By Bjorn Fehrm
06 October 2015, ©. Leeham Co: The global airline industry is on a steady course as a whole, but there are dramatic changes within Europe as low cost carriers, plus Turkish Airlines, redraw the competitive landscape.
China’s current economic softness raises concerns, with an independent analysis concluding that economic growth here is 2%-3% instead of the announced rate of 7%-8%.
Still, the mixed messages given at the annual ISTAT meeting in Europe this week didn’t put a damper on the mood of 1,200 delegates here in Prague.
IATA on airlines results and world economy forecast
Andrew Matters, senior economist of IATA, said that 2015 will be a record year for the worldwide airline industry. Profitability level for 2015 is forecasted at close to $30bn or a profit margin of 6.9%. This is the highest level in 10 years; the sobering fact is that this is what is normal in other industries and a required level to provide an adequate return on invested capital.
The profits are very concentrated to North America (7.5%). Europe (2.8%), Asia Pacific (2.5%) and Middle East (3.1%) have a low level and South America (1.8%) and Africa (1.2%) have too-low returns on capital employed. A contributing factor to the profits has been the low fuel price. The low fuel prices are expected to stay but the decline of many currencies versus the dollar has caused these economies to be more or less excluded from the low price of fuel.
Going forward, the leading indicators that IATA uses for its economic predictions (Business, Industrial and Trade indices) all show a steady continuation of achieved activity levels from 2015 into 2016, but there will be only moderate growth levels.
Oxford economics on world air travel
Oxford Economics David Goodger, senior macroeconomic editor, supported this prediction. The major threat to the world economy, the decline in economic activity in China, has already happened but to a much lower level than official Chinese statistics show. Oxford Economics doesn’t rely on official Chinese statistics, but uses its methods that show that he GDP growth is now at 2%-3% instead of the official 7%-8%.
“And it has been like this for some time and Asia is not grinding to a standstill because of China,” Goodger said. He predicted that China’s slowdown will have no further large effect on Asian economy.
He also pointed to the fact that the other thing that the markets are afraid of, an increase in interest rate from the US Federal Reserve Bank (forecasted for December) that would slow the world’s economies, rather brings the message, “things are picking up.” It should not be construed as a threat to growth, he said. The air travel industry can only profit from an economy that is going better.
Goodger said that the propensity for emerging market households to travel is still steadily increasing to the tune of 6% per year and a doubling in 20 years, even with China slowing down. There are simply an ever-larger number of households worldwide that will pass $20,000 in household income, which is the trigger level for “will to travel.”
Peter Morris, chief economist of the Ascend consultancy, said the European airline market is undergoing major change. The largest airline for European travel is now Ryanair, followed by Easyjet, then Lufthansa and at fourth place, Turkish Airlines. He predicted that Europe’s legacy carriers have a hard time in front of them, especially since Turkish developments in the last years were eye-opening (it was nowhere 10 years ago).
Turkish is also starting to challenge the Middle East carriers on long haul and will be the largest carrier for “Europe to the rest of world” travel for 2015.
The difference between Turkish Airlines and the Middle East carriers are that Turkish has a 78 million people home market and its hub at Istanbul has a 15 million population town as base. The Middle East carriers have virtually no home market or own hub traffic. When the new Istanbul mega airport is finished at the shore of the Black Sea, Turkish expansion is no longer limited by its hub’s capacity.
The order bubble
Morris finished by looking at Ascend’s predictions for worldwide single aisle and dual aisle seat-mile demand versus their predictions for produced capacity from the OEMs (based on firm orders).
He saw no immediate problem on the single aisle; demand and production followed each other to 2020 and afterwards it is difficult to forecast.
The dual aisle demand versus produced capacity was more critical with a gap opening up already 2018. Morris said that it can be because operators are more hesitant to commit to dual aisle aircraft as far out as for single aisle. There is more research needed to understand if this represents a real gap or another behavior of the airlines compared to single aisle.