Present difficulties apart, the Asia-Pacific region appears to have plenty of growth still to come. But how smoothly economic growth will translate into a rise in air travel is not so certain, writes Chris Tarry.
Over the last couple of months this column has looked at the underlying relationship between economic (GDP) growth and air travel. In North America and Europe, the broad message has been not to rely too heavily on the old rule of thumb that saw international traffic growth running at roughly twice the rate of the economy. Turning now to the Asia-Pacific region, such a warning would seem to be misplaced.
In broad terms, and looking beyond the short-term impact of SARS, there can be little doubt that the region, with its rapidly expanding economies, has considerable potential for passenger growth. However, that begs the question of the degree to which the economy is, in fact, driving traffic.
There is an obvious caution that Asia-Pacific is not a single homogeneous market. The outlook in Japan is quite different from that in Singapore or China. Yet one common theme over much of the region is the presence of high growth markets. The traditional view has been that the resulting rate of traffic growth for Asian airlines reflects not only a higher rate of economic activity but also the fact that traffic growth runs at a a higher multiple of GDP growth. In part this is considered to be due to rising income levels increasing the number of households above a threshold where to them air travel becomes affordable. Whilst this may hold for the domestic services, there is little or no evidence of a higher multiplier on international services for airlines from this region. Indeed it is possible to rationalise this is a number of ways: the balance between inbound and outbound traffic; the availability of capacity; and the availability of landing rights. But what then of the actual multipliers?
Looking at the average multiples over 1991-2002, airlines would have seemed to produce international traffic growth at between 0.5 and 2.5 times the rise in local GDP, at least, excluding Japan Airlines in its more mature market.
However, life is not necessarily that simple. It is not just the average that is important but the way in which the data is scattered around the broad trend. For this group of carriers, because the data is quite widely scattered, even if the link between economy and traffic holds, using these averages to predict the future is clearly fraught with difficulty. Given the economic crisis which beset the region in 1997/8 there was inevitably a period when the apparent multiplier became distorted. To try to look at more steady behaviour, it is reasonable to drop out the extreme values.
In the case of Singapore Airlines (SIA)this results in an increase in the average traffic/GDP multiplier to 1.07. Malaysia Airlines sees its traffic multiplier soar to 1.3 and capacity fall to the same amount.
The key is how to interpret these findings and how to apply them in the future. It is clear that the Asian industry is markedly different from western markets. In terms of its development and in terms of travel penetration, it is still at a very early stage. However, at least in terms of the GDP multipliers, in many cases these are lower than those in Europe. Yet, the rate of economic activity is significantly higher. There are clearly a number of sub-regions that will need to be reflected in any analysis. However, even at this stage it is difficult to make generalisations about traffic in the Asian region as a whole. The different influences on each airline mean that it is these factors which will enhance or reduce the effect of local economic activity on the level of international traffic carried.
Over the medium term it is inevitable that in some countries the influence of local GDP will increase as the share of outbound traffic increases - itself a function of household income. While this would have little impact on a hub carrier like SIA, for other South-East Asian carriers it is clearly a long-term opportunity. For the Japanese majors, the issues are different with a stalled advanced economy and the importance of the transpacific market. For Air China, increased route rights are probably the key.
Despite the differences, all forecasters seem to agree that over the medium term, a number of the countries will enjoy rates of economic growth significantly in excess of the USA and Europe and this will be the key to strong traffic growth. But it is worth a pause before assuming that the economic multiplier for international air traffic will be at two times or above.
Source: Airline Business
