Forecasting long-term trends in O-D passenger markets Brian Pearce, Chief Economist IATA and Visiting Professor Cranfield www.iata.org/pax-forecast www.iata.org/economics 7 th January 2015, Cranfield To represent, lead and serve the airline industry
My previous lecture was rather sceptical Source: The Daily Telegraph IATA Economics www.iata.org/economics 2
% saar As short-term forecasts fail just when needed 8 6 4 Jan 07 Actual and forecast US GDP growth - Fair Model Actual Oct 07 Oct 09 Jul 08 Apr 09 2 0 Oct 08-2 -4-6 -8 2007 2008 2009 2010 Source: Fair Model, Datastream IATA Economics www.iata.org/economics 3
But decisions about the future still required New forecast service: 4,000 O-D country-pairs JV with IATA and Tourism Economics Global, country reports, web-tool For more information: www.iata.org/pax-forecast David Oxley, IATA, oxleyd@iata.org David Goodger, Tourism Economics, dgoodger@tourismeconomics.com IATA Economics www.iata.org/pax-forecast 4
Indexed to equal 1 in 1950 So how should we model air travel demand? 250 200 150 World scheduled air travel, freight and world real GDP Air cargo (FTK) 212x Air travel (RPK) 212x 100 50 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 GDP (constant prices) 10x Source: IATA, ICAO, Haver IATA Economics www.iata.org/economics 5
Is RPK=GDP 1.5 the best modelling approach? 7 6 Ratio of RPK growth to GDP growth 5 4 3 2 1 1.5 0-1 -2 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: IATA/Tourism Economics Air Passenger Forecasts IATA Economics www.iata.org/economics 6
But real travel share does not rise with income Travel/gdp 8.0 7.0 6.0 World Bank Passengers/GDP Boeing ASM/GDP 5.0 4.0 3.0 2.0 1.0 0.0 0 5000 10000 15000 20000 25000 30000 1995 World Bank Per Capita income (US$87) Source: This slide is borrowed from Bill Swan http://cyberswans.com/airline_industry_publications.html IATA Economics www.iata.org/economics 7
And nominal share does not rise over time 1.2% Spending on air transport as a % of world nominal GDP 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 1980 1985 1990 1995 2000 2005 2010 Source: IATA/Tourism Economics Air Passenger Forecasts IATA Economics www.iata.org/economics 8
Bill Swan s conclusions Cross-sectional data: Travel Share not rising with incomes: Travel Share of GDP measured as ASK/GDP ratio Data shows small negative correlation with per-capita income No acceleration of travel share after joining middle class Time-series data confirmed pattern: Growth of Travel Share was independent of growth of GDP Based on Country-by-Country data Conclusion: Travel grows linearly with GDP growth Remaining 1/3 of travel growth is something else Useful question: What Else? Source: This slide is borrowed from Bill Swan http://cyberswans.com/airline_industry_publications.html IATA Economics www.iata.org/economics 9
US$ in 2013 prices to fly a tonne kilometer US$ in 2013 prices per tonne kilometer Falling transport costs part of what else Unit cost and the price of air transport 4.0 7.0 Boeing 707 3.5 6.0 3.0 2.5 2.0 1.5 1.0 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 5.0 4.0 3.0 2.0 1.0 - Source: IATA/Tourism Economics Air Passenger Forecasts IATA Economics www.iata.org/economics 10
Improving technology is a major cost driver Source: IATA/Tourism Economics Air Passenger Forecasts IATA Economics www.iata.org/economics 11
Proportion of countries in each range (%) And constraints on competition are also key 40% Distribution of countries by level of air market liberalization 35% 30% 25% 20% 15% 10% 5% Air markets are less liberal Air markets are more liberal Median WALI scores 2005: 9.9 2011: 10.2 0% 0-5 5-10 10-15 15-20 20-25 25-30 30-35 35-40 45 45-50 Weighted Air Liberalization Index (0 = completely regulated, 50 = completely liberalized) 2005 2011 Source: IATA/Tourism Economics Air Passenger Forecasts IATA Economics www.iata.org/economics 12
