General Trend of the Global Airline Industry
Dr Frankie O’Connell
Istanbul Technical University
Air Transportation Management, MSc. Program
Airline Business Models and Strategic Management
Module #1
8 December 2016
Agenda
•
•
•
•
Global Airline Traffic trends
Traffic Forecasts
Profitability of the Industry
The Problems Facing Network Airlines today that Impact Profitability
 Fuel Volatility
 Fuel Hedging
 Currency Issues
 Overcapacity
 Yields
 Seasonality
• Air Cargo Trends
• Airports – Their ability to make money
• Environmental impacts facing Airlines
3.0
2.5
2.0
1.5
1.0
1.13
1.15
1.14
1.23
1.30
1.40
1.45
1.47
1.56
1.67
1.64
1.63
1.69
1.88
2.02
2.19
2.30
2.37
2.37
2.5
2.69
2.81
2.94
3.02
3.21
3.5
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Billions of passengers
Number of passengers carried worldwide (1991 – 2015)
0.5
0
Source: IATA, ICAO, AEA, AAPA, ATA, AACO
Passenger Traffic transported by different airline* business models
2003 - 2015
2003
2015
% change
Full Service Airlines
1.3 billion
2.17 billion
67%
Low Cost Carriers
178 million
862 million
384%
Regional Airlines
147 million
Charter Airlines
Total
83 million
1.7 billion
107 million
-27%
78 million
-6%
3.21 billion
89%
* Share by top 200 world airlines
Source: ICAO, AEA, ATA, AAPA, AACO
Geographical Distribution of Passenger Traffic*
2000 - 2015
Passengers 2000
(millions)
North America
726
Europe
420
Asia-Pacific
378
Central/South America 82
Middle East
44
Africa
29
Total
* Share by top 200 world airlines
1.67 billion
Passengers 2015
(millions)
924
868
1,035
181
173
34
3.21 billion
% Change
27%
107%
174%
120%
293%
17%
92%
Source: ICAO, AEA, ATA, AAPA, AACO
World Traffic Forecast (measured in RPKs)
1972 - 2034
ICAO data
16
Airbus forecast
14
10
Air traffic has doubled
every 15 years
8
6
Traffic is also expected
to over the next 15 years
4
2
2034
2029
2024
2019
2015
2009
2004
1999
1994
1989
1984
1979
0
1974
RPKs (Trillions)
12
What is driving this traffic?
Source: ICAO and Airbus GMF 2015
Main Drivers for Traffic Growth
People exploring – Tourism (e.g. Egypt)
More economic prosperity – growing middle class (now at 2.7 billion people)
Dynamic growth in emerging markets (China, India, Asia Pacific, Latin America)
Continued growth of Low Cost Carriers (particularly in Asia)
Greater and continued market liberalisation worldwide
More demand for overseas vacations and for Short Break holidays
Weekend Commuters who work and live in different places
Businesses Travel is strongly connected to International Trade and Commerce
Strong correlation between Economic Prosperity and growth in Traffic
215 million people live outside their country of birth (many family and friends will visit)
700,000 foreign students study in the US for example (many family and friends will visit)
The Importance of Airlines
Stimulation of Tourism and Trade
Tourist Spend ($US Billions)
800
700
600
500
400
300
200
2000
2002
2004
2006
2008
2010
2012
Spending by Tourists carried by Air
2014
Top Tourist Cities - 2015
International overnight visitors
London
Bangkok
Paris
Dubai
Istanbul
New York
Singapore
Kuala Lumpur
Seoul
Kong Kong
Tokyo
Barcelona
Amsterdam
Rome
Milan
18.82
18.24
16.06
8.66
8.08
7.63
7.44
7.41
7.17
0
Doha:
Source: Mastercard, 2016
14.26
12.56
12.27
11.88
11.12
10.35
5
10
Millions of Tourists
15
Almost 3 million tourist visits in 2015 – 33% coming form GCC
20
Long term growth prospects of air traffic (2015- 2035)
In terms of Revenue Passenger Kilometres (demand)
2015 traffic
2016 - 2035 traffic
