Growing middle class, low air fares creating new opportunities for aviation industry

 

Middle East, Africa, South Asia, other emerging markets, will demand more planes, pilots, MRO and technologies.

About 4 billion people around the world are estimated to have traveled by air by the end of 2017 for the first time in aviation history.

That's approximately 80 percent load factor and 7.5 percent growth that will bring in about $743 billion gross revenues forthe airlines.

In 2016, some 3.6 billion people traveled by air, creating a 5 percent or more capacity and load factors for various airlines in over 140 countries.

The International Aviation Transport Authority (IATA), which made the 2017 calculations, said this is the 3rd year in a row that the global aviation industry posted positive growth and is likely to continue with analysis pointing to sustained growth in the years ahead as the middle income class in various emerging markets rises with more money to spare, China and India in particular.

 

“In 2017 we expect airlines to make $31.4 billion on $743 billion in revenues. That's sound performance. And it's good news for many. Passengers are

benefiting f rom modern fleets, expanded networks and more product choice. Direct employment has grown to 2.8 million jobs. And investors are being appropriately rewarded with above-cost-of-capital returns of 8.8%,” said Alexandre de Juniac, CEO of IATA, in one of his speeches.

De Juniac said “strong demand is driving profitability” even in the air freight industry which he described as “has just awakened from a six-year coma.”

“7.5% growth is being powered by e- commerce and pharmaceutical shipments. E-air waybill penetration has finally topped 50%. And today this assembly will be asked to endorse a resolution that will accelerate the modernization of cargo's antiquated processes,” he said.

Although the industry has sustained growth, De Juniac cautioned “full recovery is more wishful thinking than recovery” as it is still recovering from its latest cycle of financial struggles and faces substantial challenges.

Passenger Growth

Boeing, the world's largest aerospace company that manufactures commercial jetliners and defense, space and security systems, as well as Airbus, a global leader in aeronautics, space and military hardware, are both bullish about the commercial passenger outlook over the next few decades.

“Worldwide air travel has grown at a historically brisk pace. Year-over-year passenger travel growth for the past five years has averaged 6.2 percent. Low air fares, higher living standards with a growing middle class in large emerging markets, and the growth of tourism and travel relative to total consumer spending in major economies are all driving strength in the demand for air travel,” Boeing said in one of its many reports on aviation.

Boeing, which accounts for over10,000 commercial jetliners in service, flying passengers and freights across the world, economic and income growth in large emerging markets are fueling much ofthe growth in the industry.

 

China and India, which have 1.411 billion and 1 . 344 billion population,respectively, have been the primary driver of global GDP growth and also demand for airtravel, Boeing said.

“India's emergence as a high-growth economy is fueling more than 20 percent passenger traffic growth per year in its domestic market. India is expected to become the third largest commercial aviation market by the early 2020s,” the company said.

The middle class in both countries combined grew from 80 million in 2000 to 135 million in 2016, an increase of nearly 70 percent,” it added.

Based on Boeing's forecast, the world would need more than 41,000 new deliveries of planes valued at over US$6 trillion,for growth and replacement overthe next 20 years.

In a separate report, Airbus pointed out the industry would need 34,900 new aircraft by 2036—34,170 passenger aircraft and 730 freighters.

It estimates passenger traffic among emerging markets to grow at 6.2 percent annually and would be more than double since the 9/11 era.

By 2036, almost 1.6 billion of them would travel within China only, almost four times the number of passengers who traveled by air in 2016. In India, a similar domestic scenario is forecast as Indian travelers would likely grow six times in the next 20 years.

Oil and jet fuel prices would remain an important component in any airline's operating costs and are forecast to recover over time though they may not reach the peak levels of the past, Airbus said.

Massive Potential in the Middle East

Sitting on vast oil reserves that make oil and jet fuel cheaper and located at the crossroads between Asia, Africa and Europe, the Middle East with its one- stop connections has massive potential forthe aviation industryto flourish.

 “ Grow t h prospects for these connecting markets are strong. For example, South Asia has 1.8 billion people,and propensity to  travel—driven by expected improvements in regional GDP per capita—is set to grow by a factor of five over the next 20 years,” Boeing said in its analysis.

“Less dramatic but similarly robust growth is projected for other emerging markets near the Middle East, notably Southeast Asia and Africa. Increasing demand for travel to and from these regions is a key factor supporting Boeing's forecast for the region—3,350 airplane deliveries over 20 years,” it added

As of 2016, more than 2.4 million people are directly and indirectly employed in the region's aviation sector which has about 59 operating airlines in 118 commercial airports, experts said.

Passenger traffic growth in the region made up of the United Arab Emirates, Saudi Arabia, Oman, Qatar, Jordan, Bahrain, Iran, Iraq, Kuwait, Lebanon, Syria and Yemen—collectively home to more than 7 million people, is forecast to grow at 5.6 percent annually.

Dubai,  home  to  one  of the  biggest airlines in the world, Emirates, is leading the aviation growth in the region in terms of number of airlines and aircraft serving the route, technological and infrastructure advancements and passengervolume.

The once dusty and sleepy airport of Dubai , now known as Duba i International or DXB, is today the world' s number one airport for international passengers with 83.6 million passengers in 2016. It was chosen as the “Middle East's Leading Airport” at the 2017 24th World Travel Awards.

In September 2017, DXB handled 7.2 million passengers with more than 33,000 aircraft movements recorded during the period.

Paul Griffiths, CEO of Dubai Airports which operate DXB, said, “Dubai International's growth throughout the first nine months of 2017 has been very satisfying and we are now well set for a great finish to the year thanks to the internationally popular entertainment and sports events lined up for the upcoming winter season here in Dubai.”

