The General Trend of the

Global Airline Industry

Dr Frankie O’Connell

8 - 9 September 2012
 Billions of passengers

0
1
2
3

0.5
2.5

1.5
1991
1992 1.13
1993 1.15
1994 1.14
1995 1.23
1996 1.3
1997 1.4
1998 1.45
1999 1.47
2000 1.56
2001 1.67
2002 1.64
2003 1.63
2004 1.69
2005 1.88
2006 2.02
2007 2.19
2008 2.3
2009 2.37
Number of passengers carried worldwide (1991 – 2010)

2010 2.37
2.52
Source: ICAO, AEA, ATA, AAPA, AACO
 Passenger Traffic transported by different airline business models
2003 - 2010

2003 2010 % change

Full Service Airlines 1.3 billion 1.63 billion 25%

Low Cost Carriers 178 million 615 million 245%

Regional Airlines 147 million 216 million 47%

Charter Airlines 83 million 54 million -32.5%

Total 1.7 billion 2.5 billion 47%

* Share by top 200 world airlines

Source: ICAO, AEA, ATA, AAPA, AACO

 Financial Returns of different Airline Business Models (2010)
Revenues Operating Net Result
($millions) Margin ($millions)

Cargo $38,440 5.6% $817

Network Airlines $466,165 5.3% $15,719 $-9,714 (2009)

Charter Airlines $11,755 3.6% $26

Low cost carriers $46,413 7.6% $2,584

Regional Airlines $13,272 5.6% $36

Source: Airline Business, August 2011

 Geographical Distribution of Passenger Traffic*
2000 - 2010

Passengers 2000 Passengers 2010 % Change

(millions) (millions)

North America 726 777 7%

Europe 420 716 70%
Asia-Pacific 378 742 96%
Central/South America 82 137 67%
Middle East 44 107 143% …….
Africa 29 42 45%

Total 1.67 billion 2.52 billion 35%

* Share by top 200 world airlines

Source: ICAO, AEA, ATA, AAPA, AACO
 World Traffic Forecast (measured in RPKs)
1970 - 2030
ICAO forecast Airbus forecast
12
)
)
)
10 )
)
)
)
)
8 )
)
)
)
RPKs (trillions)

Air traffic has doubled )

)
6 )
every 15 years )
)
)
)
$$$)
4 $$ $
$ Air traffic is also expected
$
$$$$
$$
$ to doubled in the next
$ $
$
2 $$$$ 15 years.
$ $
$ $ $$ From 2010 – 2030 Traffic
$ $ $$ $
$$$
$ will grow at 4.8% per year
$
$$$
0
1970 1980 1990 2000 2010 2020 2030?

Note: RPKs is Revenue Passenger Kilometres

What is driving this traffic? Source: ICAO and Airbus GMF 2010
 Main Drivers for Traffic Growth

Increased traffic growth on existing routes and on new non-stop routes that will
connect main cities to secondary cities (e.g. London – Bangalore)

Dynamic growth in emerging markets (China, India, Asia Pacific, Latin America)

Continued growth of Low Cost Carriers (particularly in Asia)

Greater and continued market liberalisation worldwide

More demand for overseas holidays and wealthier people buying second homes
overseas

More travel obligations as Businesses continue to visit clients … the personal

touch remains an important ‘relationship tool’ for global companies.

Strong economic growth is an important contributor to traffic growth

 Long term growth prospects of air traffic (2009- 2030)
% of 2009 % of 2029
World RPKs World RPKs

Europe 2009 Traffic 2030 Traffic 28% 25%

North America 28% 20%

Asia Pacific 27% 33%

Middle East 6% 9%

Latin America 5% 6%

Africa 3% 4%

CIS 3% 3%
0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000

Revenue Passenger Kilometres (billions)

Source: Airbus General Market Forecast 2010

Global middle class is expected to rise to 4.9 billion people by 2030

66% of the global middle class will be in Asia-Pacific in 2030

Source: Airbus General market Forecast
 Global GDP Growth/Decline and Length of Recession
1973-75 1980-82 1991-93 2001-03 2008-2012
• Oil Crisis • Iran-Iraq war •1st Gulf War • US Weakening • Credit Crunch
- 4X to $12 • Oil Shock • Oil Hike • 9/11 • Multiple Govt Bailouts
• Stock Market - 3X to $39 * 2X to $33 • 2 Gulf War
nd • Stock market turmoil
• Fluctuating oil prices
8%
• Greece meltdown
7% • EU contagion
# Oil Contracted
to $15 per barrel
6%

