aviation advocacy economics 2013 december
TRANSCRIPT
To represent, lead and serve the airline industry
Airlines worldwide:
The value they create and the challenges they face Brian Pearce Chief Economist www.iata.org/economics December 2013
Key points (value created/challenges faced)
• Great value for consumers – slide 3-4
• $6.4 trillion of goods go by air cargo – slide 5
• Global supply chains (Dell, Apple) depend on air – slide 6
• Wider economy get large benefits – slides 7-8
• Massive expansion in demand ahead – slide 9
• Requires $4.8 trillion investment finance – slide 10
• But airline investors earn nothing – slides 11-12
• Ancillaries allow marginal profit, no more – slide 12
• Periods of profit short-lived – slide 13
• Market pressures for better profits worldwide – slide 14
• Not just problem of ‘mature, legacy’ airlines – slide 15
• Porter 5-forces ‘intense competition’ – slide 16
• Value chain profitability very unbalanced – slide 17
• Rising cost of infrastructure – slide 18
• Governments part of the problem – slide 19
• Cost threats from regulation – slide 20
• Dealing with climate change – slide 21-24
IATA Economics www.iata.org/economics 2
The value proposition for air travel remains strong
It’s safer, it’s greener and it’s still a bargain
IATA Economics www.iata.org/economics 3
Source: Constructed from worldwide data from ICAO and IATA
The quality of air service has improved Even in the past 5 years the main facets of airline service have got better
IATA Economics www.iata.org/economics 4
2007 2008 2009 2010 2011 2012 2013
On-time arrival rate*
European flights** 77.9% 78.3% 82.1% 75.8% 82.1% 83.4% 83.9%
US domestic flights*** 73.4% 76.0% 79.5% 79.8% 79.6% 81.9% 78.8%
Mishandled bags per 1000 passengers
Worldwide^ 19 15 11 12 9 9
Cancelled flights
European network airlines^^ 1.40% 1.38% 1.08% 3.43%^* 0.94% 1.00% 1.23%
US domestic flights^^^ 2.16% 1.96% 1.39% 1.76% 1.91% 1.29% 1.42%
* % flights arriving within 15 minutes scheduled time
** http://www.eurocontrol.int/articles/coda-publications
*** http://airconsumer.ost.dot.gov/reports/; table 1A YTD December figures
^ SITA Baggage Report 2012
^^ AEA
^^^ http://www.transtats.bts.gov/HomeDrillChart.asp; On time performance - Flight delays at a glance
^* Impacted by airspace closures due to Icelandic volcanic ash cloud
Over $6 trillion of goods annually are now carried by air 35% of world trade is carried by air; a key enabler of globalization
IATA Economics www.iata.org/economics 5
Source: ICAO, IATA, WTO. Value carried by air=world merchandize exports*35% (35% estimated by The Colography Group, 2005)
Air connectivity has enabled global supply chains Dell, Apple, Amazon would look very different without rapid air freight
IATA Economics www.iata.org/economics 6
Businesses can
set up much more
efficient global
supply chains
Dell manufacturing plant
Austin, Texas
Mexico
Keyboards
France
Soundcards
China
Power supplies
Hong Kong
Video Cards
Microprocessors
Singapore
SCSI Cards
Disk Devices
Japan
RAM Chips
CD-ROM Drives
Taiwan
Network Cards
Monitors
Cooling Fans
Malaysia
Floppy Drives
Source: Dell, IATA
0.0% 5.0% 10.0% 15.0% 20.0%
NigeriaPoland
JapanCzech Republic
RomaniaChina
Russian FederationHungary
BrazilDenmark
IndiaColombia
ItalyEcuadorAustria
PeruMexico
LatviaKorea
PhilippinesSwitzerland
NorwayTaiwan
GermanyIsrael
BelgiumNetherlandsSouth AfricaSaudi Arabia
PortugalWORLD AVERAGE
LuxembourgMalaysia
KenyaFrance
SwedenFinland
ChileTurkey
United StatesUnited Kingdom
SpainJordan
CanadaIrelandGreece
AustraliaEgypt
Hong KongSingapore
ThailandNew Zealand
IcelandUnited Arab Emirates
CyprusLebanon
Malta
Aviation and tourism GVA as a % GDP
Aviation plays a major role in most economies Footprint of aviation and tourism measured by the sector’s GVA as % GDP
IATA Economics www.iata.org/economics 7
Source: Oxford Economics. http://www.benefitsofaviation.aero/Pages/default.aspx Note: GVA = Gross Value Added which is
