demand for air travel - the moodie davitt report · zat kmg kwe kwl nng hak syx zha bhy hkg szx mfm...

I 17

Demand for air travel

Concentration of population, personal wealth and industrywill drive air traffic growth.

Global Market Forecast 2004-2023

DEMAND FOR AIR TRAVEL

18 I GLOBAL MARKET FORECAST 2004-2023

Emerging economieslead growth

Increasing propensity to travel in emerging nations

Comments made by IATA, during a recent “state of the industry”

address, highlight the potential for emerging markets: “China and

India have the potential to reshape the travel industry.” Indeed,

the two Asian giants have been in the midst of an economic

transformation that is anticipated to turn them into the world’s

largest consumer markets within 25 years. Their combined

purchasing power could be five times greater than that of the

United States of America today.

Today, every US citizen makes on average 2.2 air trips each year.

The corresponding figures are just 0.02 trips per year for India

and 0.06 for China. There is therefore huge potential for air travel

growth by these and other emerging and developing countries,

as wealth grows and air travel becomes affordable by more

and more people.

22 millionadditional Chinese

middle-classconsumers

per year

The Chinese route network

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Large potential for future growth in air travel

10

1

0,1

0,01

0,001

0,0001

Trips* per capita

Real GDP per Capita (US$)* Passengers carried by airlines domiciled in the country

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000

World average

Nigeria

Slovakia

Brazil

Cambodia

IndiaUkraine

ChinaIndonesia

Egypt Poland

Mexico

PakistanCuba

Vietnam

Sri LankaColombia

ThailandCzech Rep. Oman

Malaysia

Malta

Portugal

Kuwait

Brunei

Spain

Israel

UAE Singapore Iceland

UK

AustraliaFrance Germany

Austria Sweden

Japan

Denmark

SwitzerlandNorway

USANetherlands

Korea

Peru

Zimbabwe

1985 2004

GLOBAL MARKET FORECAST 2004-2023 I 19

More wealth leading to more air travel

In China, the two primary drivers of traffic growth are income,

measured by GDP per capita, and exports. These two variables

alone explain 99% of the traffic variations of the last 20 years.

Other economic factors, more linked to social developments

such as the very high Chinese personal saving rate, have limited

the discretionary spending that would otherwise have been

allocated to travel. However, private consumption has increased

steadily over the last 5 years. Spending on cars and residential

housing, for example, has grown threefold, and is continuing to

grow at even higher rates. Transport and communications have

become the fastest growing items in the Chinese household budget,

representing 10% of their total consumption expenditure today.

According to the Chinese Academy of Social Science, middle-

income consumers, defined as households with US$18,000-

36,000 of assets, represent 250 million people, or 19% of the

2004 population, and are forecast to reach the 40% level by

2020. Already, 49% of the urban population are middle-income

consumers. These emerging middle-class consumers are

concentrated in the coastal provinces of the Beijing-Tianjin

corridor, Yangtze River Delta and the Pearl River Delta.

In many emerging nations there is often a disparity between regions

and urban/rural populations in terms of wealth. For example,

in China the top 5 regions, in terms of GDP, are responsible for

about 40% of total Chinese GDP, in France this number is 22%.

Growing Chinese expenditure on transport Wealth concentration

Chinese middle-class consumers per year

50

40

30

20

10

0

% of total population

20202004

600 million people

250 million people

450

250

300

350

400

200

150

100

50

Wealthiest region (Ile-de-France, Shanghai) Poorest region0

Regional GDP per capita as a % of the national average

(National average = 100)

France China

100

80

90

70

60

50

40

30

20

10

0

% of total household expense

1985 1990 1995 1999 2000 2001

Food, clothing, medicine, others Housing

Recreation and education Transportation and communication

Source: Chinese Academy of Social Science.

Source: INSEE & China Statistical Year Book 2003.



China takes off

First domestic, now international

Income is directly related to urbanisation, due to the higher

concentration of employment opportunities and the higher salary

levels in large cities. Industrial production in volume and especially

in value is concentrated in the coastal areas and around the 3 major

Chinese cities. Therefore, not only is the population concentrated,

but their own wealth, as well as the wealth they generate through

the country’s industrial production, is concentrated in urban areas.

