Tailwinds

2014 airline industry trends

Spotlight:
The connected airline

Welcome to our second edition of Tailwinds, a publication for the airline

industry. This edition provides an overview of the current state of the
industry on a global level. It includes a special report on the connected
airline that discusses how new technologies are transforming the way
airlines do business.
Part one looks at key metrics in the global airline industry, such as growth
and operating income as well as expense patterns since 2004. The overall
picture is favorable. Revenues are at an all-time high, driven by passenger
traffic rather than cargo. Expense growth is up as a result of increases in
non-fuel items, such as labor and maintenance. The regional outlook shows
North American carriers in the most favorable position, followed by AsiaPacific carriers. All carriers face more aggressive competition in the coming
year: an expansion of the low-cost carrier (LCC) business model, the rapid
growth of airlines in the Middle East, and an increase in joint ventures to
allow more international flights.
Part two examines how airlines can thrive in an increasingly competitive
environment. Thanks to advances in technology and analytics, airlines
can now use the massive amounts of data on hand to become a connected
airline. A connected airline gets the right information to the right places
at the right time, which helps to improve decision-making and resolve
operational problems in the short-term and reduce costs and increase
revenue in the long-term.

Table of contents

Part one: Current global industry trends

Part two: The connected airline

Contacts 13

Part one: Current global industry trends

Revenue and pricing

Global airline revenues are estimated
to have reached a new high in 2013
of $708 billion (Figure 1). Growth has
been driven by increased passenger
revenue as a result of more flights
and scheduled passengers. However,
cargo revenue declined for the
second consecutive year even as
freight tonnage increased. Passenger
and cargo pricing were both weaker,
and the passenger yield declined
despite a minor uptick in load
factors. Nevertheless, the industry
has been adding more passenger
capacity in light of relatively robust
traffic growth numbers.
Cargo performance continued
to suffer from overcapacity. The
problem has been exacerbated by the
addition of belly capacity as part of a
larger passenger fleet. This challenge
is likely to worsen in coming years
because of new deliveries of widebody aircraft. Demand, on the
other hand, is being negatively
affected by a continuing modal shift
to alternative forms of transport,
including marine, rail and ground.
In addition, given that cargo is a
non-core business for many airlines,
it can suffer from a general lack of
capacity and pricingdiscipline.

Figure 1: Global commercial airline revenue ($ bil)

800
700
600

636

579

679

708

743

500
400

445

497

538

566

596

66

67

62

60

60

68

72

79

82

87

2010

2011

2012

2013e

2014f

300
200
100
0

Passenger

Cargo

Other

Note: (e) estimated and (f) forecast

Source: International Air Transport Association (IATA), International Civil Aviation Organization (ICAO)

Figure 2: Global airline passenger and cargo yield growth vs. CPI (%)
20%
15%
10%
5%
0%
-5%
-10%
-15%

As Figure 2 shows, both passenger

and cargo yields have grown at
an average annual rate far below
consumer prices over the last ten
years, with 2.6 percent average
passenger yield growth and 1.2

Tailwinds: 2014 airline industry trends

-20%

2004

2005

2006

Passenger yield

2007

2008

Cargo yield

Sources: IATA, ICAO, International Monetary Fund

2009

2010

2011

2012

Consumer prices

2013e 2014f

percent average cargo yield growth

compared to four percent average
global consumer price growth. In
addition, airline yields tend to be
more volatile than global consumer
prices. Airline passenger and
cargo yields are also far below the
10-year average operating expense
growth rate of 8.3%. These yield
data indicate that airline pricing
power is still quite modest relative
to other inflationcomparisons.
Low-cost carriers (LCCs) continued
to gain global market share,
restraining the yields of the legacy
carriers. LCCs share of global
capacity increased to over 25
percent in 2013.1

Figure 3: Jet fuel crack spread ($/barrel), fuel consumption (bil/gal)

80

150

75
70

100

65
60

50

55
0

2009

2010

Jet fuel crack spread

2011

2012

2013

50

Crude oil price, Brent

Jet fuel consumption

Source: IATA

Profitability
Airlines saw some operating
expense relief in 2013 as a result
of lower fuel prices. Fuel expense
was flat from 20122013 even as
capacity and consumption grew. A
reduction in jet fuel crack spread
in 2013 also contributed to lower
jet fuel costs. (Figure 3). The
replacement of older aircraft with
newer, more fuel-efficient models
should help airlines to continue to
control fuel expense. But there has
been a significant and steady rise
in non-fuel expense since 2009
(Figure 4), indicating an increase in
labor and maintenance costs.

