After a period of stagnated growth, 2016 was a good year for airlines and airports and the industry looks set for a period of growth over the coming years with airlines once again recruiting pilots, increasing numbers of city pair connections, and delivery of almost 1900 new aircraft to airlines by the end of 2016. This is great news for both our flying and management graduates. For more detail, read the following industry update written by Douglas Nancarrow, former lecturer of AVIA2950 Current Affairs in Aviation.
2016 has been a relatively comfortable year for the airline industry in general, particularly so in the strongly recovering United States market. That level of comfort is largely attributable to continuing low fuel prices, along with significant growth in passenger traffic. But it is moderated by concerns about a ‘fragile’ global economy, some regions of political instability and strong competition across the industry.In other words it has been a pretty good year for most airlines and the industry quietly expects that that state of affairs should continue well into 2017. It’s just that airline executives are conditioned to be pessimistic about their charges’ performance, given the vulnerability to exo shocks such as volcanic activity, epidemics, weather events etc, that can strike without warning and have an immediate effect, potentially catastrophic, on the industry. That underlying pessimism is founded on all-too-recent history and the fact that airlines almost everywhere operate on very thin margins that can be dramatically eroded by global financial downswings, as well as those exo shocks. But the current numbers support the optimism that is reluctantly voiced, at least in the passenger segment (executives are less bullish about their cargo operations).
IATA expects that a full one per cent of global GDP will be spent on air transport this year and that’s a staggering US$740 billion. And there’s no expectation that this will decline next year, though the proviso relates to that ‘fragile’ world economy. The real test of an airline executive’s confidence is the extent which they are investing in growth. Such investment may be in fleet growth, network expansion and infrastructure - and it’s all happening. By the close of this year airlines will have taken delivery of more than 1900 new aircraft, around half of which will be growth and the rest fleet replacement.
The number of city pair connections around the globe will top 18,000 this year - and that’s double what it was in 1996, only 20 years ago. As we go into the New Year airlines will have total capacity of close to 3.9 million seats and they will have been filled at an average of 80 per cent. Consumers are flying more partly because of the attractiveness of airfares, which are overall 62 per cent lower than they were a couple of decades ago. And the fares are low because of very strong competition - and remarkably low fuel costs. It wasn’t so long ago that fuel represented around 50 per cent of an airlines operating costs, with the price above the $100 per barrel mark. In 2016 fuel will be about 20 per cent of operating costs, the lowest point it has been since 2004. Will fuel stay low? If everything else in the equation remains as it is, then probably yes; but when it comes to forecasting oil prices no one’s an expert.It is also worthy of note that the latest generation aircraft, of the B787 and A350 ilk, are significantly more fuel efficient than their predecessors and that this factor also impacts the fuel spend for the industry.
Long term traffic forecasts from both major manufacturers, Airbus and Boeing, remain very bullish, particularly for the Asia Pacific region, despite recent cooling of the Chinese economy; so there is every reason to be confident about the financial health of the industry going forward. Particularly as the process of consolidation continues to deliver economies of scale, albeit slowly. The pace of change in this regard is often dictated by individual state policies that border on ‘protectionist’ and certainly hinder the process. Nonetheless, the phenomenon of mergers and acquisitions should underpin industry confidence in its future, despite the casualties along the way.
In the airport world things have never looked better, generally speaking. The realisation of some of that forecast traffic growth is driving airport revenues to exceptional levels already; but, of course, the balancing factor is the infrastructure spend, as airports seek to source funds to build the runways and ramps and all the rest needed to support the growth.
The airport industry peak body, Airports Council International (ACI), highlights what it calls “impediments that could curtail the continued rise in demand”. It identifies these as geopolitical unrest, terrorism and threats to security. But importantly then goes on to point out that “physical capacity considerations and potential bottlenecks in air transport infrastructure also pose challenges in accommodating future air transport demand”.
Which immediately brings us to the potential problem that may well be around the supply side of the demand & supply equation. It looks very evident that the demand for airline seats will be exceedingly strong over the foreseeable future. The question is: Can we find the properly trained pilots, maintenance engineers and managers to keep up with the demand? There’s a level of complacency throughout the industry that suggests we will, but not everyone is so sure that it will just happen. Or if it does happen, will safety be compromised by a slipping of standards in the training and consequent competency levels?
If the growth does eventuate as forecast, then airlines everywhere will be competing to get the pilots, engineers and managers coming out of the training regime. Airports will be competing too for the managers and other specialists they will need in increasing numbers. And the competition is likely to be tough. A few years back when there was a severe shortage of airline pilots, it was said that if you had a licence and couldn’t get a flying job then you needed to switch industries fast. Accounting? Aged care? There’s every chance that it’s going to be just like that again in the near to medium-term future. Except that this time it won’t just be pilots that are in high demand.