1

Air Passenger ForecastsGlobal ReportUPDATED

A joint venture between

Oct

ober

201

5

Contents

Welcome 03

Introduction 04

Overview of forecasts (long-term, 2014-2034) 05

Selected forecast stories 07

Review of the first half of 2015 10

Emerging markets in the spotlight 11

Box 1 – Assessing the future of the Cuban and Iranian air passenger markets 12

Box 2 – Is the era of RPK growth outperformance over? 13

Long-run forecasting framework 15

The role of living standards 15

The role of population and demographics 22

The price of air travel 29

Other relevant factors 32

Scenarios 34

Annex A – Forecasting within our framework: a stylized example 37

www.iata.org/pax-forecast

PRESS ONLY

- NOT FOR FURTHER D

ISTRIB

UTION

3

Welcome

It is my pleasure to introduce this latest installment of IATA and Tourism Economics’ joint Passenger Forecasting service. The strength of IATA Economics’ analysis of airlines and global air travel markets brought together with the leading economics and tourism forecasting of Tourism Economics, part of Oxford Economics, is an unbeatable combination. Having the best possible understanding of future growth trends in air travel markets undoubtedly will be of value to your business.

From just one route and one passenger on the 1st January 1914, the industry served over 65 billion passengers in its first 100 years. In a stark illustration of how a once daring activity for the few is now an opportunity for the many, the next 65 billion passengers are expected to take to the skies before 2030 – well within our forecast horizon.

Our Passenger Forecasting service is the most comprehensive assessment to have been undertaken to date of how air travel markets will evolve during the early years of the second century of commercial flight. Our approach encompasses annual forecasts of air passenger flows for almost 4,000 country pairs over the next 20 years.

We are well aware of the uncomfortable but realistic fact that any set of forecasts looking so far out into the future are likely to be wrong. But informed decision-making still requires us to peer into the future. So we have focused on prising open the forecasting ‘black box’ and have emphasized the drivers and underpinnings of our forecasts, to help you better understand what might shape the future of your business and, through several scenarios, the different paths that the future might take. As before, the overarching emphasis of this Global Report is on giving you the knowledge that you need to make informed decisions for the future.

Another key focus has been on making our extensive forecast database accessible, and not to simply deluge you with numbers. Our online web-tool offers an easy-to-use and fully customizable way to explore our forecasts with advanced charting and mapping facilities. All told, it could not be easier to incorporate our insights into your analysis and decision-making processes.

I hope that this Global Report and Forecasting Service continues to be your guide to meeting the market challenges to come.

Brian PearceChief Economist, IATA

Geneva, October 2015

If you have any questions or comments on any aspect of the Passenger Forecasting service, please contact:

David Oxley David Goodger Senior Economist, IATA Director, Tourism Economics oxleyd@iata.org dgoodger@tourismeconomics.com

PRESS ONLY

- NOT FOR FURTHER D

ISTRIB

UTION

4

Introduction

Details of our coverage

Our forecast service contains annual forecasts of air passenger flows for al-most 4,000 country pairs over the next 20 years on an origin-destination basis1. Our main focus is on the largest coun-try-pair relationships – those where at least 1,000 passengers a month current-ly travel between them (on a bi-direc-tional basis). These are the present-day powerhouses.

Crucially, our forecasts also include al-most 800 country pair relationships that, while below our threshold of 1,000 pas-sengers a month at present, we assess are likely to exceed it over the coming 20 years. The following word cloud depicts the countries that make up these country pairs, where the size of the lettering for each country indicates its relative prom-inence in our list of upcoming markets; the ‘markets of tomorrow’. As this report will explain, despite near-term outlooks, it is no surprise that the most prominent countries in the word cloud are from the emerging world.

1The passenger numbers in our service are taken from IATA’s Passenger Intelligence Service (better known as PaxIS: www.pax-is.com). The data cover scheduled flights only and measure the annual flow of air passengers between two countries on a bi-directional basis (eg, the country pair ‘United States - United Kingdom’ includes passenger flows from the US to the UK as well as from the UK to the US). The country pairs are also reported on an origin-destination basis. For example, if a passenger flies from an origin in the UK to a destination in the US via a connection in another country, the trip will be recorded as a passenger traveling from the UK to the US.

