The Future Shape of the Air Transport Industry
Dr Peter MorrellDirector of Research
Department of Air TransportCranfield University
Brighton, 7 June 2006
2Dr Peter Morrell, Cranfield University, 7 June 2006
Outline
Future passenger market trends
Short- versus long-haul?
Can constraints be overcome?
Business model shift
The airline product and segmentation
IFE
Conclusions
3Dr Peter Morrell, Cranfield University, 7 June 2006
Future market trends
Strong growth expected in long-haul leisure, but security will limit potential destinations
Strong growth in short break holidays, with greater choice offered in terms of:Departure times/days
Hotels and quality of service
Booking and payment processes
Network airlines focus on connections to their more lucrative long-haul services
More holiday de-packaging, but still a role for on-line consolidation
4Dr Peter Morrell, Cranfield University, 7 June 2006
Where can we go on holiday? (January 2005)
AlgeriaIndiaIndonesiaIsraelNigeriaPakistanPhilippinesRussia
UK government advises against all travel to Somalia and Ivory Coast, and to parts of 30 other countries, including:
IsraelLebanonNigeriaPakistanSri LankaThailand
UK government advises against all but essential travel to CAR, Guyana, Haiti and Iraq, and to parts of 24 other countries, including:
5Dr Peter Morrell, Cranfield University, 7 June 2006
Source: The Economist13 May 2006
Don’t forget outbound travel from fast-growing economies with large populations
6Dr Peter Morrell, Cranfield University, 7 June 2006
BAA UK airport passenger profile
Core market of more experienced, frequent travellersCore market of more experienced, frequent travellers
More independent travel by the young and ‘silver surfers’More independent travel by the young and ‘silver surfers’
Above average growth in:Above average growth in: - long haul- long haul
- short breaks- short breaks
More women, particularly on businessMore women, particularly on business
More non-English speakersMore non-English speakers
Less ‘pure’ business, more leisure and business/leisure mixesLess ‘pure’ business, more leisure and business/leisure mixes
Socio-economic profile closer to the averageSocio-economic profile closer to the average
Source: Stan Maiden, BAA Presentation, 2004
7Dr Peter Morrell, Cranfield University, 7 June 2006
Spending patterns? Rising disposable incomes More flexible working, labour mobility, short
breaks Ageing populations (health care and pensions) Early retirement (more time for travel, but
savings?) Competing attractions (saving/investing, sport,
eating out, TV/films/gambling, more expensive car/house …)
Support ratio in China: 6 people of working age supporting each person over 65 in 2000; falls to less than 2:1 in 2050
8Dr Peter Morrell, Cranfield University, 7 June 2006
Forecasting leisure travel
Leisure travel purpose:
Crash out and do nothing (usually sun/sea)
Activity (ski, dive, climb, walk, explore)
Greater discretionary income, lower prices, easier to purchase and good marketing
Travellers historically perceived the air fare as the largest component in air travel cost; no longer so on many short sectors
Forecasters and planners need to understand these demand drivers
9Dr Peter Morrell, Cranfield University, 7 June 2006
UK Government forecasts: UK Residents (Passengers)
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
1998-2010 incl. LCC
1998-2010 ex LCC
Actual 1989-1998
Average percent pa
Long-haul
Short-haul
Source: UK Department for Environment, Transport & Regions: Air Traffic Forecasts for the UK 2000, May 2000
10Dr Peter Morrell, Cranfield University, 7 June 2006
Constraints: Fuel prices
Limited impact of current high fuel prices on the world economy, and thus air traffic growth rates
Some reduction in demand from high fuel surcharges, but more than outweighed by low cost airline growth
Era of $50-70 crude oil will lead to:Economical extracting of alternative (non-OPEC) supplies
Economical application of known technologies extracting of alternative (non-OPEC) supplies
Economical application of known technologies to engine and aircraft design for greater fuel efficiency
11Dr Peter Morrell, Cranfield University, 7 June 2006
World airlines: share of fuel in total costs
10.0
15.0
20.0
25.0
30.0
35.0
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Per
cen
t o
f to
tal o
per
atin
g c
ost
s
?
