Economic Insights into the aviation sector – IATA’s observations at CAPA-ACTE Global Summit

Last week the International Monetary Fund (IMF) released its latest World Economic Outlook. Overall, the IMF suggests that the ‘global upswing in economic activity is strengthening’ and it forecasts global GDP growth of 3.7-3.8% per year over its 5-year horizon. The outlook for emerging markets is stronger than for the advanced economies, with growth lifting to 5% in the former, but easing slightly to 1.7% in the latter. In the near-term, broad-based upward revisions in the euro area, Japan, emerging Asia, emerging Europe and Russia more than offset downward revisions for the US and UK.

At the regional level, the diverse outlook is clear. The emerging Asian economies standout, with growth forecast to average a very robust 6.5% per year over the next 5 years. The emerging economies of Europe, along with the nations in sub-Saharan Africa follow, with growth of around 3.5% per year. In contrast, the Eurozone countries are faced with more subdued GDP growth prospects of just 1.8% a year.

The IMF cautions that while its baseline outlook is strengthening, growth remains weak in many countries, and a number of challenges remain. Although the short term risks to the outlook are broadly balanced, the medium-term risks to growth are still tilted to the downside. So what does all this mean for air transport?

According to IATA, the strong growth in RPKs over the past year or so has accompanied the improvement in the global economy over this period. And the favourable near-term economic outlook bodes well for the industry – indeed, as noted previously, with oil prices moving higher, economic activity will be an increasingly important driver of air transport demand going forward. The divergence in the regional economic growth outlook will also influence the evolution and changing pattern of air traffic demand over time and will likely see some amendments to its updated 20-year air passenger forecast, due for release in coming weeks.

IATA’s chief economist, Brian Pearce, highlighted the evolving trends and risks shaping the outlook for air travel, tourism and the airline industry during a keynote address at the CAPA-ACTE Global Summit in London last week.

He warned that the passenger market may be reaching its cyclical peak, but questioned “will this air traffic cycle be different or isn’t the end in sight” already? The general consensus is “pretty good shape” for the economy and global travel market, according to Mr Pearce. The airline industry generally sees a four category, eight year economic cycle, with the industry currently going through a positive eight years. “I’m not going to say that it won’t continue”, he said, however “we need to work at it” to support the positive economic environment.

Recent “political shocks” could have “easily” affected the current positive operating environment in the global airline industry, said Mr Pearce noting the rise of alternative political parties in developed economies, stating populist pressures have potential to disrupt the global industry. However other factors have driven past uncertainty, which was not initially expected by IATA. Mr Pearce outlined key drivers including strong business confidence, emerging tourist flows from China and big exchange rate shifts. The shifts “made the US less competitive”, while enabling struggling economies such as Brazil “come out of recession”.

Warning against complacency in a positive global aviation market, Mr Pearce reinforced the need to make business models and balance sheets “robust to less favourable circumstances” and reiterated there is “a lot of work to be done” for regulators and politicians to ensure positive operating conditions continue. This is especially important due to changes in travel markets since the global financial crisis (GFC). Ahead of GFC the economy and supply chains were geared towards globalisation, and borders were “yesterday’s thing,” said My Pearce. “That has changed”, he added, particularly noting a changing cargo operating environment where supply chains have “moved closer to home”, instead of being “spread” globally. He warned similar policies moving to the passenger transport sector could see “borders much more difficult to cross” as we see increasing soft protectionism.

As we appear to have “a benign fuel price environment” currently, Mr Pearce said this “adds up to strong air traffic growth”, at least “for the moment”. But uncertainty means growth in O&D passenger demand could still differ from a cautious 1.5x growth over the next 20 years to double that rate based on different operating circumstances and political environments. The “business as usual” scenario would see global air traffic double over the next 20 years and is the most likely scenario, according to Mr Pearce. A closed border, nationalistic scenario would only see passengers increase by around 50%. Open, liberal policies could triple passengers, boosted by emerging economies.