Source: Airbus General Market Forecast 2016
Asia Pacific
Europe
North America
Middle East
Latin America
CIS
Africa
0
1,000
2,000
3,000
4,000
Revenue Passenger Kilometres
2015
2015 - 2035
5,000
6,000
Middle Class Global Population
Households with yearly income between $20,000 and $150,000 at 2015 prices
4.83 billion
5
3.77 billion
Billions of People
4
2.79 billion
3
2,602
1.86 billion
2
3,528
Emerging
Countries
1,738
911
1
956
1,054
1,054
1,174
1,302
2005
2015
2025
2035
6.5 billion
7.2 billion
8.1 billion
8.8 billion
29%
38%
0
46%
55%
Mature
Countries
World population
% of Global
Middle Class
Global GDP growth/decline and length of recession
1971 - 2016
1973 -75
1980-82
2001-03
• Global Conflicts
• 1st Gulf War • US Weakening • Credit Crunch
• Multiple Govt bailouts
• Oil Crisis
• 9/11
$15 to $33 • 2nd Gulf War • Fluctuating Oil prices
• Weak Currencies
10%
9%
8%
Oil to
7%
&
$15
6%
&
5%
&
&
&
&
4% &
& &&
&
&
& &
& & &
&
&
&&&
&
&
3%
&
&
&
&
&&&&
&
2%
&
&
&
&
&
&
&
& &
1%
&
&
0%
-1%
-2%
&
-3%
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
% Change in GDP (Year over year)
•Oil Crisis
• Iran-Iraq war
$3 to $12 • Oil Crisis
•Stock Market $12 to $39
1991-93
2008-10
Source: ICAO, IATA, IMF, Economist Intelligence Unit and World Bank
Correlation of Passenger Traffic and GDP
& World GDP growth
Source: ICAO, IATA, IMF, Economist Intelligence Unit and World Bank
World RPK growth
% Change in Passenger Traffic (RPK) Year over year)
16%
10%
9%
14%
8%
12%
7%
Passenger Traffic
&
10%
6%
&
5%
&
8%
&
&
&
4% &
& &&
&
&
& &
& & &
6%
&
&
&
&
&
&
3%
&
&
&
&
&
& & & & 4%
&
2%
&
&
&
&
&
&
&
& &
2%
1%
&
&
0%
0
GDP Growth
-1%
-2%
-2%
&
-4%
-3%
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
% Change in GDP (Year over year)
1971 - 2015
1978 - 2015
&
$800
&
$700
&
&
&
&
&
&
&
&
&
&
&
&
&
&
&
&
$600
&
$500
&
&
$400
& & & &
$300
$200
$100
Net Profit/Loss
2014
2015
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
$0
& Total Airline Revenues
Source: O’Connell analysis from ICAO and IATA
Airline Revenues (US$ Billions)
& &
1980
$40
$35
$30
$25
$20
$15
$10
$5
$0
$-5
$-10
$-15
$-20
$-25
$-30
1978
Net Profit / Loss (US$ Billions)
Net Profit/Loss and Revenues for World Commercial Airlines
Proportion of Total Revenues to Total Net Profit (2015 data)
Total Revenues ($751 billion)
Total Net Profit ($35.3 billion)
Source: IATA
Why is it so difficult to make money in the Airline Industry???
World Airline revenues and expenses
1991 - 2015
$800
$ Billions
$600
$400
$200
$0
Operating Revenues
Operating Expenses
Source: ICAO and IATA
Fuel is the largest cost facing Airlines
The volatility of Jet Fuel and Crude Oil Prices ($/barrel)
In 2014 Airlines (worldwide) spent $Billions on Fuel?
In 2016 Airlines (worldwide) are estimated to spent?
Source: Platts and IATA
US$ Dollars
2008–2016
$226 Billion
$127 Billion (44% less)
Price of Crude Oil
US Dollars
2011 to August 2016
Airlines buy Fuel in US$ Dollars
Source: Barchart
Index of US Dollar
2011 to August 2016
Cathay Pacific
Fuel Hedging Issues
2015 data
2016: 62% of its Fuel at $85 per barrel
• For the first 6 months of 2016, Cathay posted fuel
hedging losses of: $580 million
• For the second 6 months– it will incur the same losses
2017: 51% of its Fuel at $89 per barrel
2018: 44% of its Fuel at $81 per barrel
Fuel has fallen by 70% since 2014
2019: 8% of its Fuel at $75 per barrel
Airline Fuel Expenses
Emirates Fuel Expenses
2007 - 2016
Singapore Airlines Fuel Cost
2007 - 2016
100%
100%
40%
Fuel
Fuel
Other expenses
Other expenses