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 13
Travel costs could fall 30-50% on liberalization -60% Most similar to the biggest differences Estimated reductions in airfares from liberalisation Most similar to the biggest differences -50% -40% -30% -20% -10% 0% My estimation of what is possible using WTO report data (2006) Agenda for Freedom reports (combined liberalisation) Africa liberalisation report Source: IATA/Tourism Economics Air Passenger Forecasts IATA Economics www.iata.org/economics 14
And price elasticities vary significantly -2.0 David Gillen's air travel own-price demand elasticities (selected measures) -1.5-1.52-1.12-1.15-1.0-0.99-0.79-0.73-0.5-0.27 0.0 All estimates Long haul Long haul business Long haul leisure Short/medium haul Short/medium haul business All short/medium haul leisure Source: IATA/Tourism Economics Air Passenger Forecasts IATA Economics www.iata.org/economics 15
Living standards matter (not aggregate GDP) Trips/ year/ person Months before next trip Low-income 0.04 300 Middle-income 0.29 41 High-income 1.48 8 Below US$20K per person 0.27 44 Above US$20K per person 1.80 7 Source: IATA/Tourism Economics Air Passenger Forecasts IATA Economics www.iata.org/pax-forecast 16
Flights per capita* (2013, logarithmic scale) There is a relationship but not the usual one 10.00 New Zealand Maldives Bahamas Singapore Hong Kong Norway Iceland Switzerland Seychelles Australia UK Luxembourg Brazil Sweden 1.00 Qatar USA Japan France 0.10 Russia China 0.01 Uganda 0.00 0 10 20 30 40 50 60 70 80 90 100 110 120 GDP per capita (2013, US$ '000s) Source: IATA/Tourism Economics Air Passenger Forecasts IATA Economics www.iata.org/pax-forecast 17
Flights per capita* (2013, logarithmic scale) They are certainly key for emerging markets 10.00 Belize Maldives Seychelles 1.00 Indonesia Malaysia Barbados Russia Uruguay 0.10 China Brazil India Gabon Slovakia Swaziland 0.01 Uganda 0.00 Middle-income High-income Low-income 0 2 4 6 8 10 12 14 16 18 20 GDP per capita (2013, US$ '000s) Source: IATA/Tourism Economics Air Passenger Forecasts IATA Economics www.iata.org/pax-forecast 18
Countries becoming middle or high income Source: IATA/Tourism Economics Air Passenger Forecasts IATA Economics www.iata.org/pax-forecast 19
Demographics are important to get right % 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 20
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 21
Working-age population makes more trips 2.5 Ratio of air passengers by age group to population by age group 2.0 1.5 1.0 0.5 0.0 N/A* Under 25 26 to 35 36 to 45 46 to 55 Over 55 LAX surveys (average 2006 and 2011) UK CAA (2012) Eurostat (average 2006 and 2011)* * Note: the Eurostat data shown in the 36 to 45 age group are actually for the wider 25-44 age group Source: UK CAA IATA Economics www.iata.org/pax-forecast 22
100+ Year 1990 Total population = 122.2m IATA Economics www.iata.org/economics 23
100+ Year 1990 Total population = 122.2m IATA Economics www.iata.org/economics 24
100+ Year 1991 Total population = 122.7m IATA Economics www.iata.org/economics 25
100+ Year 1992 Total population = 123.2m IATA Economics www.iata.org/economics 26
100+ Year 1993 Total population = 123.7m IATA Economics www.iata.org/economics 27
100+ Year 1994 Total population = 124.1m IATA Economics www.iata.org/economics 28
100+ Year 1995 Total population = 124.5m IATA Economics www.iata.org/economics 29
100+ Year 1996 Total population = 124.8m IATA Economics www.iata.org/economics 30
100+ Year 1997 Total population = 125m IATA Economics www.iata.org/economics 31
100+ Year 1998 Total population = 125.3m IATA Economics www.iata.org/economics 32
100+ Year 1999 Total population = 125.5m IATA Economics www.iata.org/economics 33
100+ Year 2000 Total population = 125.7m IATA Economics www.iata.org/economics 34
