Hospitality and Travel 2015 by
M. Cetron, F.J. DeMicco & O. Davies
In mid-2008, with the price of oil at nearly $150 per barrel and jet fuel at similarly stratospheric levels, the world’s airlines were struggling to survive. Many were failing.
In early 2009, with the price of oil under $50 per barrel and the cost of jet fuel comparably reduced, the world’s airlines are struggling to survive. Many are failing. The catastrophic failure of the global economy, just when the airlines finally seemed poised to make a profit, must rank as one of the bigger disappointments the industry could have received.
At Forecasting International, we have a reputation as optimists who can see the bright side in most situations. This is undeserved; we simply go where the data lead, without the emotional and philosophical biases that make habitual pessimists of some other forecasters. But in the case of the airline industry, there is no getting around it: The recent past has been grim, and the future offers only modest improvements.
One More Perfect Storm
These days, it seems that anyone who has suffered business reverses blames them on a “perfect storm,” a disastrous combination of forces and events that could not have been foreseen or defended against. If any industry has the right to use this excuse for its troubles, it is the airlines.
When Al Qaeda terrorists hijacked four aircraft from United and American Airlines to carry out the 9/11 attacks, it devastated the industry. In the month after the terror spectacular, U.S. domestic passenger miles dropped 20 percent from the previous October; international passenger miles were off 37 percent. Before 2001 was over, the American airline industry shed some 79,000 jobs, one in ten of the people it had employed before September 11. Other countries saw similar declines. American air carriers alone lost an estimated $10 billion that year, up from $7.7 billion in 2001. Globally, industry losses in 2001 and 2002 amounted to $25 billion, according to International Air Transport Association (IATA) Director General Giovanni Bisignani.
By early 2003, it had begun to seem that the worst might be over. Then Severe Acute Respiratory Syndrome, or SARS, appeared. For a time, it inhibited travel even more than the threat of terrorism had done. IATA estimates that in May 2003 SARS cut international passenger traffic 21 percent below the level seen 12 months earlier, when post-9/11 anxiety was still near its peak. Asian carriers lost nearly 51 percent of their passengers during the worst of the period. Air traffic also declined more than 20 percent in North America during the outbreak and 5.5 percent in Europe.
No sooner was SARS under control than America invaded Iraq, renewing fears of terrorism. Transatlantic traffic in April 2003 was down just over 25 percent, while American domestic flights were off by 15 percent. At the same time, crude oil prices soared, carrying jet fuel to $1.05 per gallon that May; it had been only $0.62 per gallon in January 2002.
The result was predictable: Airlines filing for bankruptcy or surviving on government bailouts in late 2001 and 2002 included Sabena, Swissair, Midway, U.S. Airways, United, Avianca, Air Canada, National, and TWA. When asked what other airlines might go under, one aviation analyst replied, “Almost any of them.”
The period from 2003 through 2007 qualified as good times by the standards of the airline industry. As the global economy recovered, so did air carriers. In North America, only six airlines filed for bankruptcy during the period. Six emerged, including four of the lines that had recently filed. U.S. Airways even emerged from bankruptcy protection twice.
But it seems the airline industry’s good times never last.
All these unexpected developments have been catastrophic for the world’s airlines. In the two years following September 11, carriers in the United States lost every penny they made between 1995 and 2000. They have had to take on so much debt just to survive that they will need $20 billion by 2007 to restore their balance sheets to the levels seen in 1999. The situation has been little better elsewhere.
“Our industry has lost at least three years of growth and development,” comments IATA’s Bisignani. “This year , we can expect to lose almost five billion US dollars on international services. If we include domestic traffic, losses could approach ten billion. Effectively, every round-trip international passenger was given twenty-five dollars by the airlines in 2003.”
The situation has been hardest in the United States, which accounts for 40 percent of the world’s air traffic. In 2003, only 600 million people flew on American carriers, compared with 634 million forecast before 9/11; that number is not expected to reach the level seen in 2000 until at least 2006. Ten of 16 airlines surveyed by the federal Bureau of Transportation Statistics (BTS) ran in the red in the first quarter of the year. Before 2003 was over, the airlines were expected to lose yet another $8 billion. In mid-summer, 2,000 jets—about 13 percent of the fleet—were parked in the Mojave Desert as carriers abandoned flights in order to boost their load factor, the percentage of seats with passengers in them.
In June 2004, the situation looks better in some ways, worse in others. Passengers are coming back to the airlines in substantial numbers. In January, Ulrich Schulte-Strathus, head of the Association of European Airlines, predicted that passenger numbers would rise by 7.5 percent in 2004, compared with a negligible 1 percent the previous year. In February, revenue passenger miles for U.S. airlines were up for the seventh month in a row, while passenger traffic grew by 10 percent. Airlines have actually been retrieving some of those mothballed aircraft—mostly smaller planes—from the desert to handle the demand. In the Asia-Pacific sector, passenger traffic is expected to grow no less than 14 percent in 2004, bouncing back neatly from the SARS-induced slump in 2003.