Fuel cost on 777-300ER from Abu Dhabi to Chicago (one way) is US$? $150,000
2015 - 2016
2014 - 2015
2013 - 2014
2012 - 2013
2011 - 2012
20% 36.5% 43.8% 34.7% 35% 40.9% 40.6% 38.1% 37.5%
31.8%
0%
2010 - 2011
2015 - 2016
2014 - 2015
2013 - 2014
2012 - 2013
2011 - 2012
2010 - 2011
2009 - 2010
2008 - 2009
0%
32% 35.2% 29.9% 34.5% 40.2% 39.6% 39.1% 34.6% 25.7%
2007 - 2008
20%
2009 - 2010
40%
2008 - 2009
60%
80%
56.2% 65.3% 65% 59.1% 59.4% 61.9% 62.5%
68.2%
68% 64.8% 70.1% 65.5% 59.8% 60.4% 60.9% 65.4% 74.3% 60% 63.5%
2007 - 2008
80%
Currency Issues – Income and Expenses
Turkish Airlines (2015 data)
60%
51.4%
50%
38.8%
40%
30%
27.1%
20% 18.8%
Revenues
Costs
29.3%
14.2% 13.1%
10%
7.3%
0%
US Dollars
Euro's
Turkish Lira
Other Currencies
Source: Turkish Airlines accounts, Q1 2015
Over Capacity Problems
India example
'
$
$
$
2014
$
'
'
2013
$
$
2011
$
'
2010
$
$
2007
'
'
$
2006
'
$
2004
0
$
'
$
2003
'
20
$
2002
40
2005
'
'
2009
60
'
2008
'
2001
Millions
80
'
2012
100
$ Passengers Carried ' Seat Capacity
Indian Carriers have lost billions of dollars over the last number of years while
overcapacity has been a significant contributor to these losses
Source: OAG and DGCA (India) - O’Connell analysis
120
Global Average Return Fare
Before Surcharges and Taxes
$1,200
$1,000
$800
$600
$400
$200
$0
1995
2000
2005
2010
2015?
The average return fare has fallen by more 60% over the last 20 years
Source: IATA
Seasonality of Traffic for Aer Lingus
Monthly Passengers: 2013 - 2014
1,200,000
1,000,000
800,000
)
$
600,000 $)
$
)
)
$
$
)
$
)
$
)
$
)
$
)
)
$
)
$
)
$
400,000
200,000
0
Jan Feb Mar Apr May Jun
Jul
Aug Sep Oct Nov Dec
) 2013 $ 2014
Source: Aer Lingus
Impact of Seasonality on Profits
Operating Profits for Aer Lingus 2009 – 2014
€200
€150
Millions
€100
€50
,
,
2010
2011
,
,
,
2012
2013
2014
€0
€-50
€-100 ,
€-150
2009
Summer
Winter , Total
Source: Aer Lingus Annual Accounts
World’s top 10 Airline Groups by Net Profit
Rank
Airline
US$ millions
1 American Airlines
2 United Airlines
3 Delta Air Lines
4 Emirates Group
5 Southwest Airlines
6 Lufthansa Group
7 Ryanair
8 IAG (BA, Iberia, Vueling, Aer Lingus)
9 Japan Airlines
10 Air China
2015
7,610
7,340
4,526
2,210
2,200
1,873
1,718
1,672
1,450
1,194
(Lufthansa, Swiss Austrian, Brussels)
* Includes special items - reversal of the company’s tax valuation allowance
2014
2,882
1,132
659
1,487
1,136
72
1,081
1,322
1,654
694
2013
-1,233
571
10,500*
1,112
754
416
702
195
2,062
589
Source: Airline Reports 20,16, 2015, 2014,
Passenger Load Factor
1970 - 2015
85%
80%
75%
70%
65%
27%
Increase
60%
55%
50%
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Source: ICAO and IATA
World’s top 12 Underperforming Airlines (Net losses)
Rank
Airline
US$ millions
2015
1
2
3
4
5
6
7
8
9
10
11
12
GOL
Air Berlin
Korean Air
Air India
Thai Airways
Oman Air
Alitalia
LATAM Group
TAP Air Portugal
Avianca
Egyptair
Asiana
-1,263
-493
-483
-402
-379
-225
-219
-219
-172
-140
-132
-123
2014
-473
-497
-195
-955
-479
-286
-762
-110
-112
128
-419
60
2013
2012
-332
-419
-266
-1,032
-389
-295
-765
-281
-8
249
-105
-772
9
348
-1,008
203
-254
-361
-523
-33
38
56
Source: Airline Reports 2016, 2015, 2014, 2013
Air Cargo
• The carriage of cargo by air is an essential pillar of international trade,
Around $6 trillion worth of good by value are carried by air each year
• Around 50 million tonnes of Freight is carried by air each year
• Cargo accounts for 9% of the Industry’s revenues, mostly carried by Flag carriers
World Air Cargo Traffic
1983 – 2014
6.3% growth p.a.
2.6% growth p.a.
