Aviation Industry Trends

Aviation Industry TrendsDr. Mike Tretheway

Realizing the vision together

Global air passenger traffic has been resilient.

Air Passenger Traffic

• Air travel has its ups and downs, but it has continued to grow

• ICAO expects global traffic to reach 5 billionover the next 20 years (3.5% AAGR).

Source: International Civil Aviation Organization (ICAO) and International Air Transport Association (IATA).


World Regions will Grow at Different Rates

Global Air Passenger Traffic by Region

• Air passenger traffic is expected to continue to grow at different rates around the world by region.

• Driven by economic growth, Latin America, Middle East and Asia Pacific are expected to lead global growth over the next 20 years.

Source: Boeing Current Market Outlook 2011-2030.


International traffic grows faster than domestic

Air Passenger Traffic


24%

76%

33%

67%


Germany, United States, China, United Kingdom,France, Canada, Japan, Italy, Russia, Australia

Other

Top 10 Origin Markets -2010

47%

53%

U.S. 8.2%

Canada3.2%

Shift and Diversification of Tourism Source Markets

Tourism Source Markets

• Total tourism demand accounted for by the top 10 markets world-wide

has declined from 70% in 1990

to less than 50% in 2010.

Source: World Tourism Organization (UNWTO).

Top 10 Origin Markets - 1990

United States, Germany, Japan, United Kingdom,Italy, France, Canada, Austria, Netherlands, Sweden

70%

30%

U.S. 14%

Other

Canada4.1%


Germany, United States, China, United Kingdom,France, Canada, Japan, Italy, Russia, Australia

Other

Top 10 Origin Markets -2010

47%

53%

U.S. 8.2%

Canada3.2%

Shift and Diversification of Tourism Source Markets

Tourism Source Markets

• In addition, there has also been a shift in the relative ranking of tourism spending by market:

• Germany overtakes U.S. as largest source;

• China one of the top 3 source markets;

• Japan relative ranking has dropped.

• These trends are a reflection of the growing significance of emerging markets, and highlight the importance of a targeted strategy.

Source: World Tourism Organization (UNWTO).

Top 10 Origin Markets - 1990

United States, Germany, Japan, United Kingdom,Italy, France, Canada, Austria, Netherlands, Sweden

70%

30%

U.S. 14%

Other

Canada4.1%


Financial performance of airline industry continues to be volatile.

Airline Industry Financial Performance



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Crude Oil Spot Prices

Fuel prices are having big impact on airlines.

Fuel Prices

• Fuel accounts for a significant proportion of total airline costs at about 25%.

• After peaking in 2008, fuel prices have dropped, but continue to fluctuate regularly.

• Airlines are learning to live with high fuel prices

Source: U.S. Energy Information Administration, Airlines for America (Air Transport Association).

Realizing the vision together8

Consensus Economics Oil Price Forecast

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Oil Price Forecast

•Its not down•Its not back to $145


2 Sigma Range of Forecasts

Forecast 95% ranges

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•Everyone seems to agree



Forecast 95% ranges

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Note the scale


If History Repeats ….

Oil Price with Full Historical Range

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If History Repeats ….

Oil Price with Full Historical Range

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Airlines have learned to manage with high fuel prices. But not with fuel price volatility!


In the future, airports may have to be capable of providing & handling two type of fuels – kerosene fuel and bio-fuel.

Alternative Fuels

• Although aircraft efficiency has improved, only way for the airline industry to meet IATA’s stated goal of zero carbon emissions by 2050 is by adopting alternative fuels.

• Over the next 20 years, it is expected thatbio-fuels will be introduced into commercial aircraft.

• Bio-fuel will be used in parallel with kerosene fuel for a considerable period of years.

• Implications for airports include source, infrastructure, handling


In the future, airports may have to be capable of providing & handling two type of fuels – kerosene fuel and bio-fuel.

Alternative Fuels

• Furthermore, demand for oil is expected to continue to outpace growth of supply as emerging markets continue to grow, and reliance on oil & coal as an energy source increases after the nuclear disaster in Japan.

• Price of fuel expected to continue to increase in the long-term and may reach$150-$200/barrel in 10 years.

• Potential for carbon tax will also encourage adoption of alternative fuels.

• Some airlines, such as United/Continental, BA, and Qantas have already tested alternative fuels.

• Over the next 20 years, it is expected thatbio-fuels will be introduced into commercial aircraft.

• Bio-fuel will be used in parallel with kerosene fuel for a considerable period of years.

• Implications for airports include source, infrastructure, handling


Scheduled aircraft deliveries will increase global air capacity

Aircraft Deliveries: 1995-2020

Source: Airbus, Boeing, The Airline Monitor (January/February 2012).