Source: ICAO
In 2005/06: British Airways: 20% compared to Singapore Airlines 24%
12Dr Peter Morrell, Cranfield University, 7 June 2006
13Dr Peter Morrell, Cranfield University, 7 June 2006
Environmental constraints
Local noise concerns: major airports attract housing and industry Local air quality regulations: coming soon from Brussels; a condition
for new (short) runway at London Heathrow Climate change: air transport currently only small contribution, but
greater impact at cruise altitude Proposals for aircraft engine emissions trading and an emissions tax
unlikely to impose excessive cost on industry: already coping well with fuel price escalation
Difficult to achieve future fuel efficiency increase in excess of traffic gowth rates: but laminar flying wing estimated to give 70% reduction in fuel burn per tonne-km vs existing aircraft
14Dr Peter Morrell, Cranfield University, 7 June 2006
Type of flight in 2004 IATA world plus major LCCs
0 10 20 30 40 50 60 70 80 90
Domestic
International
Short/medium haul
Long-haul
% world total
passenger-kms
Passengers
Source: IATA WATS and ATI
15Dr Peter Morrell, Cranfield University, 7 June 2006
Main airline business models
Network carriersGlobal networks and hubs feeding traffic on to long-haul flightsPart of strategic alliance structure
Low Cost Carriers (LCCs)Point-to-point, with self service transfersSimple product and fare structure
Regional airlinesSome feed to network carriers and inter-regional low density flights with small jets or turbo-props
Charter/leisure specialistsLower frequency flights to leisure destinationsTour operator ownership: most seats still ‘packaged’
16Dr Peter Morrell, Cranfield University, 7 June 2006
European seat-kms by airline group
1999 2004
Network carriers 84% 77%
Regional carriers 14% 12%
Low cost carriers 2% 11%
Total seat-kms (ASKs) per week in June 2004: 24 billion
Over same period:
LCCs increase share from 3% to 15% of total departures
Regional carriers’ departure share drops from 29% to 21%
17Dr Peter Morrell, Cranfield University, 7 June 2006
Network vs LCC model
Both dedicated to safe and punctual flights
The network model adapts operations to the various market segment needs
The LCC model is based on lowest cost scheduled operations: assume that low fare is major requirement (passengers adapt to airline)
Both models increasingly see advantages of separate pricing for extra services (ancillary revenues)
18Dr Peter Morrell, Cranfield University, 7 June 2006
Network carriers:Weighted average long-haul aircraft seats by class, 2005
F/C Class Y Class Total seats % F/C
Lufthansa 64 245 308 21
British Airways 64 238 302 21
Iberia 49 240 288 17
KLM 43 239 282 15
Air France 48 225 273 18
SAS 54 207 261 21
Austrian 26 227 253 10
Alitalia 32 217 249 13
Swiss 55 157 212 26
Source: JP Fleets and airline websites
19Dr Peter Morrell, Cranfield University, 7 June 2006
Market segmentation by flight
More business class only flights on long-haul
LCCs greater focus on leisure passengers, but some (easyJet, JetBlue etc) targeting business passengers as well:Some network airlines copying LCC tricks, and lowering service standards
LCC product generally not attractive to business, especially on longer sectors (eg no seat allocation, 30” seat pitch)
easyJet experimenting with priority boarding
20Dr Peter Morrell, Cranfield University, 7 June 2006
IFE needs: long-haul
Premium class passengersOwn equipment (laptop, phone ..)?Sleep on flight: disturbance from neighbour?Extra revenue or include in price?
Economy class passengersLower comfort, greater need for entertainmentMore children: high video/games usersSleeping more difficult (can sleep on arrival)Generally higher usageCharge extra?
21Dr Peter Morrell, Cranfield University, 7 June 2006
IFE needs: short/medium-haul
Premium class passengers
Own equipment (laptop, phone ..)?
Extra revenue or include in price?
Economy class passengers
Tight seat pitch: need for IFE on longer sectors
More children: high video/games users
Aircraft weight saving: mobile units?
Ryanair trial not successful
Charge extra?
22Dr Peter Morrell, Cranfield University, 7 June 2006
Conclusions
Large potential market if prices remain affordable
Business and leisure markets will both be huge, greater
number of trips satisfying both demands
Short-haul will remain dominant in terms of passenger
numbers, but growing revenue share of long-haul
Specialisation and ‘one-stop’ shop models of airline
service will co-exist
LCC model will increasingly target business passengers
IFE needs to meet varying demands depending on flight
sector length