General Trend of the Global Airline Industry

Dr Frankie O’Connell

Istanbul Technical University

Air Transportation Management, MSc. Program

Airline Business Models and Strategic Management

Module #1

8 December 2016

• Global Airline Traffic trends • Traffic Forecasts • Profitability of the Industry • The Problems Facing Network Airlines today that Impact Profitability

Fuel Volatility Fuel Hedging Currency Issues Overcapacity Yields Seasonality

• Air Cargo Trends • Airports – Their ability to make money • Environmental impacts facing Airlines

Agenda

1.1

3

1.1

5

1.1

4

1.2

3

1.3

0

1.4

0

1.4

5

1.4

7

1.5

6

1.6

7

1.6

4

1.6

3

1.6

9

1.8

8

2.0

2

2.1

9

2.3

0

2.3

7

2.3

7

2.5

2.6

9

2.8

1

2.9

4

3.0

2

3.2

1

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

2011

20

12

20

13

20

14

20

15

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Number of passengers carried worldwide (1991 – 2015) B

illio

ns

of

pas

sen

gers

Source: IATA, ICAO, AEA, AAPA, ATA, AACO

Passenger Traffic transported by different airline* business models

2003 - 2015

2003 2015 % change

Full Service Airlines 1.3 billion 2.17 billion 67%

* Share by top 200 world airlines

Low Cost Carriers 178 million 862 million 384%

Regional Airlines 147 million 107 million -27%

Charter Airlines 83 million 78 million -6%

Total 1.7 billion 3.21 billion 89%

Source: ICAO, AEA, ATA, AAPA, AACO

Geographical Distribution of Passenger Traffic*

2000 - 2015

Passengers 2000 Passengers 2015 % Change

(millions) (millions)

North America 726 924 27%

Europe 420 868 107%

* Share by top 200 world airlines

Central/South America 82 181 120%

Middle East 44 173 293%

Africa 29 34 17%

Total 1.67 billion 3.21 billion 92%

Source: ICAO, AEA, ATA, AAPA, AACO

Asia-Pacific 378 1,035 174%

1974

1979

1984

1989

1994

1999

2004

2009

2015 0

2

4

6

8

10

12

14

16 ICAO data

2034

Air traffic has doubled every 15 years

2019

2024

2029

RP

Ks

(Tri

llio

ns)

World Traffic Forecast (measured in RPKs)

1972 - 2034

Source: ICAO and Airbus GMF 2015

What is driving this traffic?

Traffic is also expected to over the next 15 years

Airbus forecast

Main Drivers for Traffic Growth

People exploring – Tourism (e.g. Egypt) More economic prosperity – growing middle class (now at 2.7 billion people) Dynamic growth in emerging markets (China, India, Asia Pacific, Latin America) Continued growth of Low Cost Carriers (particularly in Asia) Greater and continued market liberalisation worldwide More demand for overseas vacations and for Short Break holidays Weekend Commuters who work and live in different places

Businesses Travel is strongly connected to International Trade and Commerce Strong correlation between Economic Prosperity and growth in Traffic 215 million people live outside their country of birth (many family and friends will visit)

700,000 foreign students study in the US for example (many family and friends will visit)

Tou

rist

Sp

en

d (

$U

S B

illio

ns)

2000 2002 2004 2006 2008 2010 2012 2014

200

300

400

500

600

700

800

Spending by Tourists carried by Air

The Importance of Airlines

Stimulation of Tourism and Trade

18.82 London

Top Tourist Cities - 2015 International overnight visitors

So

urc

e: M

aste

rcar

d, 2

01

6

Doha: Almost 3 million tourist visits in 2015 – 33% coming form GCC

16.06 Paris

14.26 Dubai

12.56 Istanbul

12.27 New York

11.12 Kuala Lumpur

10.35 Seoul

8.66 Kong Kong

8.08 Tokyo

7.63

7.44

Barcelona

Amsterdam

7.41

7.17

Rome

Milan

18.24 Bangkok

11.88 Singapore

0 5 10 15 20

Millions of Tourists

Asia Pacific

Europe

North America

Middle East

Latin America

CIS

Africa

0 1,000 2,000 3,000 4,000 5,000 6,000

Long term growth prospects of air traffic (2015- 2035) In terms of Revenue Passenger Kilometres (demand)