At the same time, carriers throughout the world have cut costs and improved their efficiency. Some 400,000 jobs have been squeezed from the industry, including a total of 100,000 in the United States, and those lucky enough to remain at work have had to endure widespread pay cuts. Capacity is down as well, because the airlines have cut flights, especially from over-served routes.
To make up for this, many airlines have formed alliances in which carriers can renumber planes, market flights, book seats, and share profits on aircraft actually operated by someone else. This also allows smaller airlines to offer service to destinations they could not otherwise reach. For example, the Sky Team alliance, dominated by Air France and Delta, gives partners like Aero Mexico, Alitalia, Czech Airlines, and Korean Air access to 512 airports in 114 countries.
For U.S. air carriers, these changes have brought load factors to nearly 80 percent in April and May 2004, the best they have been in years. European airlines are running with load factors of 70 to 75 percent, while most Asian carriers are just below 70 percent.
However, all these improvements have been more than offset by a catastrophic rise in the cost of fuel, due to a combination of Iraq war worries, limited refining capacity in the U.S., and OPEC policies that have driven the cost of crude oil above $40 per gallon for the first time in history. Every penny per gallon increase in the price of jet fuel costs American air carriers $180 million, according to John Heimlich, chief economist of the Air Transport Association. There have been a lot of extra pennies. In the United States, jet fuel averaged 90 cents per gallon in 2003, $1.10 in January 2004, and $1.30 in March. Prior to the rise, U.S. airlines had been expected to score their first break-even year in recent memory. By May, they were facing a loss of at least $2 billion and perhaps as much as $3 billion—roughly the increase in their fuel bills. Carriers in Europe and Asia were not doing any better.
Post-9/11 security improvements also have added to the cost of doing business. Airlines in the U.S. had paid out over $500 billion for security upgrades by early 2004, and Federal authorities believed the carriers’ share of the tab should have been more than $700 billion—and were seeking to bill the airlines for the extra cost.
And there is a growing fear that Pestilence may return to inhibit the travel market, as it did in 2003. By June 2004, there had been only a few cases of SARS since the last outbreak, all in China, which was acting vigorously to control the disease. However, a new strain of bird flu had killed at least 12 people in as ten Asian countries. All confirmed cases appeared to have been contracted directly from infected birds, but virologists worry that the disease could soon gain the ability to pass from one human patient to another. Bird flu has a much higher mortality rate than SARS, so human-to-human transmission could produce an epidemic that would kill millions. In the process, it could kill air travel in the affected region for years.
It is against this background that some longstanding trends and a few new developments will play themselves out. Here are some of the most critical issues the airline industry must deal with in the years ahead. They add up to very mixed prospects for the future.
Like other sectors of the travel and hospitality industry, airlines are exquisitely sensitive to their economic environment. Would-be tourists with empty pockets tend to stay at home, and businesses facing lean times view travel budgets as fat ripe for the trimming.
So it comes as disastrous news that the global economy is looking sicker than it has in at least 70 years. In the first two quarters of 2004, the U.S. gross domestic product rose at an annual rate of about 4 percent. In March, new jobs finally started to appear in significant numbers for the first time in more than two years—353,000 in March and just over 1 million in all by the end of June. It takes just 150,000 new jobs each month to absorb the new workers coming into the labor market, so it looks like some of the people laid off during the downturn were finally going back to work.
According to the Conference Board’s Index of Leading Economic Indicators, this catastrophic weakness is likely to be with us for some time. It declined by 0.3 percent in May for its ninth increase in ten months and incurred only a tiny decline in June. Burgeoning federal debt—not something we generally welcome—has kept the U.S. dollar down on international currency markets, making American exports more attractive to foreign buyers; this is one more reason to hope for a brighter economic future.
Elsewhere, economic news is no more cheery. Growth has been sluggish to nonexistent in Europe since 2002. In 2003, the European Union’s growth rate came in at just 0.4 percent. Germany, Italy, and the Netherlands were in recession during the first six months of the year, and widespread strikes put the French growth rate in negative numbers as well.
This may be changing. France and Germany cut taxes in 2003, and there are signs that the powerful German labor unions have lost some of their clout. Both these developments have led economists to hope that the sluggish French and German economies are due for better times.
Their worst fears appear to be coming true. In France, the GDP had been shrinking by 0.6 percent or more since 2002, and consumer spending has remained sluggish, thanks to unemployment in the range of 9 percent. Yet the economy turned in unexpectedly positive growth of 2.5 percent annually in the fourth quarter of 2003 and 3.1 percent in the first quarter of 2004. By April, the Conference Board’s leading index for France had been positive or break-even for nine consecutive months, sagging only slightly in may. In 2004, the French GDP is expected to grow by 2 to 3 percent.
The German economy—the largest in Europe—also has been in decline for several quarters, but appeared to bottom out in September 2003. In the second half of the year, GDP growth averaged 0.9 percent. It is not clear how long or strong the recovery will be. The Conference Board’s leading index for Germany actually declined in January and February 2004, thanks in part to a substantial drop in residential construction. However, the most recent forecasts still call for a growth rate of 1.6 percent in 2004 and 1.75 percent in 2005.