Revenue Tonne Kilometres
6.8% growth per annum
2014
Source: Boeing Air cargo market forecast, 2014 -2015
The value of Goods shipped by Air
Around $6.4 trillion worth of goods is now carried by air
Trade Goods ($US Tillions)
$8
$7
,
$6
,
$5
,
,
,
,
,
,
$3
$2
,
,
,
$4
,
,
,
,
,
$1
2000
2002
2004
,
2006
2008
2010
2012
Value of traded goods carried by Air
35% of world trade is carried by air: a key enabler of globalization
Cargo will account for around 9% of the Industry’s revenues in 2015
2014 2015
These are not high value goods being transported
Apple’s global supply chain for iPhone
by Air - 2014 data
Source: ATAG 2015
Long term growth prospects of air cargo (2014- 2033)
In terms of Revenue Tonne Kilometres (demand)
2013
Asia - North America
Europe - Asia
Intra-Asia
Europe - North America
North America
Domestic China
Latin America to Europe
Latin America to North America
Africa - Europe
South Asia - Europe
Middle East - Europe
Intra - Europe
0
20
2014 - 2033
40
60
80
100
120
140
Billions of Revenue Tonne Kilometres (RTKs)
2013
2014 - 2033
Source: Boeing
Very different businesses
Global Air Cargo vs Passenger Revenues
90
70
60
50
US$ Billions (Cargo)
US$ Billions of Dollars (Pax)
80
40
30
2000 2002
2005 2007
2010 2012 2014 2016F
Cargo Revenue
Air Cargo Revenues are no higher no than they were 10 years ago
Source: IATA 2016
1995 1997
Air Cargo
Why is it difficult to make money in Cargo???
Global Air Freight Yields
US$ per Kilo
Source: IATA CASS
Which method of transporting freight is more profitable?
All Freighters or Bellyhold
Full Freighter
Bellyhold Freight on Passenger aircraft
World Freight Load Factor 2007 - 2015
The uniqueness of the 747 Freighter
Freighter Capacity (Tons)
747-800F 140 Tons
777F
100 Tons
A330F
65 Tons
Bellyhold Capacity (with full passenger load)
B777-300ER
B747-400
A340-300
A330-200
A380
B737-800
20 Tons
16.5 Tones
13 Tons
12 Tons
8 Tons
3.6 tons
World Freight by Freighter and Bellyhold
Revenue Tonne Kilometres by Percentage
Bellyhold
Bellyhold
20%
Freighter
40%
Freighter
60%
estimates 40%
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
0%
2003
Revenue Tonne Kilometres (RTKs)
80%
estimates 60%
100%
2033F?
• For every 5 new widebody passenger aircraft delivered - 1 less 100 tonne freighter is required
• At large hub airports such as LHR and Paris CDG, 95% of the freight volume is carried on
Passenger aircraft (Freight Transport Association, 2014)
Source: Air Cargo News, Boeing commercial aircraft, Airbus, O’Connell Forecast based on Industry experts
Air France/KLM change in Cargo Capacity
(Measured in ATKs)
AF/KLM generated €2.7 billion from Cargo in 2014
2013/14
2017/18
72%
28%
14 Freighter
Aircraft
5 Freighter
Aircraft
The Middle East Air Cargo Market
2003 - 2013
Middle East and Europe
Air Cargo accounted for 820,000 tons (2013)
Middle East and Asia Pacific
Air Cargo accounted for 574,000 tonnes (2013
Severe directional imbalances exist in air cargo
Source: Boeing World Cargo Forecast 2014
World’s Top 12 Airports - 2015
Rank
Airport
Passengers (millions)
Market share of top 3 airlines (seats, 2016)
1
Atlanta
101.5
2
Beijing
90
3
Dubai
78
Emirates 62%, Flydubai 14%, Qatar 2%
4
Chicago
76.9
United 44%, American 32%, Delta 4%
5
Tokyo (HND)
75.3
ANA 46%, JAL 32%, Skymark 5%
6
London (LHR) 74.9
BA 48%, Virgin Atlantic 6%, Aer Lingus 3%
7
Los Angeles
74.9
United Airlines 16%, Delta Air Lines 16%, American 15%
8
Hong Kong
68.5
Cathay Pacific 33%, Dragonair 16%, Hong Kong Air 8%
9
Paris (CDG)
65.7
Air France 51%, easyJet 6%, Lufthansa 2%
10 Dallas
64.1
American Airlines 80%, Spirit 4%, United 3%
11 Istanbul
61.3
Turkish Airlines 76.4%, Onur Air 6.8%, AtlasGlobal 4.8%
12 Frankfurt
60.0
Delta 80%, Southwest 10%, United 2%
Air China 39%, China Southern 15%, China Eastern 13%
Lufthansa 65%, Condor 4%, Airberlin 2%
Source: ACI
The Dynamics of the Airport Business Model
Airports make money via:
i) Aeronautical charges
ii) Non-aeronautical charges
Airports make money from Aeronautical based sources
