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Business Environment Update | Spring 2017
BUISNESS ENVIRONMENT SPRING | 2017Copyright The Boeing Company 2017. All rights reserved.
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BUISNESS ENVIRONMENT SPRING | 2017Copyright The Boeing Company 2017. All rights reserved.
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I n the spring of 2017, the global economy looks like it is in good shape. Despite many political distractions, fundamental economic data has been improving for months and
Strengthening economy driving industry growth
major sentiment surveys paint an optimistic picture on both the consumer and business side. Major financial markets reflect these positive expectations with near-record index levels. Current optimism is the result of a remarkable turnaround of the global economy in mid-2016 – after the first half had been characterized by GDP growth slowing, international trade stagnating, and oil prices falling to a multi-year low. Uncertainty about the underlying strength of the world’s largest economies was dominating economic analyses. However, since the summer of 2016, the economic picture has improved markedly.
Economic Rebalancing: Industrial production growth picking up
BUISNESS ENVIRONMENT SPRING | 2017Copyright The Boeing Company 2017. All rights reserved.
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With a stabilization in commodity prices and exchange rates, advanced economies posted solid growth and emerging markets rebounded,
However, this outlook is not without risk. 2016 has also been the year of significant political developments that are able to shape the direction of the global economy for years to come. Chief among them is the surge in economic populism. Yet, this has so far not significantly impacted near term confidence. Looking beyond this year and next, sustained growth near the 3% trend level seems likely. In the United States as well as continental Europe, pro-growth policies are on the agenda.
including turnarounds in the hard hit economies of Russia and Brazil. Global trade picked up since the summer on the back of improved industrial activity. Oil prices, helped by an OPEC agreement to manage output more actively, now seem range bound between $45 and $55 per barrel in the near term. And exchange rates look less volatile with some post-United States election swings in the rear view mirror. The good growth momentum continued into 2017. And at nearly trend rates, some forecasters are now seeing 2017 as potentially the best year for economic growth in six years. If the large volatility of oil prices and exchange rates does not return and absent any major political disruption, this seems entirely possible.
Global growth is accelerating despite risks, emerging markets
are leading the way
BUISNESS ENVIRONMENT SPRING | 2017Copyright The Boeing Company 2017. All rights reserved.
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Emerging markets will likely continue on a path to
stabilization although challenges remain. Examples like the political transitions in Latin America and a so far successful handling of the economic transition
towards a consumer economy in China underpin the
positive outlook.
Passenger markets continue above trend growthDespite geopolitical and economic challenges over the past years, passenger traffic continues to prove its strength. Key contributers to this are strong consumer based economies around the world, an expanding middle class in emerging economies and the fact that air travel has become an important part of everyday life and business. According to the International Air Transport Association (IATA), industry wide revenue passenger kilometers (RPKs) grew 7.4% in 2016, the seventh straight year of above trend growth. The strong demand growth was met by disciplined capacity increases, high load factors and near-record utilization for both single- and twin-aisle airplanes. Most regions saw supply and demand in balance. The Middle East is the only notable exception as airlines there have been increasing capacity faster than traffic demand growth for nearly two years. However, since the 4th Quarter in 2016, as the airline industry in the Middle East matures, carriers have started to slow capacity growth, similar to other larger regions around the world.
Across the world, low cost carriers will continue to make travel more affordable and to offer direct connections tomore markets – a trend which is now also spreading into the long haul market. But just as some uncertainty remains about the economy, air travel is not isolated from current geopolitical volatility and is faced with new challenges to thwart terrorism.
In the 1st Quarter of 2017, supply and demand for all major regions were balanced. As the global economy gathers more momentum through 2017, traffic demand is expected to hold firm. Strong consumption will be a key characteristic of the composition of GDP growth in many major markets like the United States, Europe, and China. And with further removal of structural impediments to air travel, such as visa restrictions and airport accessibility, in emerging markets little stands in the way of people taking to the skies in increasing numbers.