Elsewhere in Europe, economies are unhealthy as well. In Britain, growth is steady at around 1.9 percent per year, with 3 percent expansion forecast for 2004 and 2005. In Italy, a stagnant GDP is expected to rise by 1.8 percent in 2004. In all, the European economy as a whole grew by 0.4 percent in 2003, and slightly better performance can be expected in 2004.
In the years ahead, one more economic factor will work to the airlines’ benefit. This is the expansion of the European Union, which gained ten new members in April 2004. Opening these economies to free trade will give the wealthy countries of western Europe new markets and a source of relatively cheap skilled labor, while companies in eastern Europe will get access to prosperous western consumers. This should bring new growth in travel between the two halves of the Continent and open some profitable new routes to European airlines. The average distance between the EU capital in Brussels and the capitals of the ten new member countries is 1,400 km.
In all, the next few years hold considerable promise for European air carriers. If they cannot look forward to boom times, they can at least hope that the economic turbulence of 2001 and 2002 is finally behind them.
The three giant economies of Asia deserve special note. Japan had spent more than a decade in or near recession when, in 2003, government spending finally gave the economy the stimulus it had long needed. GDP growth shot up to 7.3 percent in the fourth quarter of the year and held at 6.1 percent in the first quarter of 2004. Exports surged, but most of the growth appeared in the domestic market. Building on this sturdy foundation, the Japanese economy remained strong until 2008.
The Chinese economy has been the world’s perpetual leader since the 1990s. GDP growth hovered at or near double digits for much of the 21st century, despite repeated interest-rate hikes and other efforts to hold potential inflation under control. The country was running a trade deficit with most of the world—the United States being a prominent exception—because it was forced to import raw materials in order keep its factories running fast enough to keep up with demand. Together with the country’s enormous population, broad expanse, and growing ties with the rest of the world, this astonishing economic success made China one of the biggest growth markets for air travel.
The third Asian powerhouse is India, home to one-sixth of the world’s people. In 2001, FI spent nearly a year studying India for a major corporate client. At that time, we concluded that the Indian economy would grow at an average rate of 6.5 percent per year at least through 2005, and probably through 2010. This was 2 percent higher than consensus estimates, and it proved to be too conservative. The Indian economy expanded by at least 7 percent annually between 2003 and 2007. During that period, India’s middle class grew by an estimated 30 percent per year, bringing new demand for air travel both within the region and to the rest of the world.
But by the end of 2008, that happy scenario changed. Like economies throughout the world, when American growth collapsed, India’s ran into a brick wall. TKTK
India and China are poster children for our second trend. The world’s population is well on the way to doubling in 40 years. Among the industrialized countries, America is growing by far the fastest, thanks to high birth rates among Hispanic immigrants and religious conservatives. However, the fastest population growth is in the developing and undeveloped countries. In Niger and the Palestinian Territories, populations will more than double between 2000 and 2050. In Yemen, Angola, and Congo, they will expand by over 160 percent.
Yet for the airline industry, the most important growth regions will be China, India, and the Muslim lands. According to the U.N., China is on track to grow by some 260 million people between 1995 and 2025, bringing its population to nearly 1.5 billion; the total could be much greater if the birthrate turns out to be even slightly higher than the extremely conservative assumptions used to form the estimate. India still has a high birthrate; its population is expected to pass 1.3 billion in 2021, up nearly one-third in 20 years. By 2050, there could be more than 2 billion people living in India. Growth rates in the Muslim lands vary widely. In Pakistan, it is about 2.6 percent per year, enough to bring its population from 130 million in 2000 to 220 million in 2020. Indonesia is growing at only half that rate. At the current rate of growth, by 2050 Pakistan could be the third most populous country in the world.
This matters to the airlines, because population growth represents new passengers. It matters even more, because the Indian subcontinent is the prime source of guest workers for the Middle East, and most of them travel by air. In addition, more than 1 million people annually fly to Saudi Arabia for the Haj, the once-in-a-lifetime visit to Mecca required of all Muslim faithful. These markets will grow rapidly in the years ahead.
It matters still more because population growth is fastest in the cities of the developing world. Between 2000 and 2030, the global population will grow by an estimated 2.2 billion. Of this, 2.1 billion people will be added to the world’s cities, primarily in places like India, China, and Indonesia. In 1950, there were just eight megacities, with populations over 5 million, in the world. (Newer definitions put the minimum population for a megacity at 10 million.) By 2015, there will be 59 megacities, 48 of them in less developed countries. Of these, 23 will have populations over 10 million, all but four in the developing lands. These vast concentrations of people—places like Delhi, Mumbai, São Paolo, and Dhaka—are likely to be among the fastest growing aviation markets in the world.
High Altitude High Tech
Not that long ago, when someone spoke of new airline technology, many people automatically thought of traveling on the Concorde and the faster, cheaper, miraculously sleeker new supersonic transports that would follow. By 2010, diplomats and the busiest executives would even bounce around the world on suborbital rocket planes, hopping from New York to New Delhi in just two hours.
