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Air Transport Demand Growth

At An Inflexion Point?

24th Annual Commercial Aviation Industry Suppliers Conference

March 2, 2010 ● Beverly Hills, CA

Dr. Kevin MichaelsPartner

Jonas MurbySenior Associate

http://www.speednews.com/Default.aspx

© 2010 AeroStrategy

Agenda

2

The Perils Of Unconstrained Growth

Five Potential Constraints To Air Travel Growth

Implications For Industry Participants

Air Travel Demand Has Averaged 5.7% Growth Since 1970

1970-2009 Air Transport Revenue Passenger Miles (Billions)

0

500

1,000

1,500

2,000

2,500

3,000

European

liberalization &

U.S. LCC

growth

1990-2002

CAGR 4.6%

Europe LCC

Asia

liberalization

2002-2009

CAGR 4.2%

U.S. Deregulation

1970-1990

CAGR 6.9%

3

Un-

constrained

Growth?

Source: ESG Aviation


…And Most Industry Forecasts Are An Extrapolation Of Current Growth – About 5% Per Annum Through 2030

4

1970-2028 Air Transport Revenue Passenger Miles (Billions)

OEM1 4.7%

OEM2 4.9%

Expert 5.5%

CAGR

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Actual

Un-

constrained

Growth?

Sources: Boeing, Airbus, ESG Aviation


Other Transportation Modes Went Through Long Term Growth Periods Before Maturing…

5

1850-2010 UK Railway Traffic (Millions of Passenger Miles)

Source: Association of Train Operating Companies

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

30-year

expansion

1890-1920

CAGR 4.3% •Great depression

•Suburbanization

•Build-out of road network

•Cars becoming inexpensive

•Low cost, reliable air travel

Un-

constrained

Growth?

..And There Are Several Structural Factors That Could Reduce Long-Term Air Travel Growth

Threats to long-term

air travel growth

Substitutes

Infrastructure

Market Maturation

Socio-Cultural

Cost of Fuel

6

Un-

constrained

Growth?


Agenda

7




Two Factors Are Likely To Drive Higher Aviation Fuel Costs, Which Are Approximately 30% Of Airline Costs…

• Oil prices have skyrocketed as oil

production levelled off in 2004

• With oil prices at >$70/bbl in a

global recession, the “peak oil”

hypothesis is gaining credibility

• Many airline leaders expect $100/bbl

oil in the long run

Sources: WEO2009 (IEA), IEO2009 (EIA), Price Waterhouse Coopers

Interagency Task Force on Commodi ty Market s , Inter im Repor t on Crude Oi l (2008)

Oil Aggregate Supply & Demand Taxation

• Aviation’s inclusion in EU’s

Emissions Trading Scheme

could add €3bn to costs by

2012

• Are cap-and trade taxes

coming to US and other

regions?

8

...And Leisure Air Travel Revenue Is Highly Susceptable To Fare Increases

•The price

elasticity of

demand for air

travel is generally

elastic

•Leisure travel,

around 60 % of

demand, is very

susceptable to

price increases

•Price increases

have the least

impact on long

haul business

revenue

Air Travel Demand Elasticities

prices = revenue

9

There Is A Negative Perception Of Aviation With A Segment Of European (Green) Consumers…

Will aviation become the new tobacco industry of Europe?

•Although aviation is only ~2.5% of

global emissions, it’s one of the

fastest growing sources of

emissions

•A segment of consumers and

politicians are sceptical towards any

investments that would facilitate

further growth of air traffic

10

2009-2019 Air Transport Emissions Forecast

(Million Metric Tonnes)

Source: AeroStrategy analysis

-

100

200

300

400

500

600

700

800

900

1,000

2009 2014 2019

…And The Aviation Industry Has Done A Poor Job Of Telling The “Green” Story

Projected 15-20% fuel efficiency

improvements put air travel on par

with commuter rail for fuel efficiency

Source: Brad Templeton analysis

US Passenger Miles Per Gallon Of Fuel

11

Air Travel Growth In Relation To GDP Is Decreasing In Key Markets

1998-2008 RPK/GDP Growth Ratio, By Region

(3-Year Average)

•Air travel growth is highly

correlated with GDP, but

there are regional

variations

•To achieve 4.5-5% long-

term travel growth, a

RPK/GDP multiplier of at

least 1.5 is required

•North America’s ratio is

<1.0 and Europe’s is falling

fast...can emerging

economies offset this

market maturity?(4)

(3)

(2)

(1)

-

1

2

3

4

5

Europe North America Asia

Ratio needed to achieve

4.5-5% air travel growth*

* Assuming 3% Global GDP growth

12Source: EIU, The Airline Monitor, AeroStrategy analysis

Air Travel Infrastructure Is Straining To Keep Up With Anticipated Growth In The US And Europe

