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8. Canadian Aviation Safety Seminar (CASS 2004)

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

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

Slide 3

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

Slide 4

Air Traffic is pro-cyclical.

Slide 5

. is influenced by personal disposable income.

Slide 6

. and remains highly sensitive to short-term shocks

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

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

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

Slide 10

The 'supply side' of the air transport industry

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

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

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

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

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

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

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???

Slide 18

Low Cost Carriers .

Stimulating demand for air travel .

Slide 19

. Low Cost Carriers .

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

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

Slide 21

.a global village of LCCs

Slide 22

A Low Cost Carrier is not guaranteed success

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

Slide 24

Foreseeable forces to influence the Air Transport Industry

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.

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

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

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

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

Date modified:

2010-05-03

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