General Trend of the Global Airline Industry Dr Frankie O...
Transcript of General Trend of the Global Airline Industry Dr Frankie O...
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
• 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
Agenda
1.1
3
1.1
5
1.1
4
1.2
3
1.3
0
1.4
0
1.4
5
1.4
7
1.5
6
1.6
7
1.6
4
1.6
3
1.6
9
1.8
8
2.0
2
2.1
9
2.3
0
2.3
7
2.3
7
2.5
2.6
9
2.8
1
2.9
4
3.0
2
3.2
1
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
2011
20
12
20
13
20
14
20
15
0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Number of passengers carried worldwide (1991 – 2015) B
illio
ns
of
pas
sen
gers
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%
* Share by top 200 world airlines
Low Cost Carriers 178 million 862 million 384%
Regional Airlines 147 million 107 million -27%
Charter Airlines 83 million 78 million -6%
Total 1.7 billion 3.21 billion 89%
Source: ICAO, AEA, ATA, AAPA, AACO
Geographical Distribution of Passenger Traffic*
2000 - 2015
Passengers 2000 Passengers 2015 % Change
(millions) (millions)
North America 726 924 27%
Europe 420 868 107%
* Share by top 200 world airlines
Central/South America 82 181 120%
Middle East 44 173 293%
Africa 29 34 17%
Total 1.67 billion 3.21 billion 92%
Source: ICAO, AEA, ATA, AAPA, AACO
Asia-Pacific 378 1,035 174%
1974
1979
1984
1989
1994
1999
2004
2009
2015 0
2
4
6
8
10
12
14
16 ICAO data
2034
Air traffic has doubled every 15 years
2019
2024
2029
RP
Ks
(Tri
llio
ns)
World Traffic Forecast (measured in RPKs)
1972 - 2034
Source: ICAO and Airbus GMF 2015
What is driving this traffic?
Traffic is also expected to over the next 15 years
Airbus forecast
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)
Tou
rist
Sp
en
d (
$U
S B
illio
ns)
2000 2002 2004 2006 2008 2010 2012 2014
200
300
400
500
600
700
800
Spending by Tourists carried by Air
The Importance of Airlines
Stimulation of Tourism and Trade
18.82 London
Top Tourist Cities - 2015 International overnight visitors
So
urc
e: M
aste
rcar
d, 2
01
6
Doha: Almost 3 million tourist visits in 2015 – 33% coming form GCC
16.06 Paris
14.26 Dubai
12.56 Istanbul
12.27 New York
11.12 Kuala Lumpur
10.35 Seoul
8.66 Kong Kong
8.08 Tokyo
7.63
7.44
Barcelona
Amsterdam
7.41
7.17
Rome
Milan
18.24 Bangkok
11.88 Singapore
0 5 10 15 20
Millions of Tourists
Asia Pacific
Europe
North America
Middle East
Latin America
CIS
Africa
0 1,000 2,000 3,000 4,000 5,000 6,000
Long term growth prospects of air traffic (2015- 2035) In terms of Revenue Passenger Kilometres (demand)
S
ourc
e: A
irbus
Gen
eral
Mar
ket
Fore
cast
2016
2015 traffic
2015
Revenue Passenger Kilometres
2016 - 2035 traffic
2015 - 2035
956 1,302
2005 2015 2025 2035 0
1
2
3
4
5
Bill
ion
s o
f P
eo
ple
Middle Class Global Population
Households with yearly income between $20,000 and $150,000 at 2015 prices
6.5 billion
29%
Mature Countries
1,054 1,174
2,602
3.77 billion
8.1 billion
46%
World population
% of Global Middle Class
7.2 billion
38%
1,738
2.79 billion
1,054
3,528
4.83 billion
8.8 billion
55%
1,302
911
1.86 billion Emerging Countries
&
&
& &
& &
& & & &
& &
&
&
& & & &
& & &
& & &
& & & &
& & &
& & &
& & & &
&
&
&
& & & &
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
0% 1% 2% 3% 4% 5% 6% 7% 8% 9%
10%
-1% -2% -3%
% C
han
ge in
GD
P (
Year
ove
r ye
ar)
Global GDP growth/decline and length of recession 1971 - 2016
Source: ICAO, IATA, IMF, Economist Intelligence Unit and World Bank
1973 -75
•Oil Crisis
$3 to $12
•Stock Market
1991-93
• 1st Gulf War
• Oil Crisis
$15 to $33
Oil to
$15
2001-03
• US Weakening
• 9/11
• 2nd Gulf War
2008-10 • Global Conflicts
