Canadian Aviation Safety Seminar (CASS 2004)

Slide 1

Economic Outlook and the Air Transport Industry

CASS 2004

Roger Roy
Director General of Economic Analysis
Transport Canada
20 April 2004

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Slide 2

Overview of Presentation

• Economic performance and the demand for air travel - the new reality
• The 'supply side' of the air transportation industry
• Foreseeable economic forces at play in coming years
• Conclusions

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Slide 3

Economic performance and the demand for air
travel - the new reality

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Slide 4

Air Traffic is pro-cyclical.

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Slide 5

. is influenced by personal disposable income.

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Slide 6

. and remains highly sensitive to short-term shocks

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Slide 7

'The Perfect Economic Storm' .

• End of 2000/beginning 2001: signs of economic slowdown of US economy
• September 11, 2001: quadruple attacks against New York and Washington
• A year and half later: an announced war against the dictatorship of Saddam Hussein
• SARS

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Slide 8

. a crisis of unprecedented scope

• $18b losses in 18 months by world air transport industry, a projected additional loss of $10b in 2003, despite significant cuts in jobs and daily flights offered
• Years of traffic growth lost. For Canada:
  • return expected to 1999 peak traffic (E/D) in other international market in 2004; 2005 for domestic market
  • 2000 peak transborder traffic to be restored in 2006

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Slide 9

. its impacts on air travel demand

• Economic growth still a driver of demand but other forces at play with diverging effects
• Enhanced security - short distance travel
• Fear of flying has resurfaced due to terrorism and association of aviation to epidemic development
• Passengers' expectations:
  • For a significant proportion of travellers, the distinction between full service and low cost is of little interest compared to low fares
• Deregulation, globalisation, privatization

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Slide 10

The 'supply side' of the air transport industry

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Slide 11

Two main categories of carriers

• Network Carriers vs Low Cost Carriers (LCCs)
• Network Carriers still working on their recovery from the 'perfect economic storm'
  • to be slightly above 2000 RPK levels by 2005
• LCCs continue to grow
  • resisted to the 'storm' and maintained profits

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Slide 12

Network Carriers' Strategy: Alliances .

• Alignment with globalization
• All-Network Carriers
• Targeting high yield and long-range passengers
• Forthcoming consolidation in Europe
• "Airline of Airlines"
• Changes in membership on the horizon

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Slide 13

Network Carriers' Strategy . re-engineering of fleet and air routes.

• Bigger Planes:  A-380
• Longer Routes:  A-340 & B-777
• Hub avoidance:  Regional Jets
• Routes transferred to commuter airlines

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Slide 14

Network Carriers' Strategy: . Air Canada - to triple its RJ fleet

• AC will add 45 CRJ and 45 ERJ to the 35 CRJs it now flies:
  • Increased use of secondary hubs (?)
  • Larger planes repositioned to higher density routes (?)

CRJ's 2700 Nm range make them ideally suited for North America

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Slide 15

Examples of Changes to Carriers' Fleet.

Announced Aircraft Purchases and Orders (2000-2004)

Low Cost Carriers	Network Carriers
Westjet:  +39	Air Canada:  -71*
Jetsgo:  +32	United:  -71
Canjet:  +7	American:  -52
Southwest:  +77	Brit. Airways:  -24
Ryanair:  +125	Lufthansa:  -6
Easyjet:  +56	Air France:  -22

*does not reflect the announced 90RJ purchase as its net effect is not yet fully clear

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Slide 16

Aircraft

• From 800 aircraft a year to 350 in 2003
• Boeing: target the "Middle-of-the-Market" (7E7) - aircraft of 180 to 250 seats with a range of 5,500 to 12,000 kms to replace the B757, B767, A300 and A310
• Airbus:  A380 - capable of flying 550 pax

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Slide 17

. aircraft parked in desert.

• North American network carriers had 355 aircrafts in storage at the end of 2003 compared to 402 at the end of 2002
• Overall, 2,169 aircrafts were in storage in October 2003 compared to 2,067 at the end of 2002
• Aircraft in storage include all major and recent types currently flying, including B-777 and A-340
• Potentially serious market distortions ahead if these aircrafts come back online
• Aircraft to come out of storage???

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Slide 18

Low Cost Carriers .

Stimulating demand for air travel .

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Slide 19

. Low Cost Carriers .

• More than filling void - e.g. in Canada, void left by Canadian Airlines, Canada 3000, .

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Slide 20

.Low Cost Carriers

• In the US, the well established Southwest still experience growth but new players - such as Jet Blue and Air Tran (formerly Valuejet) - have appeared
• Across the Atlantic - favoured by unification of European Sky .
• Different models of LCCs

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Slide 21

.a global village of LCCs

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Slide 22

A Low Cost Carrier is not guaranteed success

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Slide 23

. can we talk about profits?

• Since 9-11, some network carriers have had either to restructure, exit, merge, e.g. Air Canada, United, US Airways; Swissair, Sabena, Ansett; KLM, JAS
• North | American network carriers continue to struggle, while European ones appear to be on the route to recovery
• LCCs generated profits during the perfect economic storm, e.g. Westjet and Southwest
• LCCs can break even with load factors as low as 50%, compared to around 70% with network carriers
• Southwest has the highest market capitalization amongst US carriers; Ryanair, the biggest amongst Europeans

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Slide 24

Foreseeable forces to influence the Air Transport Industry

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Slide 25

Air Traffic Demand Outlook

• Air traveling public: increasingly price elastic with a significant segment preoccupied by security, bacteriological epidemic or geopolitical conflict.
• 4.7% global annual RPK growth = traffic doubling by 2020.
• Freight traffic to grow 4.3% to 5.5% per year globally - spectacular growth expected out of Asia.

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Slide 26

Air Transport Supply Outlook

• Longer range aircraft to open new non-stop routes
• Increased use of bigger Regional Jets across North America
• Low cost carriers may consider consolidation if profit growth slows down
• Network carriers to rethink their short haul network; to focus more on point-to-point services; to search for productivity improvements
• Air transport changes possible:
  • Replacement of bilateral with multilateral agreements;
  • New paradigm of acceptable partnership governance between airlines, airports and air navigation service providers to address air transport constraints
• Environmental protection standards and charges

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Slide 27

Major Investments in Airport terminals to accommodate
both increased origin and through traffic.

• AIF and new bond issues used for funding
• 5.5 million passengers connect yearly at Canada's 3 main international gateways: 17% of Vancouver's passengers; 13% in Toronto and 8% in Montreal

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Slide 28

. little new runway construction . and air navigation services .

• In Canada:
  • 2 new runways planned for Canada's major airports
  • Capacity constraints foreseen at Toronto, Montreal
  • Vancouver's North Runway
• Elsewhere in the world:
  • Runway congestion in the US, at major European airports
  • Phenomenal expansion in China
• Air Navigation Services - a role in the expansion of air traffic growth potential

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Slide 29

Conclusions

• The airline industry remains at the mercy of crisis and may no longer as connected to the performance of economies.
• The return to point-to-point services
• Foreseeable constraints to air transport demand growth
  • airports and air navigation services - key determinants
• Structural changes within the industry are not over:
  • Low cost carriers to play a growing role at the expense of network carriers' market share;
  • Alliances of carriers - to find new venues to survive