S

ourc

e: A

irbus

Gen

eral

Mar

ket

Fore

cast

2016

2015 traffic

2015

Revenue Passenger Kilometres

2016 - 2035 traffic

2015 - 2035

956 1,302

2005 2015 2025 2035 0

1

2

3

4

5

Bill

ion

s o

f P

eo

ple

Middle Class Global Population

Households with yearly income between $20,000 and $150,000 at 2015 prices

6.5 billion

29%

Mature Countries

1,054 1,174

2,602

3.77 billion

8.1 billion

46%

World population

% of Global Middle Class

7.2 billion

38%

1,738

2.79 billion

1,054

3,528

4.83 billion

8.8 billion

55%

1,302

911

1.86 billion Emerging Countries

&

&

& &

& &

& & & &

& &

&

&

& & & &

& & &

& & &

& & & &

& & &

& & &

& & & &

&

&

&

& & & &

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

0% 1% 2% 3% 4% 5% 6% 7% 8% 9%

10%

-1% -2% -3%

% C

han

ge in

GD

P (

Year

ove

r ye

ar)

Global GDP growth/decline and length of recession 1971 - 2016

Source: ICAO, IATA, IMF, Economist Intelligence Unit and World Bank

1973 -75

•Oil Crisis

$3 to $12

•Stock Market

1991-93

• 1st Gulf War

• Oil Crisis

$15 to $33

Oil to

$15

2001-03

• US Weakening

• 9/11

• 2nd Gulf War

2008-10 • Global Conflicts

• Credit Crunch

• Multiple Govt bailouts

• Fluctuating Oil prices

• Weak Currencies

1980-82

• Iran-Iraq war

• Oil Crisis

$12 to $39

&

&

& &

& &

& & & &

& &

&

&

& & & &

& & &

& & &

& & & &

& & &

& & &

& & & &

&

&

&

& & & &

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

0% 1% 2% 3% 4% 5% 6% 7% 8% 9%

10%

-1% -2% -3%

World GDP growth &

% C

han

ge in

GD

P (

Year

ove

r ye

ar)

GDP Growth

World RPK growth

-4%

-2%

0

2%

4%

6%

8%

10%

12%

14%

16%

% C

han

ge in

Pas

sen

ger

Traf

fic

(R

PK

) Ye

ar o

ver

year

)

Passenger Traffic

Correlation of Passenger Traffic and GDP 1971 - 2015

Source: ICAO, IATA, IMF, Economist Intelligence Unit and World Bank

&

&

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

2014

$0 $5

$10 $15 $20 $25 $30 $35 $40

$-5 $-10 $-15 $-20 $-25 $-30

Net Profit/Loss

Ne

t P

rofi

t /

Loss

(U

S$ B

illio

ns)

20

15

Air

line

Re

ven

ues

(U

S$ B

illio

ns)

&

&

& & & & &

& & & & &

& & &

& & &

&

&

&

&

& & &

Total Airline Revenues &

$800

$0

$400

$600

$200

$100

$300

$700

$500

Net Profit/Loss and Revenues for World Commercial Airlines

1978 - 2015

Source: O’Connell analysis from ICAO and IATA

Total Revenues ($751 billion)

Total Net Profit ($35.3 billion)

Proportion of Total Revenues to Total Net Profit (2015 data)

Source: IATA

Why is it so difficult to make money in the Airline Industry???