• Credit Crunch
• Multiple Govt bailouts
• Fluctuating Oil prices
• Weak Currencies
1980-82
• Iran-Iraq war
• Oil Crisis
$12 to $39
&
&
& &
& &
& & & &
& &
&
&
& & & &
& & &
& & &
& & & &
& & &
& & &
& & & &
&
&
&
& & & &
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
0% 1% 2% 3% 4% 5% 6% 7% 8% 9%
10%
-1% -2% -3%
World GDP growth &
% C
han
ge in
GD
P (
Year
ove
r ye
ar)
GDP Growth
World RPK growth
-4%
-2%
0
2%
4%
6%
8%
10%
12%
14%
16%
% C
han
ge in
Pas
sen
ger
Traf
fic
(R
PK
) Ye
ar o
ver
year
)
Passenger Traffic
Correlation of Passenger Traffic and GDP 1971 - 2015
Source: ICAO, IATA, IMF, Economist Intelligence Unit and World Bank
&
&
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
2014
$0 $5
$10 $15 $20 $25 $30 $35 $40
$-5 $-10 $-15 $-20 $-25 $-30
Net Profit/Loss
Ne
t P
rofi
t /
Loss
(U
S$ B
illio
ns)
20
15
Air
line
Re
ven
ues
(U
S$ B
illio
ns)
&
&
& & & & &
& & & & &
& & &
& & &
&
&
&
&
& & &
Total Airline Revenues &
$800
$0
$400
$600
$200
$100
$300
$700
$500
Net Profit/Loss and Revenues for World Commercial Airlines
1978 - 2015
Source: O’Connell analysis from ICAO and IATA
Total Revenues ($751 billion)
Total Net Profit ($35.3 billion)
Proportion of Total Revenues to Total Net Profit (2015 data)
Source: IATA
Why is it so difficult to make money in the Airline Industry???
$0
$200
$400
$600
$800
Operating Revenues
World Airline revenues and expenses
1991 - 2015
Source: ICAO and IATA
$ B
illi
on
s
Operating Expenses
Fuel is the largest cost facing Airlines
The volatility of Jet Fuel and Crude Oil Prices ($/barrel) 2008–2016
US$
Do
llars
Sou
rce:
Pla
tts
an
d IA
TA
In 2014 Airlines (worldwide) spent $Billions on Fuel? $226 Billion In 2016 Airlines (worldwide) are estimated to spent? $127 Billion (44% less)
Price of Crude Oil 2011 to August 2016
US
Do
llars
Source: Barchart Airlines buy Fuel in US$ Dollars
Index of US Dollar 2011 to August 2016
Cathay Pacific Fuel Hedging Issues 2015 data
2016: 62% of its Fuel at $85 per barrel
2017: 51% of its Fuel at $89 per barrel
2018: 44% of its Fuel at $81 per barrel
2019: 8% of its Fuel at $75 per barrel Fuel has fallen by 70% since 2014
• For the first 6 months of 2016, Cathay posted fuel
hedging losses of:
• For the second 6 months– it will incur the same losses
$580 million
Airline Fuel Expenses
Emirates Fuel Expenses 2007 - 2016
Fuel cost on 777-300ER from Abu Dhabi to Chicago (one way) is US$? $150,000
32% 35.2% 29.9% 34.5% 40.2% 39.6% 39.1% 34.6% 25.7%
20
07
- 2
00
8
20
08
- 2
00
9
20
09
- 2
01
0
20
10
- 2
011
20
11
- 2
01
2
20
12
- 2
01
3
20
13
- 2
01
4
20
14
- 2
01
5
2
01
5 -
20
16
0%
20%
40%
60%
80%
100%
Fuel
68% 64.8% 70.1% 65.5% 59.8% 60.4% 60.9% 65.4% 74.3%
Other expenses
36.5% 43.8% 34.7% 35% 40.9% 40.6% 38.1% 37.5% 31.8%
20
07
- 2
00
8
20
08
- 2
00
9
20
09
- 2
01
0
20
10
- 2
011
20
11 -
20
12
20
12
- 2
01
3
20
13
- 2
01
4
20
14
- 2
01
5
20
15
- 2
01
6
0%
20%
40%
60%
80%
100%
Fuel
63.5% 56.2% 65.3% 65% 59.1% 59.4% 61.9% 62.5% 68.2%
Other expenses
Singapore Airlines Fuel Cost 2007 - 2016
18.8%
38.8%
13.1%
29.3%
7.3%
US Dollars
0%
10%
20%
30%
40%
50%
60%
Revenues
14.2%
27.1%
Other Currencies Turkish Lira Euro's
51.4%
Costs
Currency Issues – Income and Expenses Turkish Airlines (2015 data)
Source: Turkish Airlines accounts, Q1 2015
' '
' ' ' '
$ $
$ $ $ $ $
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014 0
20
40
60
80
100
120
Passengers Carried $ Seat Capacity '
$
$ $
$ $
$ $ $
'
'
' ' '
' ' ' '
S
ourc
e: O
AG
and D
GC
A (
India
) -
O’C
onnel
l an
alysi
s
Indian Carriers have lost billions of dollars over the last number of years while