Those dreams have evaporated in the heat of market reality. Now that the Concorde has been retired from service, it looks like commercial supersonic flight is an idea whose time has gone. Today’s version of advanced aircraft technology is a lot less exciting, but a lot more practical.
Some of the most promising developments deal with the environment, which remains a much more important issue in most of the world than it has been in the United States of late. Researchers are working hard to improve fuel economy, reduce air pollution, and cut the noise associated with jet operations.
Air travel now produces about 12 percent of global CO2 emissions. That should drop significantly in the coming decade. Yet by 2010, researchers hope to cut aircraft CO2 emissions by another 20 percent and NOx emissions by 60 percent.
More efficient burning means that fuel economy should rise as well. Today’s jets burn an average of about 3.5 liters of fuel per 100 passenger-kilometers. This makes them 70 percent more fuel efficient than the airliners of 40 years ago, but that is only the beginning. Airbus says that per-seat fuel consumption of its A380, scheduled to enter service in 2006, will be around 13 percent lower than a Boeing 747, with total expenses per seat mile 15 percent lower. Boeing’s 787, planned for 2009, is intended to cut fuel use by 15 to 20 percent, thanks to the use of highly efficient engines and much lightweight composite in its airframe.
Noise is another important environmental issue for the aviation industry, particularly in Europe, where 7 percent of the population lives within the sound “footprint” of a commercial airport and standards are much tighter than in the U.S. Today’s jet aircraft are typically 20 dB—75 percent—quieter than the jets of 1960. That is just the beginning. Researchers hope to bring aircraft noise down another 6 dB by 2010 and perhaps 10 dB by 2020.
However, these are incremental advances. Some of the most sweeping changes are likely to appear, not in the aircraft themselves, but in the systems that guide them from one place to another. These days, the global positioning system (GPS) keeps hikers from getting lost in the wilderness and guides drivers of luxury cars to the nearest gas station. It also enables pilots to fix their positions within a few feet of latitude, longitude, and altitude. Far more is possible.
In North America, most commercial aircraft make their way over long distances via designated air lanes, like drivers following a freeway. Straight-line flights from one point to another are relatively uncommon. This is in contrast to the situation in Europe, where most flights take the direct route and few of them are longer than 90 minutes.
In large part, the American system grew out of technological limitations that no longer apply. Before GPS, air traffic controllers just found it easier to keep track of planes that moved along easily predicted paths. It has worked fairly well for the hub-and-spokes traffic system, which routes tens or hundreds of flights per day through a few major airports.
However, there are serious disadvantages to this practice. The standard airways have limited traffic capacity, and many of them are getting crowded. And it takes more time and fuel to slip into the system and follow the airways to your destination than it would to fly in a straight line.
GPS makes the airways pretty much obsolete. The combination of satellite navigation and air traffic computers can fix any number of airplanes within a few feet of their actual positions, making sure that two aircraft never try to occupy the same space. This makes it practical to fly point-to-point, even over the longest routes to the busiest airports.
It also becomes possible to pack more airplanes together safely into less altitude, and the FAA now plans to cut the vertical separation required between airplanes from 2,000 feet to only 1,000. Thus twice as many airliners will be able to take advantage of the most efficient flight levels, saving both fuel and travel time.
Nav Canada, which provides air traffic control north of the border as the FAA does within the United States, believes that satellite navigation will allow unlimited free flight in its region by 2010. At that point, planes will fly directly to their destinations by the quickest, most convenient route, taking advantage of favorable winds. This will save still more fuel and open space for many more aircraft in the system. It could also further a reshaping of the airline industry that began more than 20 years ago.
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Big and Small
We have written of bimodal distribution before. Giant players flourish due to economies of scale, and boutique operators prosper by delivering the kind of tailored service that mass marketers cannot. Mid-sized companies, lacking either advantage, disappear. This process has been especially hard on air carriers, which are vanishing at record rates. Globally, the number of airlines is expected to drop from around 500 in 2002 to only 60 in 2010.
However, in this industry the mechanism of attrition is a bit different. This is important, because it will continue to shape air travel in the next two decades as it has done for the last 20 years.
There are no small, high-service airlines analogous to the boutiques seen in other industries. Instead, carriers compete almost exclusively on price. And it is seldom the largest participants that compete most effectively. Discount carriers generally run tighter operations, pay their employees less, often buy used planes in good condition rather than investing in new equipment, turn them around faster between flights, and pack their passengers tighter. These efficiencies give the discounters lower costs per passenger-mile and better profits despite offering cheaper prices than their larger competitors.
As a result, discount operators are flourishing even as full-fare carriers fight to survive. Low-fare lines held just 4 percent of the American market in 1991. By early 2004, they accounted for 25 percent. In 2003, even business travelers were buying air tickets that averaged 51 percent cheaper than standard business rates. Thus, Southwest Airlines, the pioneer of cut-rate aviation, managed to make $45.5 million in the first quarter of 2003, a time when United had an operating loss of $608 million and American hemorrhaged no less than $735 million. Air Tran built up its capacity by 28 percent over the year ending in June 2003 and will take delivery of 35 new aircraft over the next three years. Jet Blue has expanded from 21 aircraft in December 2001 to 41 in April 2003, and expects to operate 83 aircraft by the end of 2005.