The propensity to travel in emerging economy countries typically

starts with domestic trips, when income reaches a certain

threshold, and then develops into international trips when another,

higher, threshold is reached. Chinese disposable income has

grown tenfold in two decades and reached the first domestic

travel threshold in 1990. The Chinese government’s emphasis

on raising personal income and consumption, and its focus on

foreign trade as a major vehicle for economic growth, have served

to increase demand for air transport dramatically. Between 1980

and 1998 demand for travel on China’s domestic air routes, fed

by a sharp increase in disposable income, multiplied nearly twenty

times, growing at an average 16.5% per year.

China to followthe more efficient

hub and spokesystem

Concentration of population, wealth and manufacturing activities

China steady traffic growth driven by domestic routes

100

80

60

40

20

0

Average 16.5% per year

Total Regional International Domestic

84 85 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 0386

Passengers transported (millions)

GDP/capita ($US)

> 2,000

1,500-2,000

1,000-1,500

750-1,000

<750

Source: China Statistical Year Book 2003.


Planes, trains and …more planes

Hubs will be key

Faced with this booming growth, the Chinese transport

authorities recognized that it was necessary to restructure the

domestic route network on the more efficient hub and spoke

system, with Beijing, Shanghai and Guangzhou as the three major

mainland hubs. Today, some of the high density Chinese routes

have already become air shuttle type operations, with a departure

every hour. Anticipated international and domestic growth will be

challenging for the Chinese hub airports. Aircraft movements at

Beijing airport will grow from 250,000 today to about 700,000 by

2023, making it one of the world’s busiest airports.

It is anticipated that, within the next 10 years, the Chinese network

could resemble the Japanese system, with its busy hubs and high

density routes. Today in Japan, as many as 100 domestic flights

per day are operated by aircraft with more than 470 seats.

It is thought unlikely that high-speed trains will divert a significant

portion of air traffic, as in Japan or Europe, due to the much

greater distances between China’s main cities. The rail/air

competition experience in Japan and Europe suggests that rail

trip time in excess of 3 hours does not significantly divert traffic

from air to high-speed train. At best, the high-speed train from

Beijing to Shanghai will take 5 hours to cover the 1,100 km, whilst

Beijing to Guangzhou will take more than 9 hours.

More than

700,000aircraft

movementsat Beijing Airport

by 2023

High Speed train competition decreasing with trip time

100

40

60

80

20

1 1,25 1,5 1,75 2 2,25 2,5 3,5 3,75 4 4,25 4,5 4,752,75 3 3,25 50

Rail market share (%)

Paris-BrusselsParis-Lyon

Madrid-Seville

Tokyo-Osaka

Paris-London Stockholm-Gothenburg

Tokyo-Akita

Tokyo-Aomori

Rome-Milan

Paris-Amsterdam

Rail travel time (hours)



From the US to China 90%of final destinations areconcentrated on 3 major cities

International tourism will grow

Although the income threshold that should have accelerated the

propensity to travel internationally was reached in the late 1990s,

the level of such travel has been constrained by the limited

number of countries in the Approved Destination Status (ADS) at

that time.

Today, with the rapid increase in countries on the ADS list,

together with the growing number of air service agreements, such

as those with the US and UK in 2004, a large pent-up demand

for international travel exists. In September 2004, an additional

27 European countries were added to the list of approved destinations,

ringing the total number of countries to 55. According to the

Worldwide Tourism Organization, as many as 100 million Chinese

tourists will travel internationally by 2020. China will become

the 4th largest country in terms of outbound tourists.

France, for example, anticipates as many as one million Chinese

tourists by 2008, a threefold increase over 2003. The Paris

Tourism Office expects China to become either the first or second

nation in terms of tourists, ahead of the UK, the US and Japan.

The economic benefit is expected to be significant as Chinese

tourists spend an average of $430 compared with $350 for

a visitor from the US, although a Japanese tourist spends $650.