Aircraft
landing
Terminal
Rental fees
Ground Handling
Passenger Charge
Airports make money from Non Aeronautical based sources
Duty
Free
Advertising
Car
Parking
Hangers
Food
and
Beverage
Foreign
Currency
shops
Airport Revenue
% breakdown of sources of airport revenue by region
2013 data
• Airports receive income
from multiple business
platforms
• Aeronautical income is
largest from airlines
• Larger the airport the
more diverse the business
• Each business platform
will have unique market
and business conditions
Source: ACI economics report 2013
Operating Margins for worlds top 100 airports and 150 top airlines
30%
25%
20%
15%
Airlines
Airports
10%
5%
0%
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
-5%
Source: FlightGlobal and Airline Business
Overview of the airport business (2014)
Turnover and operating margin of 7 large airports and their largest airline customer (2014 data)
Turnover
$million
Margin
Turnover
$million
Margin
Heathrow
4,425
37.2%
IAG (BA + Iberia)
26,587
5.1%
Aeroports de Paris
3,679
26.2%
Air France / KLM
32,861
-0.5%
Fraport (Germany)
3,156
20.2%
Lufthansa Group
39,558
3.2%
Port Authority of New
York (JFK + Newark)
2,479
34.5%
United
38,901
6.1%
Hong Kong
2,111
54.3%
Cathay Pacific
13,666
4.2%
Avinor (Norway)
1,674
21.6%
SAS
5,646
0.4%
Incheon (Korea)
1,664
49.7%
Korean Air
11,064
3.2%
Source: FlightGlobal, 2015
Duty Free
In 2015, Dubai Duty Free had sales of: $1.93 billion .... wow
Best selling Items in 2015:
1) Perfumes selling US$311 million (Best Selling category – makes up 16.5% of total Sales)
2) Liquor had US$293 million in sales
3) Tobacco: US$161 million
4) Confectionary US$152 million
5) Gold: US$150.5 million in sales
Source: Dubai Airport, 2016 data
Aviation and the Environment
The Threat
Environmental concerns
1973
2003
2013
Air Transport’s environmental Impact
Global Transport C0 2 Emissions by Mode
Global CO2 Emissions
14.3%
Agriculture & deforestation
9.1%
Residential &Commercial
13.0%
Transportation
19.2%
2.2%
t
or
Power Stations
29.5%
Industrial Processes
20.8%
Fossil Fuel Production
8.4%
Source: Emissions database for Global Athmospheric Research
Source: Emissions database for Global Atmospheric Research
R
d
oa
p
ns
a
Tr
r
Ai
rt
po
s
an
Tr
1.4%
1.3%
ng
pi
ip
h
S
d
an
R
l,
ai
l
In
a
W
rw
te
ay
The EU Emissions Trading Scheme (ETS)
The EU Commission charges all European Airlines a Carbon Tax to operate within Europe.
Ryanair and easyJet for example pay around €0.13 cents per passenger. Then the EU
wanted to charge all airlines operating to/from Europe for Carbon Emissions. IATA
estimated that this emission tax would cost the airline industry at US$900 million for 2013
The RESISTANCE from the rest of the World:
China ‘blocks’ Hong Kong Airlines’ order of ten A380s from Airbus
Chinese aircraft carriers are forbidden from complying with EU ETS
Russian Federation threatens to deny EU trans-Siberia route, actually denies Finnair
new landing rights
The US introduced a bill that prohibits American based carriers from complying with EU ETS
There were a Coalition of the Unwilling that included US, China, Russia, Brazil, India,
Japan, South Korea, Saudi Arabia, Singapore
For the period 2013-2016, the legislation was amended so that Non-EU carriers do not
have to pay the EU ETS fee. ICAO is mandating that a global market-based mechanism
addressing international aviation emissions will be applied by 2020.
Emissions Trading Scheme still applies for all INTRA-European flights
Hamburg
Munich
Istanbul
New Delhi
Take Hamburg to Delhi for example – there is no direct conection
So passengers MUST transfer through a hub. If this is done via
European hub such as Munich this is then subject to an emissions
Trading carbon tax, which increases the ticket cost. However it the
trip is taken via a hub outside the European Union there is NO cost.
Aircraft developments of the Future?
Development driven by Environmental issues
The Boeing 787
Lightweight aircraft
Thank you all very much
Great book !!!