All this is reshaping consumers’ travel habits. In Europe, vacationers used to book package tours, organized and sold by major tour operators. Not anymore. In 2003, more than 20 percent of visitors arriving in Mallorca, for example, arrived by discount airline and booked their hotel rooms on the Internet. And because they paid less for air fare, many upgraded to more expensive hotel accommodations. We expect this trend to reappear as soon as the European economy recovers enough to encourage elective spending.
Early in 2004, several discount airlines in the U.S. even were moving into the international market, long a private preserve of the full-service, full-price carriers. Several already are serving the Caribbean and Latin America, while others plan to offer discount service to Europe and Asia by the end of the year.
Discount airlines also have achieved steady growth in Europe, where some 500 routes are now served by 20 discount airlines. According to one estimate, low-fare carriers now handle 40 percent of passenger traffic within Britain and between Britain and the Continent. By 2010, low-fare and no-frills airlines such as Ryanair and easyJet are expected to capture at least 25 percent of the market throughout the European Union.
Despite the jammed seating and food choices that top out at a small bag of pretzels, low-cost carriers are winning passengers for more reasons than cheap travel. The Airline Quality Ratings, compiled by professors at Wichita State University and the Wichita State Aviation Institute, rate 14 airlines that carry at least 1 percent of American domestic passengers. Criteria measured in the survey include on-time performance, staff courtesy, baggage handling, and the number of customer complaints. The 2003 survey ranked 14 airlines. JetBlue came in first, with low-fare carriers taking three of the top four places.
In the United States, the discounters have one more advantage as well. United, US Airways, and the other giants exist to serve as many cities as possible. They do this by collecting passengers from smaller cities and consolidating them at about 30 major hub airports for long-distance travel. Running a hub-and-spokes system is not cheap, and it drives costs up for the major carriers by an estimated 15 percent. Discount airlines specialize in flying between cities that offer enough traffic to fill their planes and avoid the expense of hub operations.
Executives at the giant airlines argue that the hub-and-spokes model is the only way air travel can work in the U.S. Of the 30,000 city-pair markets where air service is available, only 5 percent have enough traffic to support non-stop, point-to-point flights. For example, Syracuse, NY, offers 43 departures each day. Flights run non-stop flights to 11 hub cities and provide one-stop access to more than 175 destinations. Flying point-to-point, if it takes 75 passengers to justify running an airplane for them, Syracuse could support only one flight per day to each of seven destinations.
Discount airlines can offer cheap fares in part because they serve only markets that can fill planes for point to-point travel. And the top 5 percent of city-pairs that give the discount airlines their living account for 73 percent of all passengers flying in the U.S.
However, this picture is changing. The major airlines have not just been cutting prices—by up to 77 percent on some routes!—to compete with the leaner, meaner discounters. They have been eliminating service and starting their own low-fare operations. Non-hub airports have lost 19 percent of their air service since 1998; short-haul flights by the “Big Six” airlines have declined 43 percent since late 2001, and about two-dozen cities have lost all service by the major airlines. Fully half of the aircraft flown by the traditional airlines early in 2004 are smaller regional jets with no first-class seats. Most of the “Big Six” carriers have reduced flights to some of their hubs and pulled out of some smaller communities. None of them flies to Africa any more, nor to the Middle East (other than Israel), Eastern Europe, Indochina, Scandinavia, nor any of the states of the former Soviet Union, save for a single flight to Moscow. It is getting harder and harder to tell the difference between the major airlines and the discounters, save that their seats cost up to 30 percent more, even on the same routes.
At the same time, local populations are growing. Demand for air travel grows with them, so many more markets should be able to fill planes each day. And with satellite navigation, it becomes a lot easier for the air traffic control system to handle that kind of flight schedule. Point-to-point air travel may be destined to make the hub system obsolete, except for the longest routes. That would open a lot more U.S. markets to discount service. This is not good news for the major airlines.
Some aviation experts are convinced, others not. Boeing is betting the store on direct-route air travel. Airbus clearly is just as convinced that the hub-and-spokes system is here to stay. We can see this in the new models the two companies are bringing to market.
The Boeing 787 Dreamliner series is a mid-sized model designed primarily for long-range flights. Three versions are planned, the 787-8, -9, and -3. The –8 and –9 will hold 210 to 250 passengers and 250 to 290 passengers, respectively. Both will be capable of roughly 8,000 nautical miles in a single hop. The –3 variant will be a relatively short-range model, capable of carrying up to 300 people distances of 2,500 to 3,000 miles. Delivery has been delayed several times. As of January 2009, the first planes should take to the air in the first quarter of 2010. This plane clearly aims to provide nonstop service between mid-sized cities that today would be linked by a hub. Boeing was so sure that point-to-point travel will take over the market that it committed to the 787 project with only a couple of modest orders from Nippon Airways and Japan Air Lines. It was the first time the company has built a new plane without major support from a domestic airline.