overcapacity has been a significant contributor to these losses
Over Capacity Problems
India example
Mill
ion
s
1995 2000 2005
$0
$200
$400
$600
$800
$1,000
$1,200
2015? 2010
Global Average Return Fare Before Surcharges and Taxes
Source: IATA
The average return fare has fallen by more 60% over the last 20 years
$
$
) )
) )
) ) ) )
)
)
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
2013 )
)
)
$ $
$
$ $ $
$
$
2014 $
$
$
Seasonality of Traffic for Aer Lingus Monthly Passengers: 2013 - 2014
Source: Aer Lingus
2009 2010 2011 2012 2013 2014
€0
€50
€100
€150
€200
€-50
€-100
€-150
Summer Winter
, ,
, ,
,
Total ,
,
Impact of Seasonality on Profits Operating Profits for Aer Lingus 2009 – 2014
Source: Aer Lingus Annual Accounts
Mill
ion
s
World’s top 10 Airline Groups by Net Profit
Rank Airline US$ millions
2015 2014 2013
1 American Airlines 7,610 2,882 -1,233
2 United Airlines 7,340 1,132 571
3 Delta Air Lines 4,526 659 10,500*
4 Emirates Group 2,210 1,487 1,112
5 Southwest Airlines 2,200 1,136 754
6 Lufthansa Group (Lufthansa, Swiss Austrian, Brussels) 1,873 72 416
7 Ryanair 1,718 1,081 702
8 IAG (BA, Iberia, Vueling, Aer Lingus) 1,672 1,322 195
9 Japan Airlines 1,450 1,654 2,062
10 Air China 1,194 694 589
Source: Airline Reports 20,16, 2015, 2014, * Includes special items - reversal of the company’s tax valuation allowance
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
50%
55%
60%
65%
70%
75%
80%
85%
Passenger Load Factor
1970 - 2015
Source: ICAO and IATA
27% Increase
World’s top 12 Underperforming Airlines (Net losses)
Rank Airline US$ millions
2015 2014 2013 2012
1 GOL -1,263 -473 -332 -772 2 Air Berlin -493 -497 -419 9 3 Korean Air -483 -195 -266 348 4 Air India -402 -955 -1,032 -1,008 5 Thai Airways -379 -479 -389 203 6 Oman Air -225 -286 -295 -254 7 Alitalia -219 -762 -765 -361 8 LATAM Group -219 -110 -281 -523 9 TAP Air Portugal -172 -112 -8 -33 10 Avianca -140 128 249 38 11 Egyptair -132 -419 - - 12 Asiana -123 60 -105 56
Source: Airline Reports 2016, 2015, 2014, 2013
Air Cargo
• Cargo accounts for 9% of the Industry’s revenues, mostly carried by Flag carriers
• 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
2014
Rev
enu
e T
on
ne
Kil
om
etre
s
6.8% growth per annum 2.6% growth p.a.
Source: Boeing Air cargo market forecast, 2014 -2015
World Air Cargo Traffic 1983 – 2014
6.3% growth p.a.
,
2000 2002 2004 2006 2008 2010 2012 2014
The value of Goods shipped by Air
, , , ,
,
,
,
,
,
,
, , , ,
,
2015
$1
$8
$2
$3
$4
$5
$6
$7
Trad
e G
oo
ds
($U
S Ti
llio
ns)
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
Around $6.4 trillion worth of goods is now carried by air
These are not high value goods being transported
Apple’s global supply chain for iPhone by Air - 2014 data
Source: ATAG 2015
Asia - North America
Europe - Asia
Intra-Asia
Europe - North America
North America
Domestic China
Latin America to Europe
Latin America to North America
Africa - Europe
South Asia - Europe
Middle East - Europe
Intra - Europe
0 20 40 60 80 100 120 140
2013
Billions of Revenue Tonne Kilometres (RTKs)
2013
2014 - 2033
2014 - 2033
Long term growth prospects of air cargo (2014- 2033) In terms of Revenue Tonne Kilometres (demand)
Source: Boeing
1995 1997 2000 2002 2005 2007 2010 2012 2014 2016F
Cargo Revenue
90
30
50
40
60
80
70
US$
Bill
ion
s (C
argo
)
US$
Bill
ion
s o
f D
olla
rs (
Pax)
Very different businesses
Global Air Cargo vs Passenger Revenues
Sourc
e: I
AT
A
2016
Air Cargo Revenues are no higher no than they were 10 years ago
Air Cargo
Why is it difficult to make money in Cargo???