$0

$200

$400

$600

$800

Operating Revenues

World Airline revenues and expenses

1991 - 2015

Source: ICAO and IATA

$ B

illi

on

s

Operating Expenses

Fuel is the largest cost facing Airlines

The volatility of Jet Fuel and Crude Oil Prices ($/barrel) 2008–2016

US$

Do

llars

Sou

rce:

Pla

tts

an

d IA

TA

In 2014 Airlines (worldwide) spent $Billions on Fuel? $226 Billion In 2016 Airlines (worldwide) are estimated to spent? $127 Billion (44% less)

Price of Crude Oil 2011 to August 2016

US

Do

llars

Source: Barchart Airlines buy Fuel in US$ Dollars

Index of US Dollar 2011 to August 2016

Cathay Pacific Fuel Hedging Issues 2015 data

2016: 62% of its Fuel at $85 per barrel

2017: 51% of its Fuel at $89 per barrel

2018: 44% of its Fuel at $81 per barrel

2019: 8% of its Fuel at $75 per barrel Fuel has fallen by 70% since 2014

• For the first 6 months of 2016, Cathay posted fuel

hedging losses of:

• For the second 6 months– it will incur the same losses

$580 million

Airline Fuel Expenses

Emirates Fuel Expenses 2007 - 2016

Fuel cost on 777-300ER from Abu Dhabi to Chicago (one way) is US$? $150,000

32% 35.2% 29.9% 34.5% 40.2% 39.6% 39.1% 34.6% 25.7%

20

07

- 2

00

8

20

08

- 2

00

9

20

09

- 2

01

0

20

10

- 2

011

20

11

- 2

01

2

20

12

- 2

01

3

20

13

- 2

01

4

20

14

- 2

01

5

2

01

5 -

20

16

0%

20%

40%

60%

80%

100%

Fuel

68% 64.8% 70.1% 65.5% 59.8% 60.4% 60.9% 65.4% 74.3%

Other expenses

36.5% 43.8% 34.7% 35% 40.9% 40.6% 38.1% 37.5% 31.8%

20

07

- 2

00

8

20

08

- 2

00

9

20

09

- 2

01

0

20

10

- 2

011

20

11 -

20

12

20

12

- 2

01

3

20

13

- 2

01

4

20

14

- 2

01

5

20

15

- 2

01

6

0%

20%

40%

60%

80%

100%

Fuel

63.5% 56.2% 65.3% 65% 59.1% 59.4% 61.9% 62.5% 68.2%

Other expenses

Singapore Airlines Fuel Cost 2007 - 2016

18.8%

38.8%

13.1%

29.3%

7.3%

US Dollars

0%

10%

20%

30%

40%

50%

60%

Revenues

14.2%

27.1%

Other Currencies Turkish Lira Euro's

51.4%

Costs

Currency Issues – Income and Expenses Turkish Airlines (2015 data)

Source: Turkish Airlines accounts, Q1 2015

' '

' ' ' '

$ $

$ $ $ $ $

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014 0

20

40

60

80

100

120

Passengers Carried $ Seat Capacity '

$

$ $

$ $

$ $ $

'

'

' ' '

' ' ' '

S

ourc

e: O

AG

and D

GC

A (

India

) -

O’C

onnel

l an

alysi

s

Indian Carriers have lost billions of dollars over the last number of years while

overcapacity has been a significant contributor to these losses

Over Capacity Problems

India example

Mill

ion

s

1995 2000 2005

$0

$200

$400

$600

$800

$1,000

$1,200

2015? 2010

Global Average Return Fare Before Surcharges and Taxes

Source: IATA

The average return fare has fallen by more 60% over the last 20 years

$

$

) )

) )

) ) ) )

)

)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

2013 )

)

)

