Air Transport Demand Growth

At An Inflexion Point?

Dr. Kevin Michaels Jonas Murby

Partner Senior Associate

24th Annual Commercial Aviation Industry Suppliers Conference

March 2, 2010 ● Beverly Hills, CA

Ann Arbor, Michigan • Amersham, United Kingdom • Singapore

www.AeroStrategy.com
 Agenda

The Perils Of Unconstrained Growth

Five Potential Constraints To Air Travel Growth

Implications For Industry Participants

© 2010 AeroStrategy 2
 Un-
constrained Air Travel Demand Has Averaged 5.7% Growth
Growth? Since 1970
1970-2009 Air Transport Revenue Passenger Miles (Billions)

European
3,000 liberalization &
U.S. LCC
U.S. Deregulation growth
2,500 1970-1990 1990-2002
CAGR 6.9% CAGR 4.6%
2,000

1,500
Europe LCC
Asia
1,000
liberalization
2002-2009
500 CAGR 4.2%

Source: ESG Aviation 3

 Un- …And Most Industry Forecasts Are An
constrained Extrapolation Of Current Growth – About 5% Per
Growth?
Annum Through 2030
1970-2028 Air Transport Revenue Passenger Miles (Billions)
8,000

7,000

6,000
CAGR
5,000
OEM1 4.7%
4,000
OEM2 4.9%
3,000
Expert 5.5%
2,000
Actual
1,000

© 2010 AeroStrategy
Sources: Boeing, Airbus, ESG Aviation 4
 Un-
constrained Other Transportation Modes Went Through Long
Growth? Term Growth Periods Before Maturing…
1850-2010 UK Railway Traffic (Millions of Passenger Miles)
35,000

30,000

25,000

20,000
30-year
expansion
15,000
1890-1920
CAGR 4.3% •Great depression
10,000 •Suburbanization
•Build-out of road network
5,000 •Cars becoming inexpensive
•Low cost, reliable air travel
-

© 2010 AeroStrategy
Source: Association of Train Operating Companies 5
 Un-
constrained ..And There Are Several Structural Factors That
Growth? Could Reduce Long-Term Air Travel Growth

Cost of Fuel

Socio-Cultural

Threats to long-term Market Maturation

air travel growth

Infrastructure

Substitutes
6
 Agenda

The Perils Of Unconstrained Growth

Five Potential Constraints To Air Travel Growth

Implications For Industry Participants

© 2010 AeroStrategy 7
 Two Factors Are Likely To Drive Higher Aviation Fuel
Costs, Which Are Approximately 30% Of Airline
Costs…
Oil Aggregate Supply & Demand Taxation

• Oil prices have skyrocketed as oil • Aviation’s inclusion in EU’s

production levelled off in 2004 Emissions Trading Scheme
• With oil prices at >$70/bbl in a could add €3bn to costs by
global recession, the “peak oil” 2012
hypothesis is gaining credibility • Are cap-and trade taxes
• Many airline leaders expect $100/bbl coming to US and other
oil in the long run regions?

Sources: WEO2009 (IEA), IEO2009 (EIA), Price Waterhouse Coopers

Interagency Task Force on Commodi ty Market s , Inter im Repor t on Crude Oi l (2008) 8
 ...And Leisure Air Travel Revenue Is Highly
Susceptable To Fare Increases

Air Travel Demand Elasticities

• The price
prices = revenue elasticity of
demand for air
travel is generally
elastic

• Leisure travel,
around 60 % of
demand, is very
susceptable to
price increases

• Price increases
have the least
impact on long
haul business
revenue 9
 There Is A Negative Perception Of Aviation With A
Segment Of European (Green) Consumers…

2009-2019 Air Transport Emissions Forecast

(Million Metric Tonnes) • Although aviation is only ~2.5% of
global emissions, it’s one of the
1,000 fastest growing sources of
900 emissions
800 • A segment of consumers and
700 politicians are sceptical towards any
600 investments that would facilitate
500 further growth of air traffic
400
300
200
100
-
2009 2014 2019

Will aviation become the new tobacco industry of Europe?

Source: AeroStrategy analysis 10

…And The Aviation Industry Has Done A Poor Job
Of Telling The “Green” Story
US Passenger Miles Per Gallon Of Fuel

Projected 15-20% fuel efficiency

improvements put air travel on par
with commuter rail for fuel efficiency

Source: Brad Templeton analysis 11

 Air Travel Growth In Relation To GDP Is Decreasing
In Key Markets

1998-2008 RPK/GDP Growth Ratio, By Region

(3-Year Average)
• Air travel growth is highly
5
Ratio needed to achieve correlated with GDP, but
4
4.5-5% air travel growth* there are regional
3 variations
2 • To achieve 4.5-5% long-
1 term travel growth, a
-
RPK/GDP multiplier of at
least 1.5 is required
(1)
• North America’s ratio is
(2)
<1.0 and Europe’s is falling
(3) fast...can emerging
(4) economies offset this
Europe North America Asia market maturity?
* Assuming 3% Global GDP growth

Source: EIU, The Airline Monitor, AeroStrategy analysis 12

 Air Travel Infrastructure Is Straining To Keep Up
With Anticipated Growth In The US And Europe
Air Traffic Management Airports