#
5%
#
# #
## ## # #
4% # # #
# # #
# # ## # #
3% # #
# # # #
2% ## # ## #
#
# #
1% #
#
0%
1983

1985

1987

1989

1991

1993

1995

1997

1999

2007

2009
2010
1971

1973

1975

1977

1979

1981

2001

2003

2005
Source: IMF, World Bank #World GDP growth/decline
 Global Growth in Passenger Traffic and GDP
1971 - 2010

14% 8%
% Change in Passenger Traffic year over year

12% # RPK Growth 7%

10%

% Change of GDP year over year

6%
8% #
# 5%
# #
6% ## ## # #
# # # 4%
# # #
4% # # ## # #
# # 3%
2% # # # #
## # ## # 2%
0% #
# #
# GDP Growth
-2% # 1%
-4% 0%
1983

1985

1987

1989

1991

1993

1995

1997

1999

2007

2009
2010
1977

2001
1971

1973

1975

1979

1981

2003

2005
#World GDP growth World scheduled airline RPKs

Source: ICAO, IATA and Economist Intelligence Unit, December 2010

 Net Profit/Loss and Revenues for World Commercial Airlines
1978 - 2010
$15 $600
& &
&
Net Profit/ Loss US$ Billions

$10

Airline Revenues US$ Billions

&
& &
$450
$5 &
&
$0
&
&&&& $300
&
$-5 &
&

$-10 & &

& $150
&
$-15 &&&&
&&
$-20 $0

2000
1988
1990
1992
1994
1996
1998

2002
2004

2008
1978
1980
1982
1984
1986

2006

2010
Source: ICAO and IATA Net Profit/Loss Airline Revenues

June 2010 IATA Forecasted $2.5 billion profits, by September it was raised to $8.9 billion.
But by the end of 2010, the total global profits reached $15.8 billion (IATA members) – excellent year
 Annual net profitability of ICAO member airlines
(1970 to 2008)

The overall cumulative net profitability of the sector rarely achieves more than 2 per cent

Source: (ICAO, 2011)

Why is it so difficult to make money in the Airline Industry???????
 The Air Transport Value Chain
Return on Invested Capital 2002 - 2010

30%
25.9%
25%
20%
14.8%
15%
9.3% 8.1%
10% 7.2%
4.6%
5% 2.8%
0

Airports
Lessors

Aircraft Manufacturers
ANSPs

Airlines
Freight Forwarders
GDSs

Source: McKinsey & Company and IATA

 World Airline revenues and expenses
1991 - 2011

$700

$600

$500

$400
$ Billions

$300

$200

$100

$0

Operating Revenues Operating Expenses

Source: ICAO data to 2009 and IATA estimates and forecasts to 2011
 Singapore Airlines 2010/11 Financials

Expenses vs Revenues

$16,000
$14,000
$12,000 Revenues
$10,000
$8,000 Expenses
$6,000
$4,000
$2,000
$0

2009-2010
2005-2006

2006-2007

2007-2008

2008-2009
2004-2005

2010-2011
 Yields are falling - So Airline Costs must follow suit

2.6 1.40
2.4 $ 1.30
$$
2.2 $$ $ 1.20
$
2 1.10
Fare (Real price)

1.8 1.00

Real Unit Cost

1.6 0.90
$
1.4 $ $ $$ 0.80
$
1.2 0.70
$ $
1 $ $$ 0.60
$ $
0.8 0.50
0.6 0.40
1970 1975 1980 1985 1990 1995 2000 2005 2010
Real Fare $Real Unit Cost

Air Fares have halved since the 1970s

Source: IATA, ICAO and Haver
 The volatility of Jet Fuel and Crude Oil Prices ($/barrel)
2003–2012
Dollars per Barrel

