Aviation Pushing Through The Crisis

The global aviation sector’s growth trajectory remains intact despite headwinds.

Syed Hussain
January 17, 2015

Global airlines can breathe a sigh of relief as the price of jet fuel – their single biggest cost item – has climbed down, but there is no shortage of obstacles on the horizon.

“There are numerous challenges both manmade and natural but this has always been the case,” aviation consultant John Strickland said in an interview.

“It makes it critical for airlines to be 100 per cent focussed on efficiency and cost management. Equally there is a need to be flexible and quick to adapt capacity according to any given crisis.”

Indeed, while the aviation industry celebrates its centenary, it remains constantly under threat from new challenges. Whether its the Ebola crisis in West Africa, geopolitical flashpoints, or the sagging global economy, the sensitive aviation industry feels the ripples of virtually every major economic and political event.

“Our centennial also has been tragic, with the loss of Malaysia Airlines Flight 370 and the shooting down of MH17 in July,” said IATA CEO Tony Tyler in a speech in Washington in late October.

“It is a bitter irony that aviation’s 100th anniversary — an industry whose success rests on a safety record for which we can be justifiably proud—is also one of the saddest years we have experienced in a long time.”

A perennial challenge for an industry that has razor-sharp margins is cost. In 2013, the global aviation industry safely transported 3.3 billion passengers to 50,000 routes, but made just under $18 billion in revenues. That’s $4.13 in profit per passenger.

Investors will see more favourable returns from airlines in 2014, with average return on invested capital set to reach 5.4 per cent in 2014, up from 3.7 per cent in 2012 and 4.4 per cent in 2013. This is still lower than the seven to eight per cent achieved by other industries, IATA notes.

Despite these unimpressive returns, industry players are hardly looking to keep their fleet grounded. Indeed, they are in expansion mode with as many as 1,400 airplanes expected to have been delivered to the industry at a cost of $150 billion last year.

While the industry has done a remarkable job handling costs and volatile fuel prices, it is being weighed down by regulations and excessive security measures that are becoming a feature of air travel.

“I think security is a huge, but often unspoken threat to the industry,” said Jay Sorenson, an aviation consultant and president of the IdeaWorks Company, a US-based aviation consultancy.

The threat of terrorism and conflict has rightfully concerned governments and the airline industry. The latest attack on the Malaysian Airlines plane shows that the industry will need to be mindful of flying over geopolitical flashpoints.

“This has changed everything,” Tim Clark, president of Emirates Airline, the world’s biggest carrier by international traffic told the media. “We will no longer rest on the protocols we had in place that we honestly thought were safe.”

But new layers of security measures are weighing down the industry. Hours of security checks and rerouting of flight paths, are adding to the already laborious regulations implemented by various governments.

The global airline industry contributes 3.4 per cent to the world’s GDP, and generates $2.4 trillion in economic impact annually, and is a crucial network that connects the global economy.

With IATA expecting passenger growth to more than double to 7.3 billion within two decades, there is an urgent need to streamline airport checks and reduce bottlenecks that have impacted the efficiency of airport travel.

Global airlines have already spent more than $100 billion since the tragic events of September 11 2001, and the industry continues to spend $8 billion on average every year.

While passenger safety is paramount, the airline industry is asking governments for a balance and greater use of technology to streamline the screening process.

The global airline industry is also facing intense competition, especially from low-cost carriers in the developed world.

“Low cost carriers will succeed in any market. Everywhere on the planet, the majority of consumers love low fares,” Sorensen noted. “Full service airlines will survive, and perhaps thrive, where they can erect regulatory defenses to keep low cost carriers out. Beyond that, traditional airlines seem to have a natural advantage with long haul services.”

At the other end of the airline spectrum are the full-serviced players from the Gulf region that offer a superior quality of service and are demanding greater market share from the traditional players in the developed world. Luckily for the global aviation industry, the pie is getting bigger. Rising incomes, growing populations and more economic growth in less-developed markets is fuelling growth.

Indeed, eight of the 10 fastest growing air travel markets in the world are expected to be in Africa. Meanwhile, the densely populated markets of China, the US, India, Indonesia and Brazil will emerge as the five fastest growing markets in terms of additional passengers per year, IATA forecasts show.

“The Middle East will grow strongly (4.9 per cent) and will see an extra 237 million passengers a year on routes to, from and within the region by 2034,” the association estimated in its latest report. “The UAE, Qatar and Saudi Arabia will all enjoy strong growth of 5.6 per cent, 4.8 per cent, and 4.6 per cent respectively. The total market size will be 383 million passengers.”

As such, the resilient global industry has managed to shrug off most challenges as it charts a new growth path.
Airplane maker Boeing International estimates that the industry will require 36,770 new craft over the next 20 years at a cost if $5.2 trillion. As much as 58 per cent of these planes will be new deliveries, suggesting that growth remains intact for the foreseeable future.

Not surprisingly, Asia Pacific will emerge as the biggest destination for new planes (13,460), with North America (7,550) and Europe (7,450) a distant second and third, respectively. Despite a smaller population, the Middle East will demand more airplanes than Latin America and Africa.

“The aviation industry continually adapts to market forces,” Boeing said in its long-term forecast. “Key among these are fuel prices, economic growth and development, environmental regulations, infrastructure, market liberalisation, aeroplane capabilities, other modes of transport, business models, and emerging markets. Fuel is now the largest component of airline cost structure.”

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