• U.S. ATC delays in 2014 are • By 2030, up to 39 European

projected be 62 percent greater
than in 2004, resulting in a
doubling of passenger delays
• European airspace is heavily
congested and traffic is
projected to double by 2030
airports will be fully congested
• Up to 25% of European air
traffic unaccommodated
• In the U.S., 8 major metro areas
and 14 key airports need
additional capacity by 2025
beyond what is already planned
Source: FAA, Eurocontrol 13
 Europe’s High Speed Rail (HSR) Network Is
Planned To Triple By 2025

Current And Planned European High Speed Rail Network

• HSR viewed as time

efficient on routes
up to 500 miles
• Perceived as
comfortable and
affordable
• Traffic on key
airline routes has
decreased 40-50%
since introduction
of HSR
• Planned HSR
network
expansions will
connect many more
city pairs

Source: International Union of Railways 14

 China Has Accelerated Development In HSR And
Plans To Complete Its Network In 2012

Current And Planned Chinese High Speed Rail Network

• China accelerated
completion of a
massive HSR
network by several
years to stimulate
the economy
• The network will be
completed by 2012;
total investment will
reach $300B
• Recently opened line
from Guanzhou can
travel at 245 miles
per hour

Source: International Union of Railways, Bloomberg, Daily Mail 15

 As A Result, Some Analysts Expect HSR To Gain
Market Share From Air Travel In China As Of 2012

Economy Class Airfares

Guanzhou-Chansa (Yuan)
800
700
600
500
400
300
200
100
0
Before With HSR
HSR

• Competing routes are seeing

fares fall by 50%
• In extreme cases fares are
falling by 80%

Source: International Union of Railways, Busienss Week, Daily Mail, Macquarie 16

 In Contrast, The U.S. HSR Nework Will Be Relatively
Modest...And Delayed

Planned High Speed Rail Routes In North America

• In 2009 Congress
allocated $8B to
support high speed
rail development

• The majority of the

U.S. HSR network will
not be operational for
at least a decade

• The first new HSR

line will likely be
Tampa-Orlando –
hardly a threat to air
travel!

Source: International Union of Railways 17

 In Aggregate, The World’s HSR Network Is
Expected To Triple In The Next 15 Years
Global HSR Network – Historical And Projected Size (KM)

CAGR 3% 6.6% 9.1% 9.1%

Source: International Union of Railways 18

 China And Europe, The Areas Of High HSR
Penetration, Are Expected To Drive 20 Percent Of
Global Air Traffic Growth
2008-2028 Absolute Airline Traffic Growth By
Regional Flow (RPKs In Billions)
4,700

How threatened by HSR?

1,000
HSR primarily
800 competes with
600
aviation on
routes less than
400 500 miles, which
200 represent 12 %
0
of global ASKs
Portion of
absolute 13% 8% 8% 8% 63%
growth

Source: Boeing Current Market Outlook, OAG Aviation 19

 Another Potential Substitute, Videoconferencing,
Has Had Limited Impact On Air Travel Growth

• Several reports in the 1990s

Videoconferencing created a scare that
videoconferencing would reduce
air travel demand

• To date, there is limited evidence

suggesting significant impact on
air travel growth – the greatest
impact is for intracorporate travel

• Paradoxically, videoconferencing
enables dispersed organizations,
which sometimes increases air
travel

• To what extent could generational

comfort with Skype
videoconferencing affect future
travel?
Picture credit: Tandberg 20
 Agenda

The Perils Of Unconstrained Growth

Five Potential Constraints To Air Travel Growth

Implications For Industry Participants

© 2010 AeroStrategy 21
 The Medium-Long Term Impact Of Air Travel
Constraints Vary By Region….
Implications

Constraints To Air Travel Growth: Medium-Long Term Impact

Europe North Asia Rest Of Comment
America World

30-40% of cost structure…

Cost of Fuel
and likely to increase
Primary impact with a very
Socio-cultural small segment of European
consumers

Market North America and Europe

Maturation are key concerns

North America, Europe , and

Infrastructure
India are key concerns

HSR will compete primarily in

Substitutes
Europe and China

Low High
Impact Impact
Source: AeroStrategy analysis 22
 …However, The Aviation Industry Has Overcome
Constraints And Crises Before….
Implications

23
 …And Potential Solutions To Some Of The
Constraints Are On The Horizon
Implications

• New fuel efficient aircraft & powerplants

Constraints To Air Travel Growth:

• ATM modernization
Medium-Long Term Impact • Alternative fuels

• Improved public relations – do a better

job of telling the ”green aviation” story

• ATM modernization: ADS-B, SESAR,

RNP others
• China adding nearly 100 airports

• Multi-modal transport plans – work with

rather than against HSR
• Improved air travel experience in new
aircraft and airports
Source: AeroStrategy analysis 24
 Is It Time To Develop Constrained Air Travel
Growth Forecasts?
Implications

• Most current air travel growth

forecasts are unconstrained
• In light of industry challenges,
unconstrained forecasts risk
overstating actual industry growth

© 2010 AeroStrategy 25
 Thank you for your attention!
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