Figure 4: Global revenue and operating expenses ($ bil)

800
700
600
500
400

412

300

446

455

473

498

200
100
0

139

176

210

211

210

2010

2011

2012

2013e

2014f

Non-fuel

Fuel

Revenue

Source: IATA, ICAO

Tailwinds: 2014 airline industry trends

The growth in non-fuel expenses

limited operating margins. Labor
and maintenance are typically the
largest non-fuel operating expenses
for airlines. It is unlikely that
airlines will see much relief from
a labor cost perspective because
of the expected growth in the
demand for pilots and maintenance
technicians. Boeing has forecasted
that 498,000 new commercial
airline pilots and 556,000 new
maintenance technicians will be
needed to operate new aircraft

in the global fleet over the next

20 years.2 Increased pilot training
requirements, an aging workforce (with
mandatory retirements), and global
competition for pilots are contributing
to this demand.3 In addition, until
the newer, more efficient aircraft are
delivered, the fleet will require more
maintenance, contributing to non-fuel
expenseinflation.

Figure 5: Global operating and net margins (%)

5.0%

5%

4.7%

4%
3%

3.3%

3.3%
2.2%

2%
1.3%

1%
0%

2010
Net margin

2.2%

1.8%

1.1%

2011
Operating margin

Source: IATA, ICAO

2.6%

Tailwinds: 2014 airline industry trends

2012

2013e

2014f

Despite the growth of non-fuel

operating expenses, airlines are
seeing generally better margins
since the economic downturn in
20082009. While fuel prices are
down year-over-year, the net profits
since 2010 can be mostly attributed
to higher revenues, combined with
the high operating leverage inherent
in airline business models (Figure 5).

Global results by region

There was a wide range of margin
performance by region, with North
America taking a significant lead in
the EBIT (earnings before interest
and taxes) margin (Figure 6). In
addition, North American carriers
now account for almost half of the
global industry net profit, up from
about a quarter in 2010 (Figure
7). Carriers in this region have
benefitted from a wave of domestic
consolidation and capacity discipline.
Asia-Pacific carriers also earned
relatively high EBIT margins, despite
contributing less to the overall global
net profit. Many of the airlines in
the Asia-Pacific region have been
helped by the growth of the middleclass and corresponding increases in
passenger traffic.
European EBIT margins improved
as the region attempted to move
past recession and sovereign debt
issues. Nevertheless, the economic
environment remained sluggish.
Also, European airlines have been
grappling with increased competition
from well-funded Middle East
carriers on intercontinental routes.
In fact, Middle East carriers have
placed a record number of orders for
new wide-body aircraft for the next
decade.4 To compete, the European
airlines may be facing additional
consolidation as seen in the US
during the past decade in an attempt
to strengthen the industry. Europe

Figure 6: EBIT margin by region (%)

5

4.8%
4.1%

3.4%

3.8%

3.3%

3.0%

3
2

1.3%

3.1%

1.5%
0.7%

0
-0.5% -0.4%

-1
North America
2013e

Europe

Asia-Pacific

Middle East Latin America

Africa

2012

Source: IATA

Figure 7: Global net profits by region (%)

2010

22%

10%

45%

2013

0%

58%

13%

20%

40%

25%

60%

North America

Europe

Latin America

Africa & Middle East

5% 5%

5%

80%

12%

100%

Asia-Pacific

Source: IATA

Tailwinds: 2014 airline industry trends

has already seen the formation of

3 mega carriers (Lufthansa, IAG,
Air France-KLM) like the US, but
has much more smaller airlines left
than in the US. EBIT margins for
the Latin American airlines were
up. However, according to IATA
(International Airline Transport
Association),5 improvements to
regional infrastructure have been
trailing traffic growth, which could
affect the airlines. In an effort to deal
with this issue, Brazil has offered
numerous airport concessions in
order to bring in more investment
ahead of the 2014 World Cup and
2016 OlympicGames.