Chart 1 – The ‘markets of tomorrow’

Our forecasting framework

Our approach boils down the myriad fac-tors that will combine to shape air trav-el markets in the long run into just three main drivers; doing so offers a simple but powerful framework to think about long-term trends in the industry.

Most factors that will influence air trav-el markets in the long run, from shifting dynamics in energy markets to structural economic reforms, will affect air markets through one of the three following chan-nels.

LIVING STANDARDS

POPULATION AND DEMOGRAPHICS

PRICE OF AIR TRAVEL

+

+

The next section provides an overview of our main forecast numbers and stories. Additional details can be found in the ac-companying global PDF report.

This rest of this report considers each of the three main drivers in detail, highlight-ing the fundamental factors that underpin our forecasts. A number of boxes are in-cluded; one in particular assessing the future of the Cuban and Iranian air pas-senger markets, and another looking at the relationship between growth in pas-senger numbers and revenue passenger kilometres.

What’s new with this update?• An update on developments in air passenger markets in the first half of 2015

• A special focus on the future of the Cuban and Iranian air passenger markets

• Special feature on the relationship between growth in passenger numbers and revenue passenger kilometres

PRESS ONLY

- NOT FOR FURTHER D

ISTRIB

UTION

5

Overview of forecasts (2014-2034)

3.8%annual average growth in global air passenger journeys over the next 20 years

2.1x the number of air passenger journeys in 2034 compared with today

Markets with the biggest changes in passenger numbers

Market2

Additional x thousand pax

per year by 2034

Annual % growth

China 758,096 5.2%

United States 523,455 3.1%

India 274,739 6.7%

Indonesia 132,150 4.8%

Brazil 103,541 3.7%

United Kingdom 100,886 2.2%

Philippines 97,788 6.2%

Vietnam 94,221 7.2%

United Arab Emirates 89,904 5.4%

Malaysia 87,338 5.0%

The fastest growing markets

Market2

Additional x thousand pax

per year by 2034

Annual % growth

Malawi 1,624 8.1%

Rwanda 2,514 8.1%

Sierra Leone 982 8.0%

Central African Republic 494 7.8%

Serbia 14,860 7.8%

Tanzania 9,815 7.7%

Uganda 4,180 7.7%

Papua New Guinea 6,370 7.4%

Ethiopia 9,611 7.4%

Vietnam 94,221 7.2%

Growth and change in passenger journeys by region3 (% and million, 2014-2034)

Asia Pacific 1,698m 4.8%

Europe

506m2.4%

North America

623m3.2%

Latin America

285m4.0%

Middle East

217m4.6%Africa

161m4.4%

2Individual market totals are calculated from our underlying bi-directional country-pair forecasts. The individual markets therefore represent the total number of passenger jour-neys to, from and within a given market.3As with the individual market totals, the regional numbers represent the total number of passenger journeys to, from and within a given region. Note that for conceptual reasons, and to avoid double counting, regional totals do not equal the sum of their respective individual markets.

Key points• We forecast the number of glob-

al air passenger journeys under our “current policies” scenario to increase at an average rate of 3.8% each year over the next 20 years. As detailed in the scenarios section, alternative future states of the world could plausibly see air traffic grow in the range of 3.1% and 5.8% each year over the next 20 years.

• Despite our long-run growth rate being slightly slower than our previous forecast, the future outlook for global air passenger markets remains strong. Global passenger journeys are still comfortably set to more than double over the next 20 years.

• Lower oil prices are feeding through into lower airfares and are expected to continue to stimulate aggregate demand for air travel in the short term. The number of global air passenger journeys is expected to increase at an average annual rate of 5.5% each year over the next 5 years.