Chinese long-haul international tourists are less interested in visiting

Manchester, Denver or Houston, than Paris, London, Rome,

San Francisco or New York.

Today Chinese travel agencies are concentrating their European

travel packages on France and Italy because of the high interest

in these destinations.

Similarly, the final destination of 90% of passengers travelling from

the US to mainland China is concentrated on the three largest

cities, with as many as 50 cities making up the remaining 10%.

Very few of these 50 cities will have a demand large enough

to justify a non-stop service to North America or Europe. Similarly

the origin of US passengers is concentrated on major cities,

70% of travellers’ true origins being either Los Angeles, San

Francisco or New York.

China’s Approved Destination Status (ADS)

1980 1990 2000 2003 2004

Pace of international travel to accelerate

MacauHong KongThailand

PhilippinesSingapore Malaysia

LaosVietnam AustraliaNew Zealand

Korea Cambodia MyanmarBruneiJapanIndonesia

TurkeyNepalIndiaMaldivesMaltaEgyptMorocco

CubaColombiaSri LankaSouth AfricaCroatiaHungaryPakistanSeychelles

KenyaEthiopiaTanzania TunisiaZambiaZimbabweMauritiusAustriaBelgiumFinlandFrance

GermanyGreeceIcelandItalyLuxembourgLichtensteinNetherlandsNorwayPortugalRomaniaSpainSwedenSwitzerland


Demand is simply where people want to go

Air travel in China is no longer the preserve of elite or business

travellers. It is attracting an increasing number of international

price-sensitive leisure travellers, from fast-growing urban areas, who

want to visit large tourism centres in Europe and North America.

These factors are driving the major airlines serving China to

introduce the A380. Two years before the A380’s entry into service,

current A380 customers have already announced flight plans that

will result in 130 weekly A380 frequencies to China by 2010.

The geographical concentration of population, consumers, wealth

and industry, including high-value manufacturing, in major urban

centres is driving demand for air transportation in this dynamic

Asian market.

130 weekly A380frequencies

to China by 2010

Bulk of passenger first origin and final destinationconcentrated on major cities

SeattleWashington

Boston

Chicago

Honolulu

Origin/destination passengers to mainland China from USA

Shanghai

Beijing

Guangzhou

USAFirst origin cities

Mainland ChinaFinal destination cities

Los Angeles

New YorkSan

Francisco

Source: MIDT.



Expansion through bothfragmentation andconsolidation…

Profitable new routes to open

We anticipate intercontinental traffic to continue growing, partly

through the development of new services between major cities

(fragmentation), and through the further development of traffic

on existing hub to hub routes (consolidation). The future pace

and share of fragmentation and consolidation varies from region

to region, largely depending on the evolving equilibrium of a wide

range of factors. These factors not only include the passengers

penchant for non-stop flights but also, and most importantly,

factors such as passenger route selection based on ticket price

and convenient schedule, demographics, location of trade

centres, real origin and destination demand, aircraft, airline

and hub economics, liberalisation, airline alliances, congestion

and the environment. Opportunities will continue to emerge

for profitable new routes to develop, with aircraft like the A330

and A340. These new long-haul routes are largely centered

on the Trans-Pacific, with some on the more developed Europe

to Asia markets, helped by the growth of Asian economies

and the strong expansion of the international traffic to and from

emerging economies.

This development also coincided with the availability of aircraft

with better range and economics, such as the A330 and A340,

which offer airlines new market opportunities.

Indeed, over the last 10 years, the A340 alone has been used to

open 32 new routes on the Europe to Asia flow. On July 1st,

2004, for example, a new Trans-Pacific polar route was opened

between Hong Kong and New York with the A340-600, whilst

at the same time maintaining existing 747 and A340-300 service

to Vancouver with same airline. More ground breaking A340

Family flights to be inaugurated in 2004, included non-stop flights

using the A340-500 from Singapore to New York and Los

Angeles.

Over the next 10 years, Airbus forecast that up to 