Air Transport Fundamentals

Dr Keith Mason
Head of Air Transport Management Group, Cranfield University

Twitter: @keithjmason
8th 9th Sept 2012

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WHY DO WE HAVE AN AIRLINE INDUSTRY?

Scheduled Air Transport Industry

Air transport demand is derived from other industries
(including tourism)

Airlines compete for business travellers with: Phone, fax, e-mail, internet, teleconferencing Surface transport

Airlines competes for leisure travellers with: Savings, consumer durables, etc... Surface transport

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IATA Members Operations

Source: IATA , WATS, 2010

Major Passenger Traffic Flows (RPKs)

12.4% North America 16.3%

Europe 8.5%

9.5%

Middle East 1.1%

3.1% 5.8% 4.3% 0.6% 2.1% Asia & SW Pacific 18.1%

5.8%

Source: IATA WATS 2004 IATA scheduled RPKs 2010

Source: IATA , WATS, 2011

Passenger traffic growth forecast

Actual

ICAO, Outlook for Air Transport to 2015, Cir 304 AT/127

Airline industry characteristics

Strongly influenced by economic cycles Seats cannot be stored Many markets highly seasonal

Long aircraft ordering lead times

Poor financial performance

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World GDP & scheduled traffic growth

Average Changes of World RPK / Real GDP, 1982-2008

Source: ICAO, 2009a and WEO (IMF), 2009

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Aircraft Manufacturer Forecasts

(Pax-kms)

Route Seasonality (Summer)

Gatwick - Malaga: Schedule and Charter combined 160,000

140,000

120,000

100,000

80,000

60,000

40,000

20,000

0 Jan Feb Mar Apr May Jun

2006

Jul
2009

Aug

Sep

Oct

Nov

Dec

Route Seasonality (Winter)

Route Seasonality (Business)

Financial Return and traffic growth

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Input prices, productivity and yield

World scheduled airline results: margins

8.0 6.0

Opera ng Result as % Revenues Net Result as % Revenues

4.0

2.0

Percent
0.0 -2.0 -4.0

Source: ICAO -6.0

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Scheduled airline results: margin by region

10.0 Asia/Pacific Europe North America 6.0 8.0

Opera ng profit as % Revenues

4.0

2.0

0.0

-2.0

-4.0

-6.0

-8.0 Source: ICAO, and Airline Business (From August 2007 onward) -10.0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Margins by business models

Operating Margin by Airline Business Model
10 8 6 Percent 4 2 0 -2 -4 -6 2008 2009 2010

Cargo
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Mainline

Leisure

Low Cost

Regional

The business travel market

Dependent on the route, business travel can be 50% or more of the market (in volume), although exact statistics are hard to come by there are few international or national published statistics
CAA have numbers ex-UK OAG, CAA, IATA and AMEX publish survey data

The value of the business market can be used to support discounted fares in economy
Business class travel more important than first class
airlines are substituting first class seats with business class seats

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Business Travellers

Mainly male - 80% Middle aged

35 - 54

17 trips per annum

5 Long haul 12 short haul
down 3 since 2004

Half work for large companies

Half work for SMEs
Source: IATA CATS 2009

Profitability by class of passenger service

100 90

80

70

Load Factor (%)

60

50

40

30

20

10

0 First Class Intermediate Class Actual Load Factor BELF Low Class

Source: IATA, 2003

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Business Traveller gender

IATA CATS 2009

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Company size and trip frequency

Short Haul
12.1 trips pa

Long Haul
4.1 trips pa

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IATA CATS 2009

Evidence of change of business market

Downgrading Adoption of low cost airlines Change in booking behaviour
Increase in fare transparency No longer prepared to pay high multiples for business class Increase in price elasticity Increase in value for money purchasing

Use of other forms of communication

Increased use of web-conferencing, tele-presencing, videoconferencing. This adoption has been increased as companies become aware of the carbon cost of travel.

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Choice of airline
Factors affecting choice of airline: IATA CATS 2009
50% 45% 40% 35%

30%
25% 20% 15% 10% 5% 0%

LH CATS 2009

SH CATS 2009

Travel spend 80/20?

> 10,000 employees

1,000 10,000 employees

Airlines cannot afford to manage accounts for companies with spend less than 50k

< 1000 employees < 100 employees

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26

Where will you find business travellers?

Class on travel on short haul flights (<5hrs)
10.0% First or Business Class 22.0% Premium Economy 68.0% Economy Class

Class of travel on long haul

1.5% First Class 39.0% Business Class 19.4% Premium Economy 40% Economy Class

The class is often dependent on the travellers corporate status

Source: IATA CATS, 2004
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Business Travel Cuts Summer 2009

71% of companies had significantly reduced business travel

Class of travel
38% Business class
Of these 70% said only for trips > 5 hours

Reasons for trips

Trips for sales and commercial (45%) Customer support (21%) Conference and presentations (20%) Internal company meeting (10%) Training (4%)
Source: KDS, 2009
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Demographic Segments in Leisure & VFR

Age - A very wide range Gender - 50/50

Peaking - Weekly and seasonal

Charter operators can manipulate demand with tour operator.

Planning well in advance

Although increase in Mini-breaks

Life Cycle - Tour operators segment on life-cycle

18-30, Sandals (couples only), Beaches by Sandals (Families) Eurocamp, Family destinations, Cruise and safari, Saga Tour segments may require specialised airline services (e.g. Flights to family destinations may provide children's books and colouring pens)

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Leisure traveller - Lifestyle changes

Lifestyle Changes Europe:

Lifestyle Changes Asia: Increased use of disposable income for cheap travel LCCs Rise of the newly middle class travellers

Lengthier and more flexible holiday entitlements Increased job and educational mobility

Rise of the Grey Panthers Ego Tourism The Gap Year phenomenon Educational travel 2nd Homes overseas Sporting, cultural events Sporting, cultural events

Singapore Airlines top 15 routes

Weekly one-way seat capacity - September 2010 data

Jakarta (Intl) Indonesia Hong Kong (Intl) China Shanghai (Pu Dong Intl) China Sydney Australia Bangkok (Intl) Thailand London (Heathrow) UK Manila Philippines Melbourne Australia Denpasar Bali Indonesia Beijing (Capital) China Tokyo (Narita) Japan Brisbane Australia Seoul (Incheon Intl) Korea Kuala Lumpur Malaysia Dubai U.A.E
2000 4000 0

16932 13972 11431 9450 9044 8540 8398 7567 6783 6468 5922 5415 5081 5035 4576
10000 12000 14000 16000 18000 20000 6000 8000

Source: OAG DATA

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National Association of Travel Agents, Singapore

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Breakdown of visitors by region to Singapore (May 2010)

Tourist Visitors to Singapore by Origin
2%

4%
7%

13%

Other USA Australia Europe Asia

74%

Source: CEIC

Singapore Tourist Arrivals (000s)- 2009

1,200

1,000

800

600

Q1
Q2 Q3 Q4

400

200

0 ASEAN Japan Hong Kong SAR India China, People's Republic of Taiwan South Korea Australia United Kingdom United States

Purpose of visit to Singapore - 2009

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