$ $

$

$ $ $

$

$

2014 $

$

$

Seasonality of Traffic for Aer Lingus Monthly Passengers: 2013 - 2014

Source: Aer Lingus

2009 2010 2011 2012 2013 2014

€0

€50

€100

€150

€200

€-50

€-100

€-150

Summer Winter

, ,

, ,

,

Total ,

,

Impact of Seasonality on Profits Operating Profits for Aer Lingus 2009 – 2014

Source: Aer Lingus Annual Accounts

Mill

ion

s

World’s top 10 Airline Groups by Net Profit

Rank Airline US$ millions

2015 2014 2013

1 American Airlines 7,610 2,882 -1,233

2 United Airlines 7,340 1,132 571

3 Delta Air Lines 4,526 659 10,500*

4 Emirates Group 2,210 1,487 1,112

5 Southwest Airlines 2,200 1,136 754

6 Lufthansa Group (Lufthansa, Swiss Austrian, Brussels) 1,873 72 416

7 Ryanair 1,718 1,081 702

8 IAG (BA, Iberia, Vueling, Aer Lingus) 1,672 1,322 195

9 Japan Airlines 1,450 1,654 2,062

10 Air China 1,194 694 589

Source: Airline Reports 20,16, 2015, 2014, * Includes special items - reversal of the company’s tax valuation allowance

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

50%

55%

60%

65%

70%

75%

80%

85%

Passenger Load Factor

1970 - 2015

Source: ICAO and IATA

27% Increase

World’s top 12 Underperforming Airlines (Net losses)

Rank Airline US$ millions

2015 2014 2013 2012

1 GOL -1,263 -473 -332 -772 2 Air Berlin -493 -497 -419 9 3 Korean Air -483 -195 -266 348 4 Air India -402 -955 -1,032 -1,008 5 Thai Airways -379 -479 -389 203 6 Oman Air -225 -286 -295 -254 7 Alitalia -219 -762 -765 -361 8 LATAM Group -219 -110 -281 -523 9 TAP Air Portugal -172 -112 -8 -33 10 Avianca -140 128 249 38 11 Egyptair -132 -419 - - 12 Asiana -123 60 -105 56

Source: Airline Reports 2016, 2015, 2014, 2013

Air Cargo

• Cargo accounts for 9% of the Industry’s revenues, mostly carried by Flag carriers

• The carriage of cargo by air is an essential pillar of international trade, Around $6 trillion worth of good by value are carried by air each year • Around 50 million tonnes of Freight is carried by air each year

2014

Rev

enu

e T

on

ne

Kil

om

etre

s

6.8% growth per annum 2.6% growth p.a.

Source: Boeing Air cargo market forecast, 2014 -2015

World Air Cargo Traffic 1983 – 2014

6.3% growth p.a.

,

2000 2002 2004 2006 2008 2010 2012 2014

The value of Goods shipped by Air

, , , ,

,

,

,

,

,

,

, , , ,

,

2015

$1

$8

$2

$3

$4

$5

$6

$7

Trad

e G

oo

ds

($U

S Ti

llio

ns)

Value of traded goods carried by Air ,

35% of world trade is carried by air: a key enabler of globalization

Cargo will account for around 9% of the Industry’s revenues in 2015

Around $6.4 trillion worth of goods is now carried by air

These are not high value goods being transported

Apple’s global supply chain for iPhone by Air - 2014 data

Source: ATAG 2015

Asia - North America

Europe - Asia

Intra-Asia

Europe - North America

North America

Domestic China

Latin America to Europe

Latin America to North America

Africa - Europe

South Asia - Europe

Middle East - Europe

Intra - Europe

0 20 40 60 80 100 120 140

2013

Billions of Revenue Tonne Kilometres (RTKs)

2013

2014 - 2033

2014 - 2033

Long term growth prospects of air cargo (2014- 2033) In terms of Revenue Tonne Kilometres (demand)

Source: Boeing

1995 1997 2000 2002 2005 2007 2010 2012 2014 2016F

Cargo Revenue

90

30

50

40

60

80

70

US$

Bill

ion

s (C

argo

)

US$

Bill

ion

s o

f D

olla

rs (

Pax)

Very different businesses

Global Air Cargo vs Passenger Revenues

Sourc

e: I

AT

A

2016

Air Cargo Revenues are no higher no than they were 10 years ago

Air Cargo

Why is it difficult to make money in Cargo???