Source: Platts
 Comparison of Fuel Costs & Other Costs for Global Airline Industry
$600 42.8%
35.9%
31.5%
$500 29%
25.3%
22%
$400 16.3%
14% 13.5% 12.9% 13.6%
Billions

$300

$200

$100

$0

Source: ICAO, IATA

Operating Expenses Fuel Expenses
• Average price for fuel in 2011 was $112 per barrel - represented around 30% of costs
• Costing global airlines $178 billion
Fuel Hedging Positions for 2008
% of Fuel Price hedged
hedged for 2008

78% $55

70% $86

85% $70

29% $76

11% $88

36% $95

23% $96

70% $51
Hedging positions of Asian Carriers for 2012

Source: Company data

Dollars per Barrel Price of Jet Fuel – Currency issues

Source: Platts
 Currency Issues – Income and Expenses
Turkish Airlines (2010 data)

50% 46%

40%
40%
36%
Proportion of Total

33%
30%
Income

20%
Cost
15%
12% 11%
10% 7%

0%
US Dollars Euro Turkish Lira Other
Currencies

Source: Dursun, 2011 – M.Sc thesis

 Over Capacity Problems in India
80
)
) )
Millions of passengers

60
)
$
40 $ $
)
) $
) )
)
20 $
$
$ $ $

0
2001 2002 2003 2004 2005 2006 2007 2008 2009

$
Passengers Carried )Seat Capacity

Indian Carriers have lost US$ billions in 2009, 2010 and 2011 and overcapacity has been a
significant contributor to these losses
Source: O’Connell analysis from OAG and DGCA (India)
 British Airways cost structure 2002 and 2010 (£ sterling)

2002 2010 % Difference

Employee costs 2,409 1,998 -17%

Fuel and Oil 1,028 2,372 130%
Depreciation & amortisation 770 732 -5%
Aircraft Operating Leases 199 69 -65%
Engineering costs 673 505 -25%
Landing fees & En-Route fees 615 608 -1%
Handling/catering charges 1,110 997 -10%
Selling costs (IT related) 824 290 -65%
Accommodation, ground costs 822 571 35%

Total Operating Costs £8,450 £8,225 -3%

Note: The principle operating costs are only included in this slide Source: BA
 Seasonality of Traffic for Aer Lingus
Monthly Passengers

1,200,000
) )
1,000,000 ) $
+ +
$
) )
$ $
+ )
$ $ $
)
$ +
)
Passengers

800,000 + )
$ $ )
$ ) + $
+
) +
600,000

400,000

200,000

0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
$2008 )2009 +2010

Source: Aer Lingus

 World’s top 12 Airline Groups by Net Profit
Rank Airline US$ millions
2010 2009 2008 2007

1 Cathay Pacific 1,832 606 -1,117 427

2 Air China 1,825 711 -1,353 519
3 Lufthansa Group 1,493 -156 796 2,277
4 Emirates 1,463 963 187 1,451
5 China Southern Airlines 857 48 -696 95
6 United-Continental 854 -718 - -
7 Singapore Airlines Group 824 152 737 1,395
8 Air France-KLM Group 812 -2,203 -1,142 1,080
9 China Eastern Airlines 734 25 -2,205 50
10 Delta Air Lines 593 -1,237 -8,922 1,612
11 US Airways 502 -205 -2,210 427
12 Ryanair 496 431 148 687
Note: PAL brought in revenues of around $1.67 billion in 2012 – data suggests that it made a profit
of $67 million in 2010 Source: Airline Business, August 2011; 2010; 2009; and 2008
 World’s top 10 Underperforming Airlines (Net losses)

Rank Airline US$ millions

2010 2009

1 AMR -471 -1,468

2 Mesa Airlines -340 -
3 SAS Group -332 -373
4 Kuwait Airways -268 -590
5 Pakistan International Airlines -244 -60
6 Kingfisher -226 -348
7 Oman Air -202 -168
8 Air Berlin -128 -13
9 Olympic Air -107 -
10 Tarom -105 -76

Source: Airline Business, August 2011; 2010; 2009; and 2008

 World Air Cargo Traffic
1980 – 2010

On average it has grown by around 5.7% per year since the 1980s
RTKs is Revenue Tonne-Kilometers Source: Boeing
 Global air trade volumes by airline freighters and passenger aircraft
(Millions of Tons)
25
Global air trade volumes (Millions of Tons)