Kuwait is hosting the Kuwait Air Show in January 2018 in a bid to spruce up interest in the country's aviation industry. In 2005, it opened up its skies to the private sector enabling two new carriers—Wataniya Airways & the LCC Jazeera Airways—to offer flight services apart from the state-run Kuwait Airways.

Bahrain is also on the move to get a bigger market share in the Middle East aviation industry. It is developing a new passenger terminal at  the Bahrain International Airport as part of its new 20-year airport masterplan.

Scheduled to be completed in 2020, the new passenger terminal building will allow more planes to operate at the airport and accommodate more passengers.

Airlines in the region are also investing on newer, more capable, fuel-efficient airplanes in order to compete in the very competitive Middle East aviation market.

Between 2017 to 2036 , Airbus estimates the region to need 52,890 more pilots; 58,200 technicians, and; 2,529 new aircraft deliveries. Its MRO industry is estimated to be valued at

$190 billion.

Underserved Africa

Africa remains an underserved market for the aviation industry although it is rich with abundant natural resources that should enable it to easily exchange trade and goods with the global market.

Africa is the world's second largest and most populous continent with more than 1.2 billion people, spread over 54 countries, home to some of the richest and the poorest in the world.

According to the Geneva-based Air Transport Action Group (ATAG), the region has 369 airports and 244 airlines which generate 6.8 million jobs. But majority of these airports and airlines struggle to make profits due to restrictive air policies that limit their opportunities and capabilities to do business with more locations across the world.

Only Ethiopian Airlines has consistently made profits. In fiscal years 2015-2016 ending in June 2016, it posted earnings of US$273 million. This year, the airline opened up more routes and its state- of-the-art new cargo terminal in Addis Ababa which could potentially bring in more revenues forthe state-run carrier.

Kenya Airways continues its restruct- uring program in a bid to cut losses and make business more profitable.

Other major airlines in the region are also adopting reforms to ensure their profitability, hence, longevity in the industry.

Analysts said the key to aviation growth in Africa lies on liberalization of policies and a more transparent government.

The region remains underserved but future projections for its aviation market looks rosy growing at 5.9 percent annually over the next 20 years.

“Air traffic for Africa's carriers is forecast to grow 5.9 percent annually over the next 20 years, which is above world average and is driven by overall economic growth and increasing numbers of travelers from, to, and within the region. Most of this growth is projected to occur in the second half of the forecast period,” said Boeing.

Citing a report by the United Nations, Boeing said Africa's population is the youngest among continents and is becoming highly urbanized with many  entering the workforce.

“Africa has an abundance of natural resources including metals, minerals, and oil; centers of agriculture and commerce that stimulate economic development, trade, and business travel; as well as resort beaches, cultural centers, wildlife, and natural attractions that promote leisure travel,” Boeing said.

“Within Africa, single aisle airplanes are dominant, accounting for about 75 percent of total intra-Africa available seat-kilometers. Inter-regional travel service (from or to other regions in the world) constitutes 80 percent of total Africa air travel, with an average capacity growth rate of 4.6 percent per year over the last decade. To and from Europe is and will continue to be the largest market,” it added.

India Rising in South Asia

India's rising number of millionaires and billionaires is creating more wealth in the country through various businesses and entrepreneurial opportunities that generate jobs for millions of its working class.

Additionally, the high demand for more Indian professionals in various sectors across the world is creating a new middle-class, powerful enough to spend spare cash for luxuries and convenience that were unheard of in the past.

Elsewhere in South Asia, Bangladesh, Sri Lanka and Pakistan are also seeing modest economic growth as more Chinese investors enter into their economies and their citizens gaining access to the lucrative Middle East labor markets.

The rest of South Asia—Afghanistan, Bhutan, Maldives, Myanmar and Nepal—will see modest growth in passengertraffic and aviation industry.

Based on IATA's 20-year air passenger forecast, India will overtake the UK to become the third largest market with

278 million passengers by 2025. By 2035, India's travel market will further grow to 442 million passengers, thus, aviation will be supporting about 19.1 million jobs and contributing $172 billion in the country's GDP.

The Center for Aviation (CAPA) reported India's record 100 million passengers in 2017 will make it the world's third largest domestic market afterthe US and China.

Its surging passenger traffic is already benefitting the private sector industry with

“CAPA estimates that India's airlines reported a combined profit of USD122 million in FY2016, the first time in a decade. This included record profits at IndiGo, Jet Airways, SpiceJet, GoAir and Air India Express. AirAsia India and Vistara,  still  in  their  initial  years  of

operations, were however loss- making, as was the national carrier, Air India. Although Air India reported its first operating profit in a decade,” CAPA said in its 200-page report analyzing India's growing aviationmarket.

CAPA, however, warned India has to create long-term plans on rehabilitating or creating new airports, especially key cities like Mumbai and Chennai, which in the long run may exceed their design capacities.

Failure to do that will have vast economic ramifications if air connectivity to India's centers of commerce, industry and tourism is choked off due to airports being saturated.

IATA's De Juniac says governments should provide necessary support to private sector industries like aviation to promote economic growth and provide utmost securityto those concerned.

“Amazing results are produced when governments link aviation's development to national economic strategy. Singapore, South Korea, the UAE, Qatar and Panama are among the r a re examples. Encouragingly, Germany is making efforts to join the club with its recently announced Aviation Concept. It needs to move from concept to action, and I hope that other states will see the benefits and follow,” he said.