100+ Year 2001 Total population = 126m IATA Economics www.iata.org/economics 35
100+ Year 2002 Total population = 126.2m IATA Economics www.iata.org/economics 36
100+ Year 2003 Total population = 126.5m IATA Economics www.iata.org/economics 37
100+ Year 2004 Total population = 126.8m IATA Economics www.iata.org/economics 38
100+ Year 2005 Total population = 127m IATA Economics www.iata.org/economics 39
100+ Year 2006 Total population = 127.1m IATA Economics www.iata.org/economics 40
100+ Year 2007 Total population = 127.2m IATA Economics www.iata.org/economics 41
100+ Year 2008 Total population = 127.3m IATA Economics www.iata.org/economics 42
100+ Year 2009 Total population = 127.4m IATA Economics www.iata.org/economics 43
100+ Year 2010 Total population = 127.4m IATA Economics www.iata.org/economics 44
100+ Year 2011 Total population = 127.3m IATA Economics www.iata.org/economics 45
100+ Year 2012 Total population = 127.2m IATA Economics www.iata.org/economics 46
100+ Year 2013 Total population = 127.1m IATA Economics www.iata.org/economics 47
100+ Year 2014 Total population = 127m IATA Economics www.iata.org/economics 48
100+ Year 2015 Total population = 126.8m IATA Economics www.iata.org/economics 49
100+ Year 2016 Total population = 126.6m IATA Economics www.iata.org/economics 50
100+ Year 2017 Total population = 126.3m IATA Economics www.iata.org/economics 51
100+ Year 2018 Total population = 126.1m IATA Economics www.iata.org/economics 52
100+ Year 2019 Total population = 125.7m IATA Economics www.iata.org/economics 53
100+ Year 2020 Total population = 125.4m IATA Economics www.iata.org/economics 54
100+ Year 2021 Total population = 125m IATA Economics www.iata.org/economics 55
100+ Year 2022 Total population = 124.6m IATA Economics www.iata.org/economics 56
100+ Year 2023 Total population = 124.2m IATA Economics www.iata.org/economics 57
100+ Year 2024 Total population = 123.7m IATA Economics www.iata.org/economics 58
100+ Year 2025 Total population = 123.3m IATA Economics www.iata.org/economics 59
100+ Year 2026 Total population = 122.8m IATA Economics www.iata.org/economics 60
100+ Year 2027 Total population = 122.3m IATA Economics www.iata.org/economics 61
100+ Year 2028 Total population = 121.7m IATA Economics www.iata.org/economics 62
100+ Year 2029 Total population = 121.2m IATA Economics www.iata.org/economics 63
100+ Year 2030 Total population = 120.6m IATA Economics www.iata.org/economics 64
100+ Year 2031 Total population = 120.1m IATA Economics www.iata.org/economics 65
100+ Year 2032 Total population = 119.5m IATA Economics www.iata.org/economics 66
100+ Year 2033 Total population = 118.9m IATA Economics www.iata.org/economics 67
100+ Year 2034 Total population = 118.3m IATA Economics www.iata.org/economics 68
100+ Year 2035 Total population = 117.7m IATA Economics www.iata.org/economics 69
Trade openness also matters for air travel Country The top 20 The bottom 20 Trade intensity Country Trade intensity Rank* Country Trade intensity Hong Kong 437.6 Brazil 27.9 71 Germany 85.8 Singapore 352.9 United States 30.2 97 Mexico 64.5 Luxembourg 326.6 Pakistan 31.2 98 Canada 64.1 Seychelles 209.4 Central African Rep. 33.1 104 Turkey 60.6 Hungary 197.4 Nigeria 33.1 106 United Kingdom 60.3 Ireland 196.9 Sudan 33.2 109 Italy 58.3 United Arab Emirates 189.7 Venezuela 33.4 110 France 58.3 Slovak Republic 187.9 Argentina 33.4 116 India 55.5 Swaziland 184.4 Colombia 37.7 121 Russia 50.8 Estonia 179.2 Japan 37.8 122 Indonesia 50.5 Malta 178.2 Myanmar 38.4 125 China 48.6 Belgium 171.6 Benin 39.1 137 Japan 37.8 Maldives 167.7 Cuba 39.9 145 United States 30.2 Lithuania 166.6 Martinique 41.2 146 Brazil 27.9 Czech Republic 162.1 Egypt 41.2 Vietnam 157.0 Cameroon 42.0 Netherlands 155.5 Australia 42.2 Slovenia 152.2 Burundi 43.4 Malaysia 151.3 Peru 45.4 Thailand 147.2 Iran 47.5 The G7 and selected emerging markets Source: IATA/Tourism Economics Air Passenger Forecasts IATA Economics www.iata.org/economics 70