20

15

10

0
2007 2008 2009 2010 2011F 2012F 2013F 2014F

Transported on Full Freighters Transported on Passenger Aircraft

Around 50% of the freight is carried in the bellyhold of Scheduled Network airlines
 Imbalances - European Air Freight Flows (2008)

Outbound Inbound
Volume Rates Revenues Volume Rates Revenue
(000 tonnes) (€/kg) (€m) (000 tonnes) (€/kg) (€m)
Asia - N. Am 2,000 2.94 5,880 900 1.4 1,260

Asia - Europe 2,000 2.8 5,600 1,300 1.4 1,820

Europe –
N. America 1,400 2.2 3,080 1,300 1.5 1,950

Europe – Africa 300 1.9 570 300 1.6 480

Source: AF/KLM – Aviation Strategy Jan/Feb 2010

Aviation and the Environment

The Threat
Source: Manchester Metropolitan University
Environmental concerns

1973

2007
2003
 Air Transport’s environmental Impact

Global Transport C0 2 Emissions by Mode

Global CO2 Emissions
14.3%
Residential & Commercial
13.0%
Agriculture & deforest ation Transportation
9.1% 19.2%

2.2%
1.4% 1.3%

t t
por or ing ay
Power Stations
ns sp ipp rw
29.5% a an Sh
te
Tr rT
r
W
a
d Ai d
Industrial Processes oa lan
R
20.8% In
l,
ai
Fossil Fuel Production R
8.4%

Source: Emissions database for Global Athmospheric Research

Source: Emissions database for Global Atmospheric Research

 Environmental
Aviation is responsible for 2-3% of total man-made C02 emissions

Every tonne of fuel burnt by a jet engine produces 3.2 tonnes of C02

Its made up of Nitrogen oxide (Nox), soot and water vapour which forms
condensation trails and cirrus clouds
The Stern report stated that C02 emissions from aircraft could more than triple by
2050

ICAO Has drawn up guidelines for a global emissions trading scheme. This will
add $50 per long-haul flight in the future

New Designs:-

New Rolls Royce Trent 1000 produces 40% less N0x than previous engines
See a change in engine design as fan blades will be powered by Jet
Turbines (completely remove the cover around the engines)…15% Fuel Savings

Bio-fuels: fuels are made from plants (carbon neutral) mixed with jet fuel
 Details of the EU ETS

An Emissions Trading Scheme (ETS) has been running for a number of

years for ground based polluters such as factories. This has now extended to
Aviation.

The EU ETS was passed in 2008 and will come into full effect by 2012

It will impose a cap on aircraft emissions in EU airspace and place financial

burdens on aircraft operators that exceed their allowances

The EU ETS limits the carbon emissions that can be produced by aircraft
operators and establishes a regulated system in which airlines are allocated a
free allowance. When airlines exceed this allowance, they will have to purchase
additional carbon credits.

The EU ETS places the overall annual cap of carbon dioxide (CO2) that can
be emitted by airlines at 97% of historical emissions in 2012. This will reduce to
95% by 2020. Historical emissions are defined as the mean average of annual
emissions in the years 2004, 2005 and 2006.
 Details of the EU ETS

The cost and penalties for exceeding allowances and the finite pool of
available credits for purchase could make it difficult for airlines to grow.

The allocation of free allowances will account for 82% of the capped emissions
and will be distributed annually – beginning in 2012. Operators will continue to
receive the same proportion of allowances in 2020 as they did in 2012.

A further 15% of the annual cap will be auctioned

The remaining 3% will be kept in reserve for new start up carriers.

Airlines will continue to expand and grow and this will force carriers to purchase
further credits . The two principle types of credits are i) European Union
Allowance (EUAs) units and Kyoto accredited Certified Emissions Reduction
(CERs) units. However the EUAs will be the main carbon credit currency for
operators in Europe.

A major carrier (e.g. Lufthansa) could spend in excess of €250 million on

emission credits between 2012 and 2020
Leakage Problem facing the EU ETS
 Aircraft developments of the Future?
Development driven by Environmental issues
Thank you all very much