BUISNESS ENVIRONMENT SPRING | 2017Copyright The Boeing Company 2017. All rights reserved.6
Air cargo markets reboundingOne of the key features of the global growth acceleration since mid-2016 was the return of growth to industrial activity. Stabilizing commodity prices and exchange rates, coupled with the end of economic recession in some big emerging markets are important factors driving this. In addition, there has been an improved outlook for business friendly reforms in may parts of the world. Many regions saw increases in business sentiment first and industrial production and trade soon after. This is an indicator closely related to global trade and thus air cargo.Trade rebounded particularly strong in Asia and Europe. China’s manufacturing sector stabilized, its import demand continued to rise and regional supply chains increased activity to satisfy rising globaldemand. According to Oxford Economics, China’s first quarter imports and exports rose 13.4% and 9.6% in volume terms, respectively. In Europe, a competitive currency and improved international demand for exports led to a trade rebound. The air cargo industry benefited from this upswing in trade activity, posting growth rates not seen since the initial rebound from the Great Recession.
OPENING NEW MARKETSOver 130 new nonstop markets now connected with the 787
March 3. 2017
787 FOUND IN FLEETS IN EARLY EVERY REGION OF THE WORLDPercentage in each region
Source: Ascend, November 2016
Bergen
Bangkok
Brisbane
Boston
Guangzhou
Copenhagen
Chengdu
Dusseldorf
Doha
Denver
Edinburgh
Sao Paulo
Tokyo
Jakarta
AustinNew York
OsakaLos Angeles
Lagos
Orlando
Manchester
Nairobi
Oslo
Oakland Beijing
Shanghai
San Francisco
Ho Chi Minh
Wuhan
Helsinki
Cancun
Mauritius
Barbados
Warsaw
Xi'an
Toronto
Announced
In Operation
Vancouver
Aruba
MelbourneSydney
Dublin
Casablanca
Addis Ababa
Delhi
Rome Seoul
Calgary
Maputo
Tashkent
Santiago
Perth
March 3. 2017
N. America
15%L. America
9%SE Asia7%
S. Asia5%
Oceania4%
Europe
17% NE Asia(Japan)
18%China
8%
AFR6%
Middle East
11%
Source: Ascend, November 2016
Airline productivity rising - assets being efficiently utilized
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Many key sectors of air freight saw demand improving: industrial goods based on better investment numbers around the globe, perishables on the back of improved consumer confidence, and e-commerce related activities in a growth market with speed and availability at the center. In the final quarter of 2016, freight ton kilometers (FTKs) grew by nearly 10%, potentially also helped by a modest mode shift away from a struggling ocean shipping industry.
767
777 A330
Less than 5 years
787
5 - 10 years More than10 years
Air cargo closely linked to industrial production, world trade
2016 cargo traffic grew by 3.6%.
Acceleration led by Middle East and Europe
Air cargo recovery expected to continue
The first months of 2017 showed similar dynamics and expectations are for a very strong first half of 2017. The recent rebound in trade and air cargo highlights cyclical elements in the evolution of the industry. While some factors driving extraordinary growth rates in trade before the Great Recession have faded, globalization is not dead. In fact, global trade is forecast to grow at nearly 4% through the end of the decade supporting solid air cargo growth.
A
| 2017 Copyright The Boeing Company 2017. All rights reserved.
irlines continue to benefit from strong traffic growth, high load factors and relatively low fuel costs.
After two record beating years for industry wide profits in 2015 and 2016, 2017 looks like another very profitable year. IATA estimates net industry profits to finish the year at about 31 billion US dollars with a net margin just above 4%. This would bring the last three year's totals to around 100 billion US dollars - more than in the previous 30 years combined. While healthy profits at the industry level are expected to generally continue, rising fuel and labor costs are putting pressure on airlines to keep investing in productivity improvements, customer experience and modern equipment.
Near record profits in 2016, 2017 expected to be historically high
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Falling unit costs meant decreasing unit revenues were not as problematic as they otherwise would be. Now airlines face the challenge of bending the unit revenue curve upward again – something they have accomplished before in the high fuel price years following the Great Recession. Average industry wide profitability also hides significant regional divergence and challenges. While North American carriers, enjoying a strong currency environment, brought home more than half the industry’s profits over the past years, others have had to contend with currency pressures, geopolitical turmoil, terrorism, and increasing competition. Nevertheless, the environment remains favorable to airlines around the globe with above trend traffic growth and fuel price expectations anchored well below the average of the last decade.
BUSINESS ENVIRONMENT SPRING | 2017 Copyright The Boeing Company 2017. All rights reserved
North America leading industry profitability
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