Airlines and airport network planners arrive in Chengdu for this year's World Routes with the industry showing distinct signs of a split personality.
On the one hand, for the airline sector things have seldom been better. Industry profits have been on the rise since the lows of the 2008 global financial crisis and recession. They reached record highs in 2015 as airline consolidation and restructuring efforts were bolstered by the sudden and unexpected fall in fuel costs.
And while those profits have been driven by North American carriers – which have contributed well over half of the total for the last three years – financial performance has steadily improved in other regions and across more carriers. In 2015, seven carriers posted operating profits of more than $1 billion – including the three enlarged US majors American Airlines, Delta Air Lines and United Airlines. By 2015, 18 carriers were topping the billion-dollar operating profit mark.
This has been achieved off the back of unspectacular, and far from uniform, economic growth. But notably, through the cycle airlines have largely put greater focus on securing profitability rather than on chasing market share – something which historically has not necessarily been the case.
But this has not stopped the sector from growing. Passenger traffic has grown at annual rates in excess of 5% since 2010 and by over 7% in 2015.
"Air [passenger] travel volumes have been growing well above trend for the last few years. It's been a very strong market," notes IATA chief economist Brian Pearce. "There has been some price stimulation, most recently from the fall in fuel prices, and we think there is more to come, because the impact of hedging has delayed the impact of benefits of fuel falls we saw last year. We expect fares to fall 7%."
Airline route development has also been boosted by a range of new aircraft. Lufthansa debuted Airbus's re-engined A320neo earlier this year and Swiss in July begin services with Bombardier's CSeries. With new widebody types – notably the Airbus A350 and Boeing 787 – also available, airlines have plenty of new metal to develop new routes.
But while the profits pictures is strong, revenues and yields are falling. Fuel costs will still likely fall faster to keep airlines firmly in the black, but airlines have been striking a much more cautious note on capacity this winter and in summer 2017, especially amid market uncertainly.
And first-half industry traffic figures from IATA show the pace of air travel growth relenting, to 5.4% once the impact of the extra day for the leap year is accounted for.
"The demand for travel continues to increase, but at a slower pace," notes IATA director general Tony Tyler. "The fragile and uncertain economic backdrop, political shocks and a wave of terrorist attacks are all contributing to a softer demand environment."
KEY FACTORS: FUEL PRICE
While the oil price has risen from the lows seen in January – when the barrel price of Brent crude oil dipped below $30 – it is still sitting a long way down from the highs of the last decade. The barrel price of Brent crude began September at around $50.
That lower fuel cost has driven airline profitability and enabled carriers to withstand lower yields and prolong the life expectancy of some older fuel-hungry aircraft and borderline-profitable routes.
Airlines too have some insulation, even should the fuel price spike, as the same hedges that prevented many from enjoying the full gains of lower fuel costs until this year will provide a lower fuel-cost cushion for any rise in the oil price.
KEY FACTORS: TERRORISM
Air transport demand can be heavily impacted by wider geopolitical and terrorist events, even before the devastating attacks that directly targeted aircraft and airports during the last year. The North African market, for which tourism is so key, has been hard-hit, and Sharm el-Sheikh flights remain affected nearly a year after the downing of a MetroJet Airbus A321 in the region.
Brussels Airport was temporarily shut down after the fatal bombing there in March, while there was similar disruption after devastating attacks at Istanbul Ataturk in June. Turkey, a huge growth market in air travel over the last decade, is enduring a particularly turbulent period following an attempted military coup in the country in mid-July.
Uncertainty in these markets has hit both demand locally and also air travel and tourism demand from key overseas territories.
KEY FACTORS: ECONOMIC UNCERTAINTY
The economic picture is seldom a one-size-fits-all affair. While the broad picture has been one of steady economic growth, the challenges in two of the BRIC nations – Brazil and Russia testify – illustrate that this is far from uniform. Concerns around the Chinese economy, which spooked global financial markets at the turn of the year, appear to have settled but have since been overtaken by uncertainty around the impact of the UK referendum vote to leave the EU.
Prior to the Brexit vote, the IMF was seeing global economic growth in line with its 3.1% projection for this year, with improvements in the Brazilian and Russian economies giving some cause for optimism of an improved picture for 2017. But in its July forecast, it points to the materialisation of an important downside risk and concludes that despite a better-than-expected start to the year, the global outlook for 2016 and 2017 has worsened.
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Source: Airline Business