In contrast, the Airbus A380-800 is a double-decker giant originally designed to seat 555 passengers in three classes or 853 in a single-class economy version. Future variants under consideration include a long-range version of the –800 and the A380-900, capable of seating 658 passengers, or up to 900 in the all-economy version. In practice, carrying capacities range from 450 (Quantas) to 644 passengers (Emirates Air.) The A380 series makes sense only in a hub-and-spokes system, where it can serve as the long-haul carrier for passengers with a variety of origins and destinations. After repeated delays, the A380-800 entered service with Singapore Airlines in October 2007.
The two firms have put hard numbers to their visions of the future. Boeing believes that about 24,000 new airliners will be sold in the world over the 20 years beginning in 2006, not counting the smallest planes suited only to regional service. Of those, it says that 68 percent will mid-sized single-aisle aircraft like its 787; only 3 percent will be mass movers larger than the current 747. Airbus puts the market closer to 15,000 new jets, plus 3,000 planes being refurbished to like-new standards. It believes that 52 percent of sales will be in the 787 category and 11 percent will be vast hub-to-hub airplanes like its A380, which thus far is the only model destined for its intended class.
At FI, it seems to us that both companies may be half-right, in principal if not in their exact numbers. It will be a long time before the hub-and-spokes system disappears completely. Too many small cities cannot support direct service, and even some medium-sized communities must combine their passenger loads to support international flights. Yet both technology and population growth clearly point toward more point-to-point service, at the expense of the hub-and-spokes carriers.
Nearly all of the American full-fare airlines have tacitly accepted the point-to-point model by setting up their own discount operations. The European airlines will make this transition soon, though it will not be easy for them. (NO!) In late 2003, Cranfield (U.K) University’s Air Transport Group warned that excess seating capacity already could drive some of Europe’s low-cost air carriers out of business. At this point, we expect both Boeing and Airbus to find markets for their new models—but there are likely to be a lot more 787s than A380s in the air 20 years from now.
The Bottom Line
The post-2008 downturn in air travel will have a lasting impact on the airline industry, just as the contraction after 9/11 did. Boeing estimated that 5 percent fewer passenger-miles would be flown in 2020 than would have been the case if the 9/11 terrorist spectacular had not taken place. That put the market roughly four years behind the growth curve that analysts once expected. This fit well with FAA projections. In 2000, the FAA forecast that passenger volumes in the U.S. would reach 1 billion in 2010 and 1.1 billion three years later. Prior to the recession, it estimated that growth would recover soon to the 5.1 percent annually seen prior to 9-11. Yet American carriers would not fly 1 billion in a year until 2014.
This all adds up to an environment much like the one that existed before the world’s economic problems began. Undercapitalized, inefficient carriers will struggle to survive—and that second category will include some of the biggest names in air travel. Full-fare carriers will continue to offer wider seating, in-flight Internet service, and even a few bunks for weary passengers on long flights, all in an effort to justify premium prices. They will find it a hard sell, as even business travelers put up with the discomforts of flying coach in order to save money on all but the longest routes. The number of major hub-and-spokes airlines in the United States will decline from seven to five, then four, and eventually perhaps to only three. The same trends will be seen in Europe, and to a lesser extent Asia. Yet in each region the most efficient, best capitalized competitors will reap ample rewards.
But behind these forecasts there are a few assumptions, and they should be made clear because they could prove wrong. In predicting a recovery, we assume that the cost of jet fuel will come down before it drives many of the major airlines out of business. This is likely, if only because OPEC has always found it impossible to inflate the price of crude oil for very long. We will be surprised if there is not a significant break in time for the American presidential elections in November 2004.
We assume also that there will be no major outbreak of infectious disease, like the epidemic of SARS that inhibited Asian travel in 2003. Though the threat of bird flu has largely disappeared from the news, and thus from popular awareness, it still has the potential to halt most international air travel for a year or more. We assume that it will not only because there is, as yet, no firm evidence that the virus has learned to leap from one human patient to another.
Key Trends for the Airlines
1. The world’s population will grow to 9 billion by 2050.
Early versions of this report predicted that the world’s population would double by 2050, and population growth has proceeded almost exactly on schedule. However, even this estimate may be too low. According to the Center for Strategic and International Studies, most official projections underestimate both fertility and future gains in longevity. Unfortunately, the greatest fertility is found in those countries least able to support their existing people. Populations will triple in the Palestinian Territories and Niger between 2000 and 2050 and will more than double in Yemen, Angola, the Democratic Republic of Congo, and Uganda. In contrast, populations in most developed countries are stable or declining. The United States is a prominent exception.
Assessment: Demographic trends such as this are among the easiest to recognize and most difficult to derail. Barring a global plague or nuclear war—wildcard possibilities that cannot be predicted with any validity—there is little chance that the population forecast for 2050 will err on the low side.
Implications for the Airlines: Demand for air travel will grow at least as quickly as the world’s population.