PRESS ONLY

- NOT FOR FURTHER D

ISTRIB

UTION

6

Overview of forecasts (continued)

The fastest growing country pairs*

Country pairAdditional x

thousand pax per year by 2034

Annual % growth

1 Indonesia - East Timor 888 13.9%

2 India - Hong Kong 4,473 10.4%

3 Within Honduras 1,370 10.3%

4 Within Pakistan 16,940 9.9%

5 United Arab Emirates - Ethiopia 1,244 9.5%

6 Thailand - Philippines 3,036 9.5%

7 Kenya - Tanzania 1,778 9.4%

8 India - Egypt 650 9.3%

9 Within Tanzania 4,124 8.9%

10 Within Laos 1,965 8.9%

International country pairs only

Country pairAdditional x

thousand pax per year by 2034

Annual % growth

1 US - Mexico 21,888 3.7%

2 India - United Arab Emirates 20,907 6.7%

3 China - Chinese Taipei 18,101 4.7%

4 US - Canada 16,776 2.7%

5 China - Korea 16,404 4.0%

6 China - Hong Kong 15,430 4.6%

7 Malaysia - Indonesia 14,501 6.1%

8 UK - Spain 11,294 1.7%

9 China - Thailand 10,902 4.9%

10 Indonesia - Singapore 10,805 5.0%

All country pairs

Country pairAdditional x

thousand pax per year by 2034

Annual % growth

1 Within China 623,893 5.3%

2 Within US 359,693 3.0%

3 Within India 152,779 6.6%

4 Within Brazil 95,315 4.0%

5 Within Indonesia 85,737 4.7%

6 Within Vietnam 61,905 8.4%

7 Within Philippines 50,950 6.1%

8 Within Mexico 50,615 5.5%

9 Within Turkey 48,763 5.0%

10 Within Japan 44,027 2.0%

* Filtered to only display countries with at least an additional 500 thousand passengers per year by 2034.

The 10 largest air passenger markets over time (ranked by passenger numbers)

Country pairs with the biggest changes in passenger numbers

PRESS ONLY

- NOT FOR FURTHER D

ISTRIB

UTION

7

Selected forecast stories

Following a period of consolidation, a combination of com-paratively bright near-term economic prospects and favorable longer-term demographic trends will support growth in the highly-liberalized US market throughout the forecast period.

The domestic Mexico market is on course to overtake Canada’s in 2023, helped by ongoing scope for catch-up in living standards and a younger population.

Colombia’s domes-tic market is expect-ed to surpass the British, French and Thai markets within the next five years, before cementing its position as the world’s 14th largest domestic market from the mid-2020s onwards.

Highly challenging economic con-ditions will weigh on growth in the Bra-zilian air passenger market in the near term. Nonetheless, relatively bright long-term economic underpinnings and demographic factors will see the total market pass through the 200-million mark in the early 2030s.

Growth in the domestic Russia air passenger market will be constrained by the country’s declining and aging population throughout our forecast period. From 8th largest domestic mar-ket in the world in 2014, the market is expected to slip to 12th largest by the late 2020s.

In stark contrast to Russia, strong favorable demographics trends will help to propel the domestic Turkey air market up the ranks to become the world’s 8th largest domestic air market by 2020.

Challenging demographics and modest expected gains in future living standards translate into moder-ate growth rates in many of the most-developed in-tra-European passengers markets over the long run. Highly developed domestic markets including Italy, France, Spain, and the UK are all expected to drop down the ranks, with the latter two dropping out of the top-20 altogether over our forecast period.

However, stronger economic condi-tions and a boost from the weaker euro will drive sizeable absolute gains in even the most developed intra-Euro-pean passenger markets over the next five years.

Top-10 increasing international markets within Europe (2014-2019)

PRESS ONLY

- NOT FOR FURTHER D

ISTRIB

UTION

8

Air passenger markets in Russia and Brazil have lagged behind their ‘BRIC’ coun-terparts India and China over the recent past, following severe pressure from falling commodity prices and, in Russia’s case, economic sanctions. The divergent trend in growth is expected to continue, reflecting starkly differing economic and demo-graphic prospects. India’s domestic air passenger market will increase by more than Brazil and Russia’s combined between now and 2019.