mainly wages and profits. GDP = Gross Domestic Product
Size of aviation’s GDP footprint linked to development The size of aviation’s GDP footprint depends, among other factors, on the
country’s stage of economic development (GDP per capita)
IATA Economics www.iata.org/economics 8
Source: Oxford Economics http://www.benefitsofaviation.aero/Pages/default.aspx
Massive expansion ahead for emerging markets Expanding middle classes drive both travel and air cargo flows
Serving this demand will require a big expansion of investment
IATA Economics www.iata.org/economics 9
Global middle income class in 2009 and prediction for 2030
North America
Central &
South America
Europe
Middle East &
North Africa
Sub Saharan
Africa
Asia Pacific
100mn
500mn1bn
20092030
Source: OECD, Standard Chartered Bank
Market expansion will require $4.8 trillion investment Airlines will need to raise funds to invest in 35,000 new aircraft over 20 years
IATA Economics www.iata.org/economics 10
Source: Boeing Current Market Outlook
Capital
cost
$4.8
trillion
Even in the good years airline returns are inadequate Below WACC returns indicate intense competition and fragile financing
IATA Economics www.iata.org/economics 11
Source: IATA
Revenue per passenger exceeds cost by just $2.56 (1%) Excluding $12 ancillaries revenues would have lagged costs by $10 (-5%)
IATA Economics www.iata.org/economics 12
Source: Ancillary revenues from Idea Works 2012 estimate, other data IATA. Costs include operating items and debt interest.
2012 worldwide airline financial results per departing passenger
0
20
40
60
80
100
120
140
160
180
200
220
Net profit
$2.56
Costs
$212.04
Costs $212.04
Revenues
$214.64
Cargo & other $31.30
Air fare $171.20
Ancillary $12.14
Periods of profit in the industry are typically short-lived Average 1990-2012 net profit margin for airlines worldwide was 0.0%!
IATA Economics www.iata.org/economics 13
Source: ICAO, IATA
Airlines subject to market pressure to raise profitability Majority of airlines are now privately owned in most regions
IATA Economics www.iata.org/economics 14
0%
20%
40%
60%
80%
100%
120%
N America Europe L America Africa Asia-Pacific Middle East
Ownership of airlines, weighted by ASKsSource: various
Private Government
Source: IATA’s Vision2050 report http://www.iata.org/pressroom/facts_figures/Documents/vision-2050.pdf
Lack of profitability not due to business model or region Airlines generating average EBIT margins of more than 8% during the 2000s
IATA Economics www.iata.org/economics 15
0% 5% 10% 15% 20% 25%
Ryanair
Republic Airways
COPA
Allegiant
GOL
Air Arabia
Turkish
Aeroflot
Pinnacle Airlines
Emirates
Singapore Airlines
Southwest Airlines
Aegean
LAN
INDUSTRY
EBIT margin %, 2000-2009
Average EBIT margins, 2000-09
LCC
Full service long-haul
Regional
L America
N America
Mid East
Asia-Pacific
Europe
Source: IATA Vision2050 report http://www.iata.org/pressroom/facts_figures/Documents/vision-2050.pdf
Porter’s 5-forces show the high intensity of competition Four out of five rate ‘high’ with the fifth ‘medium and rising’
IATA Economics www.iata.org/economics 16
Source: IATA’s Vision2050 report http://www.iata.org/pressroom/facts_figures/Documents/vision-2050.pdf
Profitability is very unbalanced across the value chain Airlines sit in the middle of the value chain making the least returns
IATA Economics www.iata.org/economics 17
ROIC excluding goodwill of sample, period 2004-2011, %
20
7 0
5
10
15
20
25
30
35
40
45
44
4
15 9 6 9 11
9-11 Cost of
capital
9-11 7-9 6-8 6-8 7-10 10-11 8-11 7-8
Source: McKinsey
The rising cost of airports and air navigation services Payments by airlines and passengers for infrastructure services
IATA Economics www.iata.org/economics 18
Source: Aeronautical revenues – ACI aeronautical revenue data 1997-2011. ANS charges – ATM-Cost Effectiveness (ACE) Benchmarking reports, Eurocontrol and ATM Report and Directory 2012, CANSO. AATF levies – FAA. DHS levies – TSA.