Air Traffic Management

•U.S. ATC delays in 2014 are

projected be 62 percent greater

than in 2004, resulting in a

doubling of passenger delays

•European airspace is heavily

congested and traffic is

projected to double by 2030

• By 2030, up to 39 European

airports will be fully congested

• Up to 25% of European air

traffic unaccommodated

• In the U.S., 8 major metro areas

and 14 key airports need

additional capacity by 2025

beyond what is already planned

13

Airports

Source: FAA, Eurocontrol

Europe’s High Speed Rail (HSR) Network Is Planned To Triple By 2025

Current And Planned European High Speed Rail Network

Source: International Union of Railways

•HSR viewed as time

efficient on routes

up to 500 miles

•Perceived as

comfortable and

affordable

•Traffic on key

airline routes has

decreased 40-50%

since introduction

of HSR

•Planned HSR

network

expansions will

connect many more

city pairs

14

China Has Accelerated Development In HSR And Plans To Complete Its Network In 2012

Source: International Union of Railways, Bloomberg, Daily Mail

•China accelerated

completion of a

massive HSR

network by several

years to stimulate

the economy

•The network will be

completed by 2012;

total investment will

reach $300B

•Recently opened line

from Guanzhou can

travel at 245 miles

per hour

Current And Planned Chinese High Speed Rail Network

15

As A Result, Some Analysts Expect HSR To Gain Market Share From Air Travel In China As Of 2012

Economy Class Airfares

Guanzhou-Chansa (Yuan)

0

100

200

300

400

500

600

700

800

Before HSR

With HSR

Source: International Union of Railways, Busienss Week, Daily Mail, Macquarie

•Competing routes are seeing

fares fall by 50%

• In extreme cases fares are

falling by 80%

16

In Contrast, The U.S. HSR Nework Will Be Relatively Modest...And Delayed


Planned High Speed Rail Routes In North America

• In 2009 Congress

allocated $8B to

support high speed

rail development

•The majority of the

U.S. HSR network will

not be operational for

at least a decade

•The first new HSR

line will likely be

Tampa-Orlando –

hardly a threat to air

travel!

17

In Aggregate, The World’s HSR Network Is Expected To Triple In The Next 15 Years


Global HSR Network – Historical And Projected Size (KM)

9.1%6.6%3% 9.1%CAGR

18

China And Europe, The Areas Of High HSR Penetration, Are Expected To Drive 20 Percent Of Global Air Traffic Growth

0

200

400

600

800

1,000

2008-2028 Absolute Airline Traffic Growth By

Regional Flow (RPKs In Billions)

Source: Boeing Current Market Outlook, OAG Aviation

13% 8% 8% 8% 63%Portion of

absolute

growth

4,700

How threatened by HSR?

19

HSR primarily

competes with

aviation on

routes less than

500 miles, which

represent 12 %

of global ASKs

Another Potential Substitute, Videoconferencing, Has Had Limited Impact On Air Travel Growth

•Several reports in the 1990s

created a scare that

videoconferencing would reduce

air travel demand

•To date, there is limited evidence

suggesting significant impact on

air travel growth – the greatest

impact is for intracorporate travel

•Paradoxically, videoconferencing

enables dispersed organizations,

which sometimes increases air

travel

•To what extent could generational

comfort with Skype

videoconferencing affect future

travel?Picture credit: Tandberg 20

Videoconferencing


Agenda

21




The Medium-Long Term Impact Of Air Travel Constraints Vary By Region….

Europe North

America

Asia Rest Of

World

Comment

Cost of Fuel30-40% of cost structure…

and likely to increase

Socio-cultural

Primary impact with a very

small segment of European

consumers

Market

Maturation

North America and Europe

are key concerns

InfrastructureNorth America, Europe , and

India are key concerns

SubstitutesHSR will compete primarily in

Europe and China

22

Constraints To Air Travel Growth: Medium-Long Term Impact

Implications


High

Impact

Low

Impact

…However, The Aviation Industry Has Overcome Constraints And Crises Before….

23

Implications

…And Potential Solutions To Some Of The Constraints Are On The Horizon

24

• New fuel efficient aircraft & powerplants

• ATM modernization

• Alternative fuels

• Improved public relations – do a better

job of telling the ”green aviation” story

• Multi-modal transport plans – work with

rather than against HSR

• Improved air travel experience in new

aircraft and airports

• ATM modernization: ADS-B, SESAR,

RNP others

• China adding nearly 100 airports

Constraints To Air Travel Growth:

Medium-Long Term Impact

Implications



Is It Time To Develop Constrained Air Travel Growth Forecasts?

25

•Most current air travel growth

forecasts are unconstrained

• In light of industry challenges,

unconstrained forecasts risk

overstating actual industry growth

Implications

Thank you for your attention!

EMEA

London, England

43 Hill Avenue, Amersham

Buckinghamshire HP6 5BX

United Kingdom

Phone: +44 1494 431-600

Fax: +44 1494 434-500

Email: [email protected]

26

AmericasAnn Arbor, Michigan

101 North Main Street, Suite 400

Ann Arbor, Michigan 48104

United States of America

Phone: +1 734 821-0220

Fax: +1 734 821-0221


Asia PacificSingapore

314 Tanglin Road, #01-05

Phoenix Park Office Campus

Singapore 247977

Phone: +65 9111-8435

Fax: +65 6884-4951


www.aerostrategy.com

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