19. The economy of the developed world is growing steadily, with only brief interruptions.
When the United States catches a cold, the rest of the world gets pneumonia, or so economists used to say. Late in 2008, the United States has pneumonia. Home prices remain in free-fall, and the credit market has collapsed. Jobs are disappearing at a rate of more than 1 million every two weeks. Consumer confidence is plummeting. Most of the world is in recession. It turns out that 2008 and some of 2009 are one of the interruptions contemplated in the trend.
Looking abroad, we can see effects of America’s problems. The entire European Union is in recession. China, Australia, India, Japan, and Russia are in or near recession. In all, the economies of the world seem a lot less healthy than they did a few months ago.
Throughout the world, governments are scrambling to shore up lending institutions, stem the tide of foreclosures, restore the flow of credit, and provide jobs for the newly unemployed. These efforts will continue through 2009.
At that point, global economic growth will resume its accustomed rate, a bit more than 5 percent per year as of 2007.
Assessment: These trends have been revised many times since they were first codified in the late 1980s. Some trends have fallen out of the list as they matured or as circumstances came along to change them. Others have been added as they were recognized. This trend has remained a constant, and with each revision its effective period has been extended. To invalidate this trend would take a catastrophe on the order of the permanent loss of Middle Eastern oil from the Western economies. Not even the recession of 2008 and ’09 rises to that level of destruction.
Implications: Barring another terrorist incident on the scale of 9/11, or some equivalent shock, the world’s recovery efforts should reinforce each other, with each trading nation helping to generate the continued well-being of its partners. By 2011, business profits and GDP growth will return to the peak levels seen before the recession of 2008/’09.
Labor markets will remain tight, particularly in skilled fields. This calls for new creativity in recruiting, benefits, and perks, especially profit sharing. This hypercompetitive business environment demands new emphasis on rewarding speed, creativity, and innovation within the workforce.
In the United States, the growing concentration of wealth among the elderly, who as a group already are comparatively well off, creates an equal deprivation among the young and the poorer old. This implies a loss of purchasing power among much of the population; in time, it could partially offset the forces promoting economic growth.
Implications for the Airlines: Thanks to the global recession, airline ticket sales are generally expected to be off about 15 percent from 2008. At Forecasting International, we believe this prediction may be significantly too optimistic.
The International Air Transport Association expects American carriers to lose about $2.5 billion in 2009—and that is the good news. Worldwide, all regions except the U.S. are expected to show larger losses in 2009 than in ’08. Industry revenues are expected to come in a $501 billion, down $35 billion from 2008.
The latest wave of airline bankruptcies has already begun. In the U.S. alone, 13 lines entered bankruptcy protection in 2008, including six that terminated service. In Europe, at least 50 airlines reportedly have enough trouble on their balance sheets to threaten their survival. The situation is even worse in Asia: not even the region’s strongest airlines can be sure of weathering the bad times ahead.
Beginning in the second half of 2009, business travel will slowly recover from its low in the current recession, bringing new demand for seats, particularly on long-distance flights. However, executives whose companies have grown accustomed to discount fares will not soon be willing to pay for business-class seats.
Leisure travel will recover approximately as it did after the last recession, with consumers returning to the market as they grow more secure in their job prospects. However, employers will put off new hiring as long as possible, just as in the “jobless recovery” after the last U.S. recession. Employment will not reach pre-crash levels until at least 2012.
Demand in the Asia-Pacific markets, particularly India and China, will gain strength much more quickly than demand in North America and Europe.
32. When not perturbed by greater-than-normal political or economic instability, oil prices average around $65 per barrel.
New energy demand from the fast-growing economies of China and India has raised the floor that until 2004 supported oil in the $25 per barrel range. Nonetheless, the spike in prices to nearly $150 per barrel in mid-2008 was an aberration. At least four factors contributed to the bubble in energy prices: Perhaps 30 percent of the increase in oil prices to their June 2008 high stemmed from the long-term decline in the value of the U.S. dollar on foreign exchange markets. Another $10 to $15 per barrel represented a “risk premium” due to fears of instability triggered by the Iraq war and Washington’s threats to attack Iran. Without those two factors, $145 oil would have been $100 oil. A worldwide shortage of refinery capacity helped to drive up the cost of gasoline, fuel oil, and other energy products. It appears that rampant futures speculation in the energy markets also helped to spur oil prices. None of these factors was permanent.
Assessment: The long-term trend toward stable energy prices can only grow stronger as the West reigns in consumption and alternative energy technologies become practical.
Implications for the Airlines: While oil prices remain under control, the biggest American air carriers should at last have had the chance to become solidly profitable. Instead, they will have a better chance to survive the global economic crisis.
Airlines such as Southwest, which locked in long-term supplies of jet fuel at prices well below their peak, watched their competitors suffer while oil soared. In 2009, they are being forced to put up cash to meet the terms of their fuel contracts—some $230 million in Southwest’s case. This deprives them of a significant competitive advantage.