Structurally lower oil prices present near-term budgetary challenges to oil-exporting nations within the Middle East. Nonetheless, beneficial demo-graphic trends will help to propel the Saudi Arabia domestic market into the ranks of the world’s top-20 by 2034.

Sustained strong rates of income growth are expected to see the do-mestic Vietnam air market surge from 24th largest in the world in 2014 to within the top 10 by the mid-2020s.

Domestic journeys in South Africa are expected to more than double between now and 2034, leaving it on the cusp of the world’s top-20 domestic markets.

As in most of Africa, air travel in Nigeria will be boosted by highly favourable de-mographics and strong potential for catch-up in living standards over the long run.

Top-10 increasing international markets within Asia Pacific (2014-2019)

BRIC domestic air passenger markets (million passenger journeys)

Despite well-documented signs of slowing economy growth, consumer demand for air travel remains robust. The required rebalancing towards domestic demand over the medium term will outweigh the poor demographics, and the Chinese domestic air market remains on track to surpass the US as the world’s largest in 2020. Six of the top-10 gaining international air passenger markets within the Asia Pacific region over the next five years will touch on China.

Future growth in Japan’s domestic air market will be held back by weak demographic factors and modest gains in future living standards. The market will be overtaken by India in the early-2020s and by Indonesia in the early-2030s.

The total Indian air passenger market is forecast to climb from 9th largest in the world in 2014 to 5th in 2020 and into the top-3 in the late 2020s, supported by large gains in living standards.

The total Indonesian air market is another stronger performer in South-East Asia, and is forecast to climb steadily up the ranks from 11th largest in 2014 to 5th largest in 2033. Pas-senger traffic to/from Malaysia and Singapore are amongst the top-10 gainers in the short term.

Selected forecast stories

PRESS ONLY

- NOT FOR FURTHER D

ISTRIB

UTION

9

Review of the first half of 2015

The global number of air passenger jour-neys increased by 7.8% in the first half of 2015 compared to the same period a year ago – its strongest showing since 2010.

The outcome was set against a backdrop of ongoing moderate growth in advanced economies but more challeng-ing conditions in the emerging world, par-ticularly in net energy-exporting countries.

The prior declines in oil prices that have caused problems for net energy export-ers have started to flow through into lower airfares. Global average airfares in the first half of the year were 13% low-er than the year ago when measured in USD terms, which, given the appreciation in the USD over the time period, corre-sponds to a 5.7% decline in constant currency terms.

Air passenger demand conditions were further supported by increases in trav-el options for customers, which help to reduce overall journey times. Indeed, the first half of 2015 saw a net 2.6% annual increase in the number of non-stop scheduled airport routings as well as a modest increase in average flight frequencies. All told, an additional 135 million air passenger journeys were un-dertaken between January and June 2015 than in the same period in 2014.

Despite well-documented challenging economic growth conditions, the air passenger markets that saw the biggest increases in journeys in the first half of 2015 were mainly in the emerging world. Almost 19 million additional domestic air passenger journeys were undertaken in China in the first half of 2015 compared to the same period in 2014 – an increase of 11.5%. Having both disappointed in 2014, the domestic Indian and Indone-sian markets also saw very strong growth, corresponding to a combined additional 17.6 million passenger journeys.

Table 1 – Top-10 gaining air passenger markets (Jan-Jun 2015 vs. Jan-Jun 2014)