Outlook for 2014

1) The low-cost carrier (LCC)
model will likely evolve in western
markets, and the concept should
gain more traction in Asia. Western
LCCs are likely to continue their
push into international markets.
Pending regulatory approval,
Norwegian Air is planning to launch
a new transatlantic service out
of Ireland, which will use 787s
and pilots from Asia. In addition,
Southwest is assuming AirTrans
international routes, and CEO

Tailwinds: 2013 airline industry trends

Kelly has commented that they will

have opportunities to expand their
international service. Canadas
WestJet has recently announced
a transatlantic route to Ireland.6
The net effect of these moves is
likely to be greater pressure on
internationalyields.
While the LCC business model is
less developed in Asia, there will
be significant growth as carriers
target nearby emerging markets. For
example, Aviation Daily reports that
the Civil Aviation Administration of
China has urged domestic airlines
to consider moving to a budget/LCC
business model7 and China Airlines
announced near the end of 2013 that
it would be setting up a joint venture
with Singapores Tigerair in order to
target the Taiwan market.8
2) Middle East carriers will
likely become even more
of a competitive threat on
international routes. Middle East
carriers are well-funded and their
costs tend to be lower. Fuel and labor
costs are generally cheaper in this
region than in more developed parts
of the world. Gulf-based airlines are

buying new, fuel-efficient aircraft in

large numbers, often with financing
help from US and European export
credit agencies. They also benefit
from government investment in
infrastructure and advantageous
tax environments. In addition,
these carriers are blessed with an
advantageous geographic location,
which places them at the cross-roads
of Asia and Europe.
3) Carriers are likely to remain
more conservative in their
capacity planning relative to
previous cycles. In the years
following past global recessions,
annual percentage capacity
growth peaked at doubledigit levels. However, capacity
increases following the 2009
global recession were much more
measured. Consolidation in certain
geographies as well as a focus on
yield improvement led to improved
capacity rationalization. The
challenge moving forward is that
many new aircraft will be delivered
over the next several years and

serve to modernize the existing fleet

(Figure 8). While some carriers may
try to grow market share by keeping
some of their older equipment in
service, high fuel costs will reinforce
stated intentions to retire older
equipment, leading most airlines to
remain capacity disciplined.
4) Airlines will push for more
joint ventures (JVs) and antitrust
immunity agreements (ATIs)
to target international growth.
Some airlines in Asia are using the
LCC model in JVs with other Asian
airlines in an effort to capture more
international traffic. More airlines
will pursue new JVs and ATIs
(subject to open skies agreements)9
to allow them to offer more
direct flights on transatlantic and
transpacific routes and enhance their
ability to compete.

Figure 8: Global commercial aircraft orders, deliveries & retirements

4000
3500
3000
2500
2000
1500
1000
500
0

2010
Orders

2011
Deliveries

2012

2013e

2014f

Retirements

Source: Airline Monitor

Tailwinds: 2013 airline industry trends

Part two: The connected airline

Airlines have made great strides in the

last decade by improving operating
performance, controlling costs,
enhancing customer relationships,
and increasing profit margins. But
the rules of the game keep changing.
New competitors, with inventive and
often lower-cost business models, are
operating in established and emerging
markets, challenging larger incumbents
on their own turf. Also, customers
have become more demanding and
knowledgeable, as they can easily
compare prices and services across
airlines and share positive and negative
experiences with vast networks of
people in seconds.
To compete successfully and maintain
profitability requires that airlines
make the most of their opportunities
to further streamline and improve
processes. A look at several key
indicators on an industry-wide
level highlights some of the existing
opportunities for reducing costs and
increasing revenues:
Flight delays and cancellations
cost US airlines an estimated $7.2
billion annually.10
Mishandled bags, 26 million in
2012, cost airlines nearly
$3 billion.11
Suboptimal fleet deployment
choices cost US airlines nearly
nearly $4.8 billion.12

Tailwinds: 2014 airline industry trends

Further integration between

airlines and airport IT
infrastructure and operations
can yield as much as $2.5
billion and could further
increase the efficiency of airline
on-airportoperations.13
Many airlines now find themselves at a
crossroads. They can continue to chip
away at inefficiencies and realize small,
incremental improvements, or they
can apply advanced technologies and
achieve step function advancements in
operational and financial performance.

Convergence of
technological advances
While technological advances in the
industry have been developing for
some time, it is only recently that they
are converging in a game changing
way. Airlines can now collect massive
quantities of data from sensors on
the aircraft, analyze the data to turn
them into actionable information, and
then disseminate that information
in real-time to resources dispersed
throughout the operation. This
process can help airlines to improve
decision-making and resolve or even
avoid problems.