• Record deliveries of aircraft of all sizes will drive strong capacity growth.

• This may result in capacity gluts in some markets, especially Europe to Asia.

• Some of these aircraft could be redeployed to North American markets.


Ultra low cost carriers are changing airport business model.

Ultra Low Cost Carriers

• Growth in recent years driven by Ultra Low Cost Carriers (ULCCs) such as Allegiant Ryanair, Wizzair, etc.

• ULCCs differ from LCCs :• Rely on traffic

stimulation more than market steal;

• Generate high proportions of ancillary revenues; and

• Do not offer ‘frills’, even if they enhance revenues, if the frill adds to costs.




• ULCCs have power to shift passenger travel and airport usage patterns to much greater degree than traditional LCCs.




• The ULCC business model is based strictly around low fares,

which requires low costs.

This means that airports can only attract ULCCs by offering sustained low fees (not simply introductory incentives).

Airports must therefore adapt their own business models to maximise generation of non-aeronautical revenues from ULCC passengers.




• Canada has no ULCC presently. However, Allegiant Air attracts many Canadian travellers by offering steeply discounted fares at U.S. border airports. The current tax and border fee regime in Canada means that even with airport fees at zero, ULCCs cannot offer prices low enough to stimulate sufficient traffic.


Internet creates new interline products

Google/Social Media/Visa Int’l: Re-packaging airline Product?

• Internet companies have potential to repackage airline products:

• Kayak “hacker fares” create interline connections not available from carriers;

• Google has invested in airline reservation business;

• Could develop platform to enter business directly;

• Could offer value added packages for trip fulfillment:

• Would you pay $125 for guarantee that you will get to your destination today?

• Concierge services with call centre partner.

ITA


Internet creates new interline products

Google/Social Media/Visa Int’l: Re-packaging airline Product?

• Skeptical?Did the following industries anticipate impact of internet companies?• Music• Video rental• Newspapers• Book publishing • Cable TV• Income tax• Investment • Coming: retail • Financial

payments


Fleet Growth

Key US LCCs & ULCCs continue to grow. Aircraft units on order/option represent 88% growth on current fleet. While some will be used for fleet replacement, these carriers will have the capacity to expand.

Allegiant’s apparent lack of future fleet growth is misleading, as used aircraft need not be ordered with the lead time (or publicity) of new aircraft. G4 has increased its fleet by 107% in the last 5 years, and will continue to grow. Allegiant is also increasing total existing fleet capacity by 11% through seat reconfiguration.

5 Aircraft on Order/Option

5 in Current Fleet


Westjet planning to establish new regional airline with smaller aircraft.

Westjet

• WS announced plans to move ahead with a regional airline operating aircraft in the 70-seat range(e.g., Q400s, ATR-72s)

• Two objectives:1. Drive domestic growth

by adding markets not large enough to support 737 service.

2. Build connecting networks at key airports (YYC, YYZ)

Having regional feed is a prerequisite if WS intends to add widebody aircraft to enable future long haul services. This may be a likely step within the next decade.

Regional feed also assists its alliance strategy,


Airlines are focusing more on air cargo.

Air Cargo

• Yield pressures on passenger services have airlines paying more attention to cargo revenues.

Source: InterVISTAS Market Research and GDS data.Notes: U.S. average includes AA, CO, DL, UA, US and WN.


Automated kiosks are playing a greater role at airports.

Automation

• Approximately 90% of domestic Air Canada passengers use kiosk, mobile check-in or automated bag-tag process.

• WestJet has approximately 85% of passengers check-in via the internet or a kiosk on-site at the largest Canadian airports.

• Ryanair charges fee if kiosk is not used

• Amsterdam airport is an example of a fully automated bag drop function.

August 2011, Amsterdam Bag-Drop

Automation & Check-In:

• Mobile check-in and boarding passes have nearly replaced the traditional check-in process.

• Canada was a pioneer in self bag-tag.

Auckland, New Zealand

Climate Change


Is Aviation a Culprit or Victim?

"Making selfish choices such as flying on holiday or buying a large car are a symptom of sin.”• "Sin is not just a restricted list of moral mistakes. It is

living a life turned in on itself where people ignore the consequences of their actions."

• Richard ChartresBishop of London


Community Response/Backlash


Sophisticated Messaging on Roads & Rail Routes to LHR


Coming Soon to North America

Climate Change issue is not confined to Europe• North American attitudes are

shifting rapidly

• Aviation will be targeted


IATA commitment

• IATA goals• 2020:

25% improvement in fuel efficiency• From technology and operating practices

• 2050air travel to be carbon neutral• Further technology and operational changes

• Adoption of bio fuels


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Aviation Industry Trends