H1 2014 Pax (m) H1 2015 Pax (m) Change (m) Change (%) % of global total

01 Domestic China 163.4 182.2 18.8 11.5% 13.9%

02 Domestic Indonesia 26.7 37.5 10.8 40.3% 7.9%

03 Domestic India 28 34.8 6.8 24.3% 5.0%

04 Domestic US 222.5 227.7 5.2 2.3% 3.9%

05 Domestic Thailand 9 12.1 3.1 33.9% 2.3%

06 China - Thailand 3 5.5 2.5 81.2% 1.8%

07 Domestic Brazil 37.3 39.5 2.2 5.8% 1.6%

08 Domestic Vietnam 7.2 9.3 2.1 29.1% 1.5%

09 China - Japan 4 5.5 1.5 38.6% 1.1%

10 China - Korea 6.1 7.6 1.5 24.4% 1.1%

The US domestic market was the sole entrant in the top-10 gaining markets from the advanced economies. Strikingly, given its position as the world’s largest air passenger market, its modest 2.3% annual increase in numbers trans-lated into a larger incremental increase than a 34% increase in passenger num-bers in Thailand.

All three of the bi-directional international routes in the list of the top-10 gaining air passenger markets touch on China.

Chart 1 – Recent developments in the global air passenger market

Sources: IATA PaxIS+

Chart 2 – Global airfares

Sources: IATA Economics, IATA PaxIS+

Sources: IATA PaxIS+

PRESS ONLY

- NOT FOR FURTHER D

ISTRIB

UTION

10

Emerging markets in the spotlight

There has been a steady barrage of bad macroeconomic news from the emerging markets this year, from finan-cial market turmoil and signs of eco-nomic slowdown in China to commod-ity price-induced woes in Russia and Brazil. A sizeable gulf has opened up between the performance of air pas-senger markets in the so-called ‘BRIC’ economies (ie, the large emerging mar-kets of Brazil, Russia, India, and China).

On the one hand, the Indian and Chi-nese air passenger markets are holding up well, with India in particular surging back from a subdued 2014 and buoyed by a strong increase in average flight frequencies. Meanwhile, although signs of industrial weakness in China have dominated global headlines, it is impor-tant to note that the consumer sector appears to be more resilient. This trend should continue to support the expan-sion of China’s air passenger market as the economy rebalances towards a more consumer-led economic model.

By contrast, however, the air passenger markets in Russia and Brazil have been weaker as their energy-dependent econ-omies have come under severe pres-sure from falling commodity prices and, in Russia’s case, economic sanctions.

Total passenger traffic to, from and with-in Brazil was actually 4.6% higher in H1 2015 than in the same period a year ago, but as shown in chart 3, traffic fell away sharply towards the middle of the year.

Russia is a tale of two markets: domes-tic passengers have held up surprisingly well, up 6.3% in H1 2015, in part re-flecting destination switching following the sharp drop in the purchasing power of the rouble. Prime tourist markets from Russia, including UAE, France, Italy and Spain, comprised 6 of the top-20 worst performing air passenger markets in the first half of the year, while travel to and from Sochi has done well. Passen-ger journeys to and from Ukraine have also surged; the route saw the 15th biggest annual increase in passenger numbers in the world in the first half of

Chart 3 – ‘BRIC’ air passenger markets Chart 4 – Russia air passenger markets

Sources: IATA PaxIS+ Sources: IATA PaxIS+

2015, with 1.2 million more passenger journeys undertaken. In fact, excluding Ukraine, the number of passenger jour-neys to and from Russia fell by 11% year-on-year in the first half of 2015.

We expect the divergent trend in growth between the BRICs’ air passenger mar-kets to continue over the short term, mainly reflecting starkly divergent eco-nomic and demographic near-term pros-pects.

Our ‘current policies’ scenario sees an additional 230 million passenger jour-neys taking place to, from or within China in 2019 compared to 2014. Strikingly, this increase in absolute terms is more than double that of the rest of the BRICs combined. In percentage growth terms, the same scenario sees India’s air pas-senger market leading the way over the next five years, with annual growth three times the pace of Brazil’s.

‘Current policies’ scenario

Total air passenger market (million, 2014)

Additional million passengers per year by 2019

CAGR (%, 2014-2019)

China 437 230 8.8%

India 103 63 9.9%

Brazil 99 18 3.3%

Russia 82 15 3.4%

Table 2 – Near-term outlooks for the BRICs

PRESS ONLY

- NOT FOR FURTHER D

ISTRIB

UTION