Further enabled by more recent

advances in networking and mobile
devices, the connected airline is now
not just a concept, but a reality. Pilots
carry real-time flight and navigation
information on tablets, crew members
customize in-flight service using
passenger profiles on handheld
devices, and passengers rely on Wi-Fi
for productivity and enjoyment, not
just in airports but in-flight as well.14

The challengeand the

opportunity
As shown in Figure 9, traditional
airline organizations operate in
siloes, with each major stakeholder
independently managing data and
prioritizing investments for its own
ends. Figure 10 illustrates the concept
of the connected airline, where the
most relevant information is easily
available to all stakeholders, when
and wherever needed.
The dissemination of information
is pivotal to building a connected
airline that can address many of
the issues facing the industry today.
The examples on the following page
highlight how getting the right
information to the right places at the
right time can help airlines improve
results:

Figure 9: Legacy airline approach to stakeholders and

information management

Aircraft data

Tech ops
data

Crew data

Pax data

Airport data

Source: PwC analysis

Figure 10: Connected airline approach to stakeholders and

information management

Dispatch

Traveler

Tech Ops

Bags

Aircraft

Crew

Airport

Source: PwC Analysis

Tailwinds: 2014 airline industry trends

 Airlines can improve air-and landside operational coordination,

leading to better slot planning and
increased airport asset efficiency,
by consolidating airport and airline
data across stakeholders and their
separate IT systems (Figure 11).
Airlines can better predict and
prepare for maintenance events,
leading to improved aircraft
utilization and reduced turnaround
time and maintenance costs, by
correlating aircraft operating data
(e.g., the instances of hard landings
and turbulence) with component
reliability data.
By taking a holistic approach to
IROPS (irregular operations)
management (incorporating crew,
network, fleet, and passenger
data and inputs), airlines can
accelerate decision-making
to minimize the disruption to
customers and the operation. For
a network carrier interested in
premium passenger satisfaction,
assigning a customer value to each
passenger would allow the airline
to optimize re-accommodation
and re-scheduling and minimize
disruptions to high-value
frequent flyers. For LCCs, the
goal might be different. If an LCC
wants to minimize cash outlays
for hotels and meals, it could
apply an algorithm that would
minimize overnight disruptions
topassengers.

10

Tailwinds: 2013 airline industry trends

Figure 11: Optimizing the turn cycle

Air Traffic
Control

Ground
Control

Ramp
Operations

Gate
Operations

Connecting bags
Maintenance alerts

Flight
Stage/
Activity

In-flight
Slot planning
Route plans

Catering usage

Arrival
Runway to
gate taxi
Taxiway/
Ramp
Congestion

Sample
Airline/
Airport/
Industry
System

Ramp
Cleaning
Fueling
Baggage
Real-time
unload
Gate
Availability

Ramp
Crew
ETA

ATC mgmt

Airport ramp
control

Catering
vendors

PSS

Dispatch/
weather

Other airline
systems

Baggage
mgmt

DHS
(Homeland
Sec)

Updated flt plan

Wind/Wx updates

Delayed bags
re-routing

Departure alignment

Flight
Stage/
Activity

Gate
Disembark
Crew change

In-flight
Slot planning
Route plans

Source: PwC analysis

Departure
Taxi runway
to gate

Airlines can increase

merchandising revenue and reduce
the cost of supply chain fulfillment
by correlating passenger data
across multiple channels and better
matching supply with demand.
Through loyalty programs,
in-flight sales, and social media,
airlines can learn much about their
passengers buying behavior. These
behaviors can then be analyzed
to help determine how best to
sell to passengers, increasing

Updated,
crew, bags

Delayed
passengers,
crew

Security line
queue time

Real-time passenger &

bags boarding

Ramp
Baggage load

Gate
Passenger
boarding
Flight close

merchandising revenue, and

shared with vendor management
to more accurately predict and
procure needed parts, catering,
and other goods and services.
The value of pursuing the connected
airline is derived from capturing these
opportunities (and many others) by
leveraging and correlating existing
data sources to better predict,
manage, and react to changes in the
daily operation of the airline.

Moving forward
Many airlines are reluctant to
establish their own connected airline
program. Some fear the process
will be costly and time-consuming,
crowding out other critical initiatives.
Others perceive the skills gap to be
too large, with insufficient in-house
capabilities like data analytics,
system integration, business process
redesign, and change management.
Still others are waiting for OEMs
to develop a commercial, off-theshelf solution that can easily
beimplemented.
However, airlines need not wait until
all stars are aligned. They can start
building a connected airline with
small scale projects that not only
mitigate risks, but help demonstrate
the utility of the concept. Early
wins can often be generated using
existing data and returns then
reinvested in further development or
otherinitiatives.

