the future shape of the air transport industry dr peter morrell director of research department of...

The Future Shape of the Air Transport Industry

Dr Peter MorrellDirector of Research

Department of Air TransportCranfield University

Brighton, 7 June 2006

2Dr Peter Morrell, Cranfield University, 7 June 2006

Outline

Future passenger market trends

Short- versus long-haul?

Can constraints be overcome?

Business model shift

The airline product and segmentation

IFE

Conclusions


Future market trends

Strong growth expected in long-haul leisure, but security will limit potential destinations

Strong growth in short break holidays, with greater choice offered in terms of:Departure times/days

Hotels and quality of service

Booking and payment processes

Network airlines focus on connections to their more lucrative long-haul services

More holiday de-packaging, but still a role for on-line consolidation


Where can we go on holiday? (January 2005)

AlgeriaIndiaIndonesiaIsraelNigeriaPakistanPhilippinesRussia

UK government advises against all travel to Somalia and Ivory Coast, and to parts of 30 other countries, including:

IsraelLebanonNigeriaPakistanSri LankaThailand

UK government advises against all but essential travel to CAR, Guyana, Haiti and Iraq, and to parts of 24 other countries, including:


Source: The Economist13 May 2006

Don’t forget outbound travel from fast-growing economies with large populations


BAA UK airport passenger profile

Core market of more experienced, frequent travellersCore market of more experienced, frequent travellers

More independent travel by the young and ‘silver surfers’More independent travel by the young and ‘silver surfers’

Above average growth in:Above average growth in: - long haul- long haul

- short breaks- short breaks

More women, particularly on businessMore women, particularly on business

More non-English speakersMore non-English speakers

Less ‘pure’ business, more leisure and business/leisure mixesLess ‘pure’ business, more leisure and business/leisure mixes

Socio-economic profile closer to the averageSocio-economic profile closer to the average

Source: Stan Maiden, BAA Presentation, 2004


Spending patterns? Rising disposable incomes More flexible working, labour mobility, short

breaks Ageing populations (health care and pensions) Early retirement (more time for travel, but

savings?) Competing attractions (saving/investing, sport,

eating out, TV/films/gambling, more expensive car/house …)

Support ratio in China: 6 people of working age supporting each person over 65 in 2000; falls to less than 2:1 in 2050


Forecasting leisure travel

Leisure travel purpose:

Crash out and do nothing (usually sun/sea)

Activity (ski, dive, climb, walk, explore)

Greater discretionary income, lower prices, easier to purchase and good marketing

Travellers historically perceived the air fare as the largest component in air travel cost; no longer so on many short sectors

Forecasters and planners need to understand these demand drivers


UK Government forecasts: UK Residents (Passengers)

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0

1998-2010 incl. LCC

1998-2010 ex LCC

Actual 1989-1998

Average percent pa

Long-haul

Short-haul

Source: UK Department for Environment, Transport & Regions: Air Traffic Forecasts for the UK 2000, May 2000


Constraints: Fuel prices

Limited impact of current high fuel prices on the world economy, and thus air traffic growth rates

Some reduction in demand from high fuel surcharges, but more than outweighed by low cost airline growth

Era of $50-70 crude oil will lead to:Economical extracting of alternative (non-OPEC) supplies

Economical application of known technologies extracting of alternative (non-OPEC) supplies

Economical application of known technologies to engine and aircraft design for greater fuel efficiency


World airlines: share of fuel in total costs

10.0

15.0

20.0

25.0

30.0

35.0

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Per

cen

t o

f to

tal o

per

atin

g c

ost

s

?

Source: ICAO

In 2005/06: British Airways: 20% compared to Singapore Airlines 24%


Environmental constraints

Local noise concerns: major airports attract housing and industry Local air quality regulations: coming soon from Brussels; a condition

for new (short) runway at London Heathrow Climate change: air transport currently only small contribution, but

greater impact at cruise altitude Proposals for aircraft engine emissions trading and an emissions tax

unlikely to impose excessive cost on industry: already coping well with fuel price escalation

Difficult to achieve future fuel efficiency increase in excess of traffic gowth rates: but laminar flying wing estimated to give 70% reduction in fuel burn per tonne-km vs existing aircraft


Type of flight in 2004 IATA world plus major LCCs

0 10 20 30 40 50 60 70 80 90

Domestic

International

Short/medium haul

Long-haul

% world total

passenger-kms

Passengers

Source: IATA WATS and ATI


Main airline business models

Network carriersGlobal networks and hubs feeding traffic on to long-haul flightsPart of strategic alliance structure

Low Cost Carriers (LCCs)Point-to-point, with self service transfersSimple product and fare structure

Regional airlinesSome feed to network carriers and inter-regional low density flights with small jets or turbo-props

Charter/leisure specialistsLower frequency flights to leisure destinationsTour operator ownership: most seats still ‘packaged’


European seat-kms by airline group

1999 2004

Network carriers 84% 77%

Regional carriers 14% 12%

Low cost carriers 2% 11%

Total seat-kms (ASKs) per week in June 2004: 24 billion

Over same period:

LCCs increase share from 3% to 15% of total departures

Regional carriers’ departure share drops from 29% to 21%


Network vs LCC model

Both dedicated to safe and punctual flights

The network model adapts operations to the various market segment needs

The LCC model is based on lowest cost scheduled operations: assume that low fare is major requirement (passengers adapt to airline)

Both models increasingly see advantages of separate pricing for extra services (ancillary revenues)


Network carriers:Weighted average long-haul aircraft seats by class, 2005

F/C Class Y Class Total seats % F/C

Lufthansa 64 245 308 21

British Airways 64 238 302 21

Iberia 49 240 288 17

KLM 43 239 282 15

Air France 48 225 273 18

SAS 54 207 261 21

Austrian 26 227 253 10

Alitalia 32 217 249 13

Swiss 55 157 212 26

Source: JP Fleets and airline websites


Market segmentation by flight

More business class only flights on long-haul

LCCs greater focus on leisure passengers, but some (easyJet, JetBlue etc) targeting business passengers as well:Some network airlines copying LCC tricks, and lowering service standards

LCC product generally not attractive to business, especially on longer sectors (eg no seat allocation, 30” seat pitch)

easyJet experimenting with priority boarding


IFE needs: long-haul

Premium class passengersOwn equipment (laptop, phone ..)?Sleep on flight: disturbance from neighbour?Extra revenue or include in price?

Economy class passengersLower comfort, greater need for entertainmentMore children: high video/games usersSleeping more difficult (can sleep on arrival)Generally higher usageCharge extra?


IFE needs: short/medium-haul

Premium class passengers

Own equipment (laptop, phone ..)?

Extra revenue or include in price?

Economy class passengers

Tight seat pitch: need for IFE on longer sectors

More children: high video/games users

Aircraft weight saving: mobile units?

Ryanair trial not successful

Charge extra?


Conclusions

Large potential market if prices remain affordable

Business and leisure markets will both be huge, greater

number of trips satisfying both demands

Short-haul will remain dominant in terms of passenger

numbers, but growing revenue share of long-haul

Specialisation and ‘one-stop’ shop models of airline

service will co-exist

LCC model will increasingly target business passengers

IFE needs to meet varying demands depending on flight

sector length

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