36. Transportation technology and practice are improving rapidly.
The newest generation of aircraft, such as the Boeing 787 and future Airbus A350 XWB, are using lightweight materials and more efficient engines to cut fuel costs, stretch ranges, and increase cargo capacity. In the United States, two companies have even announced plans to build supersonic business jets and have them in the air by 2013 or so. One has already taken deposits for several dozen aircraft. At the same time, rail travel is getting faster. The new TGV Est line, which runs 300 km (180 miles) from Paris to Frankfurt, operates at 320 kph (198.8 mph) inside France, compared with 300 kph on other parts of the TGV system. China has begun to install a network of highspeed trains to compensate for its shortage of regional air transportation.
Assessment: These advances will continue at least through mid-century.
Implications for the Airlines: New technology should cut fuel use by as much as 10 percent per passenger-mile over the next ten years.
New safety technologies, such as fuel tanks filled with inert gas, should eliminate some potential accidents in the future, saving more than 1,000 lives in the next ten years.
By eliminating the need for America’s hub-and-spokes air travel network, satellite navigation will dramatically reduce the cost of air travel in the U.S. over the next ten years. It also will make improve the profitability of the major airlines—or at least of those that survive until the transition has been made.
40. People around the world are becoming increasingly sensitive to environmental issues as the consequences of neglect, indifference, and ignorance become ever more apparent.
The World Health Organization (WHO) estimates that 3 million people die each year from the effects of air pollution, about 5 percent of the total deaths. In the United States, an estimated 64,000 people a year die of cardiopulmonary disease caused by breathing particulates. In sub-Saharan Africa, the toll is between 300,000 and 500,000 deaths per year. Pollution-related respiratory diseases kill about 1.4 million people yearly in China and Southeast Asia. And contaminated water is implicated in 80 percent of the world’s health problems, according to WHO. An estimated 40,000 people around the world die each day of diseases directly caused by contaminated water, more than 14 million per year.
Though some debate remains about the cause, the fact of global warming has become undeniable. At Palmer Station on Anvers Island, Antarctica, the average annual temperature has risen by 3 to 4 degrees since the 1940s, and by an amazing 7 to 9 degrees in June—early winter in that hemisphere. Anticipating a three-foot rise in sea levels, the Netherlands is spending $1 billion to build new dikes.
Assessment: A solid majority of voters throughout the developed world, and even some in the developing lands, now recognize the need to clean up the environment, and especially to control greenhouse warming. They will keep this trend intact for at least the next 30 years.
Implications for the Airlines: Pollution controls will continue to be a growing burden for the airlines. However, the need to eliminate pollution eventually will help to make the air carriers more efficient and profitable.
53. Institutions are undergoing a bimodal distribution: the big get bigger, the small Survive, and the mid-sized are squeezed out.
Economies of scale enable the largest companies to win out over mid-sized competitors, while “boutique” operations can take advantage of niches too small to be efficiently tapped by larger firms. We see the result in a wide range of industries throughout the developed world. In agriculture, banking, auto manufacturing, telecommunications, and many other sectors, the largest firms have been buying up their mid-sized competitors or driving them out of business. At the same time, hundreds or thousands of tiny operators have arisen in each industry to get rich by serving markets beneath the notice of the giants.
Assessment: Thanks in part to technology, this trend is likely to be a permanent feature of the business scene from now on. It will accelerate significantly during the recession of 2008/’09.
Implications for the Airlines: High-priced, full-service airlines have only just begun to cope with competition from the discount carriers. No-frills airlines will continue to gain market share at the expense of the full-fare lines.
Boeing’s 787 is likely to find more of a market than the Airbus A380.
Competition among the discount airlines will be even more intense than between the discounters and the full-fare carriers.
55. International exposure includes a growing risk of terrorist attack.
Terrorism has continued to grow around the world as the Iraq war proceeds, even as the rate of violence in Iraq itself has, at least temporarily, declined. State-sponsored terrorism has nearly vanished, as tougher sanctions have made it more trouble than it was worth. However, nothing will prevent small, local political organizations and special-interest groups from using terror to promote their causes. These organizations have found inspiration in the successes of Al Qaeda, and many have found common cause. The most dangerous terrorist groups are no longer motivated primarily by specific political goals, but by generalized, virulent hatred based on religion and culture.
On balance, the amount of terrorist activity in the world will continue to rise, not decline, in the next 10 years. This was seen in corrections to the State Department’s April 2004 report on terrorism, which originally seemed to show a sharp drop in terrorist incidents. In fact, terrorist attacks had risen sharply since the invasion of Iraq, both in number and in severity.
Assessment: This trend is unlikely to change in the next decade and relatively unlikely to change in the next 20 years. A permanent end to the international terrorist threat would require a broad philosophical and cultural change in Islam that makes terrorists pariahs in their own communities. No such change is on the horizon.
Implications for the Airlines: No matter what else goes right, there will be a sword over the industry’s neck for at least the next ten years.
New security precautions will continue to drain profits from the airlines, particularly in the United States.
It is essential that the airlines set up to screen all checked baggage before it goes onto an airplane, just as they do carry-on luggage.