One yardstick to use in choosing

early projects is how quickly they can
provide value and create momentum.
To ensure the business case is realized
and benefits are captured, the initial
test cases selected must be based on
actual airline operating data and
measurable through ROI and other
benchmarked financial metrics.
An example of a good test case
might be to increase pre-day-ofdeparture ancillary sales through
improved customer targeting and
the introduction of new products,
services, and pricing models.
Another test case might be to
improve asset utilization through
the implementation of a needs-based
maintenance program that reduces
aircraft downtime.
At the start of a project, an airline
must select a suitable champion.
This champion, who will serve as
the project manager, has to pull
together a cross-functional team,
spanning multiple business owners
and diverse corporate function
owners. With a cross-functional team,

the project manager must bridge the

gaps between the functional and
technology silos, helping to ensure
that information flows seamlessly
throughout the organization.

The end result

The connected airline provides
information where and when its
needed to optimize airline operations
and the customer experience. It
allows relevant stakeholders to make
better decisions by giving them the
information they need to do so. It can
lead to better aircraft utilization and
dependability, reducing turnaround
times and maintenance costs. It can
minimize transfer times for flyers
and shorten the time it takes to
reach destinations. It enables more
effective collaboration among the
different organizational functions,
making workers more productive
and efficient. In a time of rapidly
expanding competition, the connected
airline can help build and maintain
competitive advantage.

Tailwinds: 2013 airline industry trends

11

Endnotes
1 http://centreforaviation.com/reports/files/29/CAPA%20Yearbook%202013%20-%20Global.pdf
2 http://www.boeing.com/boeing/commercial/cmo/pilot_technician_outlook.page
3 In regard to the increase in pilot training requirements, we do note that the safety performance of the industry is strong: 2013 had the fewest passenger
fatalities since 1996, see http://www.airsafenews.com/2014/01/airsafecom-airline-safety-review-for.html
4 http://www.nytimes.com/2013/11/29/business/international/a-growth-spurt-for-middle-eastern-carriers-led-by-emirates.html?pagewanted=all&_r=0
5 http://www.iata.org/pressroom/pr/Pages/2013-12-12-01.aspx
6 Irish Eyes Could Smile on WestJet, Aviation Daily, November 18, 2013
7 Challenges Loom in 2014 for Asia-Pacific Airlines, Aviation Daily, December 31, 2013
8 China Airlines, Tigerair to launch Taiwanese LLC, Flightglobal, December16, 2013
9 For example, see: Delta Shifts Focus From Japan as Trans-Pacific Hub; Move Underscores Growing Importance of China, Elsewhere in Asia, Wall Street
Journal, February 10, 2014 and Delta and Virgin Atlantic Launch Joint Venture, Flight International, December 31, 2013
10 Airlines for America, "Annual and Per-Minute Cost of Delays to U.S. Airlines," published May, 2013.
11 SITA 2013 baggage report.
12 Strategy& 2013 Fleet Deployment IndexStudy
13 Strategy& analysis
14 PwC Experience Radar 2013: Lessons Learned from the Airline Industry, October 2013.

12

Tailwinds: 2013 airline industry trends

www.pwc.com/us/airlines

Contacts

To have a deeper conversation about the subjects discussed in this report, please
contact the following PwC airline/transportation specialists:
Jonathan Kletzel
US Transportation & Logistics Leader
+1 (312) 298 6869
jonathan.kletzel@us.pwc.com

Bryan Terry
US Transportation & Logistics Director, Advisory
+1 (678) 419 1540
bryan.terry@us.pwc.com

Dirk deWaart
US Transportation & Logistics Advisory Principal
+1 (213) 830-8374
dirk.de.waart@us.pwc.com

Michael J. Portnoy, CFA

Senior Manager, Research & Analytics
+1 (813) 348 7805
michael.j.portnoy@us.pwc.com

Richard Wysong
US Transportation & Logistics Director, Advisory
+1 (415) 498 5353
richard.wysong@us.pwc.com
Alexander T. Stillman
US Transportation & Logistics Director, Advisory
+1 (202) 487 8086
alexander.t.stillman@us.pwc.com

For general inquiries, contact:

Diana Garsia
US Transportation & Logistics Marketing Senior Manager
+1 (973) 236 7264
diana.t.garsia@us.pwc.com

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