Global Trends in Aviation

Dr Frankie O’Connell

Ninth Annual Tourism Policy Workshop

Dromoland, 2018

1.1

2

1.1

5

1.1

4

1.1

7

1.1

91.2

2

1.2

3

1.3 1.4

31.4

7

1.5

5

1.6

7

1.6

4

1.6

31.6

9

1.8

82.0

2

2.1

92.3 2

.5 2.6

9

2.8

1

2.9

43.0

2

3.2

1 3.6

54.0

2

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

20170

1

2

3

4

5

Number of passengers carried worldwide (1991 – 2017)

Billi

on

s o

f P

assen

gers

Source: O’Connell analysis from IATA, ICAO, AEA, AAPA, Airlines for America, ALTA, AACO, AFRAA

1972

1977

1981

1986

1991

1996

2001

2006

2011

2017

0

5

10

15

20

RP

Ks

(Tri

llio

ns)

World Traffic Forecast (measured in Revenue Passenger Kilometres)

1972 - 2037

Traffic is expectedto double over thenext 15 years

2037

Airbus forecastICAO data

2021

2026

2032

Air traffic has doubledevery 15 years

Source: IATA, ICAO, AEA, AAPA, Airlines for America,

ALTA, AACO, AFRAA, Airbus, Boeing, O’Connell

* Does NOT include travel within China

Within Asia*

Within China

Within North America

Within Europe

Middle East - Asia

North Atlantic

Within Latin America

Transpacific

Within/to CIS

Europe - Latin America

Africa - Europe

0 500 1,000 1,500 2,000 2,500 3,000 3,500

2017

Revenue Passenger Kilometres (billions)

Long term growth prospects of air traffic (2017- 2037)In terms of Revenue Passenger Kilometres (Demand)

2017 2017 - 2037

2017 - 2037

Source: Boeing Market Forecast

2018

Global Fleet

0

5,000

10,000

15,000

20,000

25,000

Nu

mb

er o

f ai

rcra

ft w

orl

dw

ide

21,450 Aircraft

30,000

35,000

40,000

45,000

Source: Airbus General Market Forecasts 2018

Fleet Evolution: 2018 - 2037

2037Global Fleet

10,600 Still inService

50,000 47,990 Aircraft

10,850 Replace

26,540 Growth

37,390Aircraft

NewDeliveries

New Deliveries

The number of outstanding firm orders at the start of 2018 was ~17,000 aircraft

1996

0

1,000

2,000

3,000

4,000

5,000

6,000

Advanced Countries

Developing/Emerging

Mill

ion

s o

f P

eo

ple

781

501

1,282

5.8 billion

23%

World Population

% of world Population flying

2006

828

1,125

781

6.6 billion

30%

2016

852

2,038

2,890

7.4 billion

39%

2026

865

3,020

3,885

8.2 billion

47%

2036

860

4,080

4,940

8.9 billion

56%

Growth of the Middle Class Global Population

1996 - 2036

2,063

Sourc

e: I

MF,

MID

T,

IAT

A

1960 2017 Gain

South Korea 28%

Saudia Arabia 31%

Turkey 32%

China 16%

Brazil 46%

Indonesia 15%

Nigeria 15%

Thailand 20%

Japan 63%

Mexico 51%

Greece 56%

Russia 54%

Global Average 34%

Vietnam 15%

India 18%

Ethiopia 6%

United States 70%

United Kingdom 78%

Germany 71%

83% 55 pts

83% 52 pts

74% 42 pts

57% 41 pts

86% 40 pts

54% 39 pts

49% 34 pts

52% 32 pts

94% 31 pts

80% 29 pts

78% 22 pts

74% 20 pts

54% 20 pts

34% 19 pts

33% 15 pts

20% 14 pts

82% 12 pts

83% 5 pts

76% 5 pts

People Movement from Rural to Urban

% of people living in urban/suburban areas

Source: World Bank

2017 rank 2037 rank

Rank by size of O-D passenger flows in, out & within country

Source: IATA Economics, 2018

Most important Passenger Traffic - Country markets 2017 to 2037

International City Pairs Daily Flights

New York – London 30

Hong Kong – Taipei 39

Jakarta – Singapore 38

Los Angeles – Mexico City 13

London - Dublin 52

China to India City Pairs Daily Flights

China – India? 6

Shanghai – Mumbai 0

Beijing – Delhi <1

Beijing – Mumbai <1

Shanghai – Delhi 2

Guangzhou – Delhi 2

There are only 6 daily direct flights joining 2.7 billion people between China and India

Connectivity around the world and its potential – 2018 data

Sourc

e: O

AG

, Aer

Cap

, O

’Connel

l

A new trend that is helping drive tourism is the growth in social media, and sights like

Instagram, with more than 500 million active users popularising many sites through the

power of the image.