Global Air Freight Yields US$ per Kilo

Source: IATA CASS

Full Freighter Bellyhold Freight on Passenger aircraft

Which method of transporting freight is more profitable?

All Freighters or Bellyhold

World Freight Load Factor 2007 - 2015

The uniqueness of the 747 Freighter

Freighter Capacity (Tons)

747-800F 140 Tons

777F 100 Tons

A330F 65 Tons

Bellyhold Capacity (with full passenger load)

B777-300ER 20 Tons B747-400 16.5 Tones A340-300 13 Tons A330-200 12 Tons A380 8 Tons B737-800 3.6 tons

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014 0%

20%

40%

60%

80%

100% Fr

eig

hte

r B

elly

ho

ld

World Freight by Freighter and Bellyhold Revenue Tonne Kilometres by Percentage

Source: Air Cargo News, Boeing commercial aircraft, Airbus, O’Connell Forecast based on Industry experts

Rev

en

ue

Ton

ne

Kilo

met

res

(RTK

s)

2033F? Fr

eig

hte

r B

elly

ho

ld

estimates 6

0%

estim

ates 40

%

• For every 5 new widebody passenger aircraft delivered - 1 less 100 tonne freighter is required

• At large hub airports such as LHR and Paris CDG, 95% of the freight volume is carried on

Passenger aircraft (Freight Transport Association, 2014)

14 Freighter

Aircraft 2013/14 72% 28%

Air France/KLM change in Cargo Capacity

(Measured in ATKs)

2017/18 5 Freighter

Aircraft

AF/KLM generated €2.7 billion from Cargo in 2014

Middle East and Europe Middle East and Asia Pacific

The Middle East Air Cargo Market 2003 - 2013

Source: Boeing World Cargo Forecast 2014

Severe directional imbalances exist in air cargo

Air Cargo accounted for 820,000 tons (2013) Air Cargo accounted for 574,000 tonnes (2013

World’s Top 12 Airports - 2015

1 Atlanta 101.5 Delta 80%, Southwest 10%, United 2%

Rank Airport Passengers (millions) Market share of top 3 airlines (seats, 2016)

2 Beijing 90 Air China 39%, China Southern 15%, China Eastern 13%

6 London (LHR) 74.9 BA 48%, Virgin Atlantic 6%, Aer Lingus 3%

4 Chicago 76.9 United 44%, American 32%, Delta 4%

7 Los Angeles 74.9 United Airlines 16%, Delta Air Lines 16%, American 15%

9 Paris (CDG) 65.7 Air France 51%, easyJet 6%, Lufthansa 2%

10 Dallas 64.1 American Airlines 80%, Spirit 4%, United 3%

11 Istanbul 61.3 Turkish Airlines 76.4%, Onur Air 6.8%, AtlasGlobal 4.8%

3 Dubai 78 Emirates 62%, Flydubai 14%, Qatar 2%

8 Hong Kong 68.5 Cathay Pacific 33%, Dragonair 16%, Hong Kong Air 8%

12 Frankfurt 60.0 Lufthansa 65%, Condor 4%, Airberlin 2%

5 Tokyo (HND) 75.3 ANA 46%, JAL 32%, Skymark 5%

Source: ACI

The Dynamics of the Airport Business Model

Airports make money via: i) Aeronautical charges

ii) Non-aeronautical charges

Airports make money from Aeronautical based sources

Aircraft landing

Terminal Rental fees

Ground Handling

Passenger Charge

Airports make money from Non Aeronautical based sources

Car Parking

Duty Free

Hangers

Advertising

Food and Beverage

Foreign Currency shops

• Airports receive income

from multiple business

platforms

• Aeronautical income is

largest from airlines

• Larger the airport the

more diverse the business

• Each business platform

will have unique market

and business conditions

% breakdown of sources of airport revenue by region

2013 data

Source: ACI economics report 2013

Airport Revenue

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

0%

5%

10%

15%

20%

25%

30%

-5%

Airports

Airlines

Operating Margins for worlds top 100 airports and 150 top airlines

Source: FlightGlobal and Airline Business

Overview of the airport business (2014)

