Unique city-pairs 3.5 3 10,000 2.5 8,000 2 6,000 4,000 2,000 Real air transport costs 1.5 1-0.5 1994 1997 2000 2003 2006 2009 2012 Source: IATA, ICAO, OAG IATA Economics www.iata.org/economics 27
Global Value Chains Source: ATAG IATA Economics www.iata.org/economics 28
How do we measure air connectivity? Poland Nigeria Papua New Guinea Solomon Islands South Korea IATA air connectivity measure, seats to weighted destinations as % GDP Brazil China Germany UK Norway Trinidad and Tobago Spain US Dominican Republic Singapore Mauritius Barbados Vanuatu Grenada Seychelles Jamaica Antigua and Barbuda Fiji Maldives St. Lucia 0.00 1.00 2.00 3.00 4.00 5.00 6.00 Source: IATA, World Bank, SEO IATA Economics www.iata.org/economics 29
Challenges of high growth Meeting demand for air travel Attracting capital Wider economic benefits Climate impacts IATA Economics www.iata.org/economics 30
Indexed to equal 100 in 1994 CO 2 up despite strong efficiency gains 300 Worldwide RTKs, CO 2 and fuel efficiency 250 RTKs 2.7x 200 150 CO 2 1.5x 100 50 Fuel use/rtk 0.4x 0 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source: IATA, Datastream IATA Economics www.iata.org/economics 31
Carbon neutral growth policy key for aviation Global CO2 from fuel burn, million tonnes Aviation CO2, million tonnes 60 000 55 000 50 000 45 000 40 000 35 000 Global vs aviation CO 2 emissions Aviation CO2 after pillar 1-3 measures, inc. 12% biofuels +2.5% p.a. Current climate policies +1.4% pa New policies +0.7% pa 1150 1050 950 850 750 30 000 650 25 000 20 000 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 Source: IEA 2013 World Energy Outlook, IATA Aviation Carbon Model 450ppm scenario -1.7% pa IATA Economics www.iata.org/economics 32 550 450
But further cost-effective CO 2 cuts possible 215 million tonnes CO 2 cuts cost-effective in 2030 Source: McKinsey, IATA IATA Economics www.iata.org/economics 33
Challenges of high growth Meeting demand for air travel 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 Attracting capital $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 Wider economic benefits 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 CO 2 reductions IATA Economics www.iata.org/economics 34