Natural and cultural assets matter too The highest 20 The bottom 20 Country Index level Country Index level Rank* Country Index level United States 141.5 Haiti 61.1 1 United States 141.5 Switzerland 141.0 Lesotho 65.6 3 United Kingdom 139.5 United Kingdom 139.5 Burundi 68.4 4 Canada 135.0 Canada 135.0 Sierra Leone 70.4 7 Germany 133.0 Australia 135.0 Chad 70.6 10 Japan 130.7 Spain 134.2 Swaziland 73.6 11 France 130.2 Germany 133.0 Guinea 75.9 12 Brazil 127.7 Sweden 132.7 Moldova 76.1 13 China 127.4 Austria 131.2 Kuwait 78.6 14 Italy 126.4 Japan 130.7 Mozambique 78.9 15 Mexico 125.7 France 130.2 Burkina Faso 79.1 21 India 118.2 Brazil 127.7 Yemen 79.6 27 Turkey 115.9 China 127.4 Benin 80.1 31 Indonesia 114.2 Italy 126.4 Madagascar 80.1 70 Russia 100.7 Mexico 125.7 Bangladesh 81.1 Netherlands 124.4 El Salvador 81.1 Malaysia 123.4 Algeria 81.4 Belgium 122.7 Mali 82.1 Portugal 121.2 Paraguay 82.4 Korea, Republic Of 118.7 Kazakhstan 82.6 The G7 and selected emerging markets Source: WEF Travel and Tourism Competitiveness Index human, cultural and natural resources sub-index IATA Economics www.iata.org/economics 71
The TE-IATA econometric model Equations follow a standard Error Correction Mechanism (ECM) structure involving both short-run growth dynamics and convergence to longer-run level terms The levels relationships are crucial to the twenty-year outlook Short-run dynamics follow the current expected economic cycle and largely include economic drivers A primary driver of long-run levels is income and the share of population able to afford travel Other structural factors will also be accommodated within the long-run equation IATA Economics www.iata.org/economics 72
Short-run equation Passengers between country AA and country BB D(LN(PAXAABB)) = x*d(ln(gdp,aa)) + (1-x)*D(LN(GDP,BB)) + y*( x*ln(up,aa/upave,bb) + (1-x)*LN(UP,BB/UPAVE,BB) ) + z*( x*d(ln(rxaabb))-(1-x)*d(ln(rxaabb)) ) + z1*d(ln(rxtour,aa)) + z2*d(ln(rxtour,bb)) + a* D(LN(PRAABB)) -0.5 * ( LN(PAXAABB(-1)) LN(LRAABB(-1)) ) GDP Unemployment Exchange rate Relative RX Price ECM Assumed GDP elasticity = 1 x share of travel from country AA on AABB flow (from TDM) y elasticity of unemployment (0.1) z elasticity of own nominal exchange rate (0.3) z1,z2 elasticity of cross exchange rate (nominal) ECM coefficient of 0.5 ensures rapid convergence to long-run (90% in 3 years) LRAABB = long-run relationship IATA Economics www.iata.org/economics 73
Long-run equation components Air passenger volumes are modelled according to the following, split overall travel population factors and bilateral route factors Overall travel population factors GDP per capita / wealth effects Population and demographics Trade linkages Bilateral route factors Exchange rates Air fares (includes dynamics of greater access) Destination attractiveness (share of rising outbound) Visa facilitation measures IATA Economics www.iata.org/economics 74
Adding up to differing outlooks for 2014-2034 900 Drivers of additional passenger numbers, million 800 700 Living standards Demographics Price and other 600 500 400 300 200 100 0-100 -200 Source: IATA/Tourism Economics Air Passenger Forecasts IATA Economics www.iata.org/pax-forecast 75
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 76
Uncertainty can also be explored 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 77
For more information. New forecast service: 4,000 O-D country-pairs JV with IATA and Tourism Economics Global, country reports, web-tool For more information: www.iata.org/pax-forecast David Oxley, IATA, oxleyd@iata.org David Goodger, Tourism Economics, dgoodger@tourismeconomics.com IATA Economics www.iata.org/pax-forecast 78