Turnover and operating margin of 7 large airports and their largest airline customer (2014 data)

Turnover

$million

Margin Turnover

$million

Margin

Heathrow 4,425 37.2% IAG (BA + Iberia) 26,587 5.1%

Aeroports de Paris 3,679 26.2% Air France / KLM 32,861 -0.5%

Fraport (Germany) 3,156 20.2% Lufthansa Group 39,558 3.2%

Port Authority of New

York (JFK + Newark)

2,479 34.5% United 38,901 6.1%

Hong Kong 2,111 54.3% Cathay Pacific 13,666 4.2%

Avinor (Norway) 1,674 21.6% SAS 5,646 0.4%

Incheon (Korea) 1,664 49.7% Korean Air 11,064 3.2%

Source: FlightGlobal, 2015

In 2015, Dubai Duty Free had sales of:

$1.93 billion .... wow

Best selling Items in 2015:

1) Perfumes selling US$311 million (Best Selling category – makes up 16.5% of total Sales)

2) Liquor had US$293 million in sales

3) Tobacco: US$161 million

4) Confectionary US$152 million

5) Gold: US$150.5 million in sales

Duty Free

Source: Dubai Airport, 2016 data

Aviation and the Environment The Threat

Environmental concerns

1973

2003

2013

Global CO2 Emissions

Transportation

19.2%

Residential &

13.0%Agriculture & deforest

9.1%

Power Stations

29.5%

Fossil Fuel Production8.4%

Industrial Processes20.8%

Commercial

ation

Source: Emissions database for Global Athmospheric Research

Source: Emissions database for Global Atmospheric Research

Air Transport’s environmental Impact

Global Transport C0 2 Emissions by Mode

14.3%

2.2%1.4% 1.3%

Roa

d Tra

nspo

rt

Air

Trans

port

Shipp

ing

Rail, In

land

Wat

erway

The EU Commission charges all European Airlines a Carbon Tax to operate within Europe. Ryanair and easyJet for example pay around €0.13 cents per passenger. Then the EU wanted to charge all airlines operating to/from Europe for Carbon Emissions. IATA estimated that this emission tax would cost the airline industry at US$900 million for 2013

The EU Emissions Trading Scheme (ETS)

China ‘blocks’ Hong Kong Airlines’ order of ten A380s from Airbus Chinese aircraft carriers are forbidden from complying with EU ETS

Russian Federation threatens to deny EU trans-Siberia route, actually denies Finnair new landing rights

The US introduced a bill that prohibits American based carriers from complying with EU ETS

There were a Coalition of the Unwilling that included US, China, Russia, Brazil, India, Japan, South Korea, Saudi Arabia, Singapore

The RESISTANCE from the rest of the World:

For the period 2013-2016, the legislation was amended so that Non-EU carriers do not have to pay the EU ETS fee. ICAO is mandating that a global market-based mechanism addressing international aviation emissions will be applied by 2020.

Munich

Hamburg

Istanbul

New Delhi

Take Hamburg to Delhi for example – there is no direct conection So passengers MUST transfer through a hub. If this is done via European hub such as Munich this is then subject to an emissions Trading carbon tax, which increases the ticket cost. However it the trip is taken via a hub outside the European Union there is NO cost.

Emissions Trading Scheme still applies for all INTRA-European flights

Aircraft developments of the Future? Development driven by Environmental issues

The Boeing 787

Lightweight aircraft

Thank you all very much

Great book !!!