Social Media-Fuelled Tourism

Now you’re less than 10 clicks away from seeing an image on Instagram to purchasing a

ticket to go there.

19

78

19

80

19

82

19

84

19

86

1988

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

$0$5

$10$15$20$25$30$35$40

$-5$-10$-15$-20$-25$-30

Net Profit/Loss

20

14

20

15

20

16

20

17

&

&

&&&

&

&&&

&&&&&&&

&&

&&

&

&

&

&

&&&

&

Total Airline Revenues &

$800

$0

$400

$600

$200

$100

$300

$700

$500

&

Air

line

Rev

enu

es (

US$

Bill

ion

s)

Ne

t P

rofi

t /

Loss

(U

S$ B

illio

ns)

Net Profit/Loss and Revenues for World Commercial Airlines

1978 - 2017

Source: ICAO, IATA, O’Connell, $38

Total Net Profit ($38 billion)

Total Revenues ($754 billion)

Proportion of Total Revenues to Total Net Profit (2017 data)

Source: IATA, O’Connell

Airline Consolidation in Europe2004 2008 - 20182005 - 2006 2007

Source: O’Connell

Lufthansa Group13.1%

IAG Group10.0%

Air France-KLM7.2%

Ryanair12.0%

easyJet, 8.4%

Norwegian, 3.3%

Wizz Air, 3.0%

Turkish Airlines, 5.8%

Aeroflot, 3.1% Others34.1%

European market fragmentation - 2018 European market is still highly fragmented compared to the US

Source: Citi Research, Diiio Mi

Top 5 Airlines have ~51% of EU market

Major Issues

• Rising Oil Prices ($74 per barrel October 2018 vs $43 per barrel October 2016)

• Falling Fares

• Incessant competition

• New airline business models (Long Haul LCCs increasingly entering global marketplace)

• Currency fluctuations (27% of Ryanair’s revenues is in UK£, while 40% of its Costs in US$)

• Global Economic Cycles

• Seasonality in Leisure and Business travel

• Overcapacity – Too many seats being supplied to the market

• Labour unrest (Airline crew strikes – Ryanair, Air France, Lufthansa; ATC strikes - in France)

• Runways and Airport Terminals close to full capacity

• Navigational Airspace approaching Full Capacity

• Political and Regulatory Environment (Open Skies)

• Shortage of Skilled labour (in the next 20 years: 800,000 pilots; 750,000 maintenance technicians)

• Changes in consumer preferences, expectations, demographics

• Weather, natural disasters, pandemics and other external shocks

•Aviation Taxes

• Industry Merging and development of Joint Ventures through Alliances and Equity Partners

• Brexit uncertainty (easyJet purchased Austrian AOC; Ryanair bought UK AOC)

• Technology game changing initiatives (Block Chain)

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

0%

10%

20%

30%

40%

50%

60%

North America South East Asia Latin America

LCC Penetration in N. America, W. Europe and S.E. Asia

1996 - 2017

Source: OAG analysis by O’Connell

Western Europe

Global Passenger Yields (excluding surcharges & ancillaries)

Source: IATA

Ind

ex

AIRSPACE CAPACITY

Source: Eurocontrol

Jan

Feb

Ma

r

Apr

May

Ju

n

Ju

l

Aug

Sep

Oct

Nov

Dec

20,000

22,000

24,000

26,000

28,000

30,000

32,000

34,000

36,000

2014 2015 2016 2017 2018

Average daily Traffic for the last 5 years

European Airspace is getting maxed out M

ovem

ents

per

day

Source: Eurocontrol

Introduction Growth Maturity Decline

Airline Business Model Lifecycle

Long Haul

LCCs

Gulf Carriers (eg EK, QR, EY)

LCC

EU

LCC

Asia

Hybrids(eg JetBlue)

Large

NetworkNational

Carriers(eg SAS, Alitalia,

LOT, Air Malta )

Charters

Time

Rel

ativ

e S

ales

& M

ark

et S

har

e P

ote

nti

al

Norwegian Airlines International Route Network – Summer 2018

• 2014: 41 Flights a week across the Atlantic

• 2018: 215 Flights a week Across the Atlantic

• However, there is limited Feed to Norwegian flights in North America

From Scandinavia – Norwegian is Strong

Summer 2017 – Summer 2018

Copenhagen - New YorkCopenhagen - Bangkok

Copenhagen - Miami/Orlando/Fort LauderaleCopenhagen - Boston

Copenhagen - San FranciscoCopenhagen - Los Angeles

Oslo - New YorkOslo - Bangkok

Oslo - Miami/Orlando/Fort LauderaleOslo - Los Angeles

Oslo - San Francisco

Stockholm - New YorkStockholm - Bangkok

Stockholm - Los AngelesStockholm - Miami/Orlando/Ft Lauderale

Stockholm - San Francisco

Departing seats (June 2017 to June 2018)

SAS Thai Airways Delta Air Lines United Airlines Norwegian

Are Airline Alliances are becoming Fractured?