2007-2011 • Rise in infrastructure costs: 28% • Rise in passenger numbers: 17% • Rise in infrastructure costs per passenger: 9% • Rise in OECD CPI: 9.3% • Rise in airline revenues per passenger: 0.1%
Governments are part of the problem Porter’s 5-forces model identifies how government intervenes in the market
IATA Economics www.iata.org/economics 19
12 Copyright 2011 © Professor Michael E. Porter
Threat of Substitute
Products or Services
Threat of New
Entrants
Rivalry Among
Existing CompetitorsBargaining Power
of Suppliers
• Subsidies and export-financing
for aircraft manufacturers
pushes capacity growth and
entry
• Labor market regulations give
power to unions and create
advantages for new entrants
• Privatization of airports and
ground handling services has
raised costs
• Government-mandated fees
(Over flight rights, air control,
security fees) raise costs
• “Fly national’ rules
for government
employees and
government
contractors distort
market choices
• Some legal entry barriers remain (domestic,
international) which limit consolidation
• Policies influence allocation of slots/gates
• Safety standards create limited barriers
• Government financing for substitutes (e.g., high-
speed trains)
• Inconvenience and delays created by safety
procedures and air traffic control for airline travel
• Competition rules limit consolidation
• Restrictions to FDI/M&A limit consolidation
• Government ownership leads to uneconomic
decisions, though privatization is increasing
• Public service requirements require serving
unprofitable markets
• Bankruptcy laws and bail-outs allow
uneconomic carriers to persist
• Environmental standards and taxes raise
costs
• Safety and air traffic control procedures
reduce service quality and create costs
• Safety guidelines and technical standards limit
potential for differentiation
Bargaining Power
of Channels
• Consumer protection
laws on pricing
transparency and
delays raise airline
costs
Bargaining Power
of Buyers
Source: IATA’s Vision2050 report http://www.iata.org/pressroom/facts_figures/Documents/vision-2050.pdf
Existing and proposed regulation risk significant cost A selection of regulations/policies illustrating industry and market-level costs
IATA Economics www.iata.org/economics 20
Source: IATA
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
Airportregulation
Budgetdeficits
Passengerrights
Climatechange
Congestionpolicy
% a
ve
rag
e tic
ke
t p
rice
Policy risk impact
Austrian tax
German tax
Climate fund levy
EU ETS
LHR 2012-14
Delhi
ACSA
LHR congest-ionpricing
CDG congest-ion pricing
Europe
Total cost for industry
$1.5bn
Industry is addressing the climate change challenge Lower compliance cost for Carbon Neutral Growth from 2020 requires
government to deliver on infrastructure and biofuel support
IATA Economics www.iata.org/economics 21
Source: IATA Aviation Carbon Model. Note revisions to IEA aviation fuel data have slightly increased the emissions profile from previous estimates.
400
500
600
700
800
900
1000
1100
1200
1300
1990 1995 2000 2005 2010 2015 2020 2025 2030
Worldwide CO2 emissions from commercial air transport, mT per year
689mT in 2012
790mT in 2020
235mT offsets
CNG2020 cap 790mT
1240mT CO2 in 2030 after fleet renewal and
higher load factors
Operations
Infrastructure
Biofuels
Airlines bought 25,000 new aircraft during 1990-2012 Spending equivalent of $3 trillion when valued at today’s aircraft prices
IATA Economics www.iata.org/economics 22
0
5,000
10,000
15,000
20,000
25,000
30,000
0
200
400
600
800
1,000
1,200
1,400
1,600
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
New aircraft deliveries, 1990-2012
Aircraft deliveries (left scale) Cumulated deliveries (right scale)
Source: Ascend
35
40
45
50
55
60
65
70
75
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Fuel
eff
icie
ncy
, lit
res/
10
0 T
KP
Fuel efficiency of commercial airlines worldwide, in litres/100 RTK
46% improvement1990-2012
Airlines improved fuel efficiency by 46% over 1990-2012 Fuel efficiency measured in litres of fuel burned per 100 RTK
IATA Economics www.iata.org/economics 23
Source: IATA calculations. Note revisions to IEA aviation fuel data have increased fuel efficiency gains from previous estimates.
300
400
500
600
700
800
900
1000
1100
1200
1300
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
mill
ion
to
nn
es C
O2
CO2 from commercial airline fuel burn, actual versus frozen technology
1293mT
689mT
CO2 if industry fuel efficiency had remained fozen at 1990 levels
Actual airline industry CO2 emissions
Cumulative CO2 emission savings of over 5 billion tonnes during 1990-2012
During 1990-2012 airlines saved 5 billion+ tonnes CO2
Comparison of actual emissions with the level had fuel efficiency remained frozen
IATA Economics www.iata.org/economics 24
Source: IATA Aviation Carbon Model