Global Air Freight Yields US$ per Kilo
Source: IATA CASS
Full Freighter Bellyhold Freight on Passenger aircraft
Which method of transporting freight is more profitable?
All Freighters or Bellyhold
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 20 Tons B747-400 16.5 Tones A340-300 13 Tons A330-200 12 Tons A380 8 Tons B737-800 3.6 tons
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014 0%
20%
40%
60%
80%
100% Fr
eig
hte
r B
elly
ho
ld
World Freight by Freighter and Bellyhold Revenue Tonne Kilometres by Percentage
Source: Air Cargo News, Boeing commercial aircraft, Airbus, O’Connell Forecast based on Industry experts
Rev
en
ue
Ton
ne
Kilo
met
res
(RTK
s)
2033F? Fr
eig
hte
r B
elly
ho
ld
estimates 6
0%
estim
ates 40
%
• 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)
14 Freighter
Aircraft 2013/14 72% 28%
Air France/KLM change in Cargo Capacity
(Measured in ATKs)
2017/18 5 Freighter
Aircraft
AF/KLM generated €2.7 billion from Cargo in 2014
Middle East and Europe Middle East and Asia Pacific
The Middle East Air Cargo Market 2003 - 2013
Source: Boeing World Cargo Forecast 2014
Severe directional imbalances exist in air cargo
Air Cargo accounted for 820,000 tons (2013) Air Cargo accounted for 574,000 tonnes (2013
World’s Top 12 Airports - 2015
1 Atlanta 101.5 Delta 80%, Southwest 10%, United 2%
Rank Airport Passengers (millions) Market share of top 3 airlines (seats, 2016)
2 Beijing 90 Air China 39%, China Southern 15%, China Eastern 13%
6 London (LHR) 74.9 BA 48%, Virgin Atlantic 6%, Aer Lingus 3%
4 Chicago 76.9 United 44%, American 32%, Delta 4%
7 Los Angeles 74.9 United Airlines 16%, Delta Air Lines 16%, American 15%
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%
3 Dubai 78 Emirates 62%, Flydubai 14%, Qatar 2%
8 Hong Kong 68.5 Cathay Pacific 33%, Dragonair 16%, Hong Kong Air 8%
12 Frankfurt 60.0 Lufthansa 65%, Condor 4%, Airberlin 2%
5 Tokyo (HND) 75.3 ANA 46%, JAL 32%, Skymark 5%
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
Car Parking
Duty Free
Hangers
Advertising
Food and Beverage
Foreign Currency shops
• 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
% breakdown of sources of airport revenue by region
2013 data
Source: ACI economics report 2013
Airport Revenue
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
0%
5%
10%
15%
20%
25%
30%
-5%
Airports
Airlines
Operating Margins for worlds top 100 airports and 150 top airlines
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
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
Duty Free
Source: Dubai Airport, 2016 data
Aviation and the Environment The Threat
Environmental concerns
1973
2003
2013
Global CO2 Emissions
Transportation
19.2%
Residential &
13.0%Agriculture & deforest
9.1%
Power Stations
29.5%
Fossil Fuel Production8.4%
Industrial Processes20.8%
Commercial
ation
Source: Emissions database for Global Athmospheric Research
Source: Emissions database for Global Atmospheric Research
Air Transport’s environmental Impact
Global Transport C0 2 Emissions by Mode
14.3%
2.2%1.4% 1.3%
Roa
d Tra
nspo
rt
Air
Trans
port
Shipp
ing
Rail, In
land
Wat
erway
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 EU Emissions Trading Scheme (ETS)
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
The RESISTANCE from the rest of the World:
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.
Munich
Hamburg
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.
Emissions Trading Scheme still applies for all INTRA-European flights
Aircraft developments of the Future? Development driven by Environmental issues
The Boeing 787
Lightweight aircraft
Thank you all very much
Great book !!!