Are Airline Alliances becoming Irrelevant?

American Airlines domestic network

British Airways European network Connectivity between BA and AA

Alliances are becoming increasingly Fractured

Joint Ventures & Equity Partners are becoming more relevant

Airline Business Model Lifecycle

Integration Level

Val

ue

Interline

SPAs

Code-sharing

Global Alliances

Source: O’Connell

Cost Sharing between International Airlines (JV)

Revenue Sharing (JV)

Profit sharing (JV)

Full Joint Venture (JV)

Merger & Acquisition

Regulatory Freedom Barrier

$8.2B

$5.4$4.8 $4.7 $4.6 $4.5 $4.3

$3.3 $3.2 $3

Equity 49% 3.5% 49% 10% 9.5%

JV * * *

Delta’s top 10 Markets from the US by Revenue (2017)

Delta Air Lines partnership based on its top International markets

34.433.3

28.922.7

19.519.4

16.211.410.39.59.4

5.24

IrelandBelgium

AustriaFinlandUkraine

RomaniaCzech Republic

BulgariaCyprusIcelandCroatia

LithuaniaGeorgia

0 50 100 150

Millions of passengers

United Kingdom? 288

200 250 300 350

249.2Spain235.1Germany

54.651.2

SwitzerlandPortugal

46.339.5

34.4

SwedenPoland

Denmark

European Airport Traffic Statistics by Country (EATS) - 2017

Sources: ADV, AENA, Assaeroporti, Avinor, Finavia, DHMI, HCAA, Transportstyrelsen, UAF, UK CAA, ACI Europe and individual airports

193175.1

167.3

TurkeyItaly

France105Russia

76

55.6

NetherlandsGreece 58

Norway

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 2 3 4 5 6 7 8 9 10 11

Millions of Passengers

UK

as

a p

rop

ort

ion

of

Pass

en

ger

Traf

fic

(%)

BRUAMS

DUB

ALC

FAO

IBZ

FRA CDG

ORK

Dependence of UK by European airport (2017)

Source: O’Connell

NOC

SNN

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

10 20 30 40 50 60 70 80

Millions of Passengers

To/F

rom

EU

(%

)

EDI

LHR

LGW

Source: O’Connell

Dependence by UK airport on “EU 27” pax flows

MAN

STN

LTN

BHX

EMA

LPL

NCL

Conclusion

• Traffic is doubling every 15 years

• Global Markets are shifting fast with large Middle Class demographics

• Many industry challenges: Tight Financial Margins, Consolidation,

Long-Haul LCCs, Bottlenecks, Falling Fares

• Joint Ventures and Equity Partners are increasing in importance

• Large impact on UK regional airports with Brexit

• Large impact on Irish airports with Brexit

Thank you all very much

Global Connectivity to the UK – Summer 2018

The UK was served by 17,520 flights a week or 3.2 million seats a week in Summer 2018

BREXIT

Are Airline Alliances are becoming Fractured?

Are Airline Alliances becoming Irrelevant?

American Airlines domestic network

British Airways European network Connectivity between BA and AA

Global Connectivity to the UK – Summer 2018

The UK was served by 17,520 flights a week or 3.2 million seats a week in Summer 2018

84% of total flights came from the EU or 78% of the seats came from the EU

Global Connectivity to Ireland – Summer 2018

Ireland was served by 2,870 flights a week or 487,000 seats a week in Summer 2018

86% of total flights came from the EU or 81% of the seats came form the EU

Introduction Growth Maturity Decline

Airline Business Model Lifecycle

Time

Rel

ativ

e S

ales

& M

ark

et S

har

e P

ote

nti

al

Joint

Ventures

Equity

Partners

Alliances

Intra-European

44.4% ofTraffic Revenue

Lufthansa Group - 2015

North America

24.9%

Asia-Pacific

17.8%

South America

5.7%

Mid-East

3.6%

Africa

3.6%

The basic principle behind the joint ventures is so-called “metal neutrality” which is achieved through close cooperation in capacity and price

planning as well as revenue management. This allows travellers to freely combine flights from a harmonized range of offers and take advantage

of additional travel options and the increased availability of special fares and connecting flights. Passengers do not need to choose a preferred

partner when buying a ticket – instead, they are “neutral” in terms of the “metal” they fly with. For the airlines to reach their targets together,

revenues are managed in a single “pot,” itemized according to the share of production and then distributed.

This material cannot be copied or used unless permission is sought from Dr Frankie O’Connell

27 Members 13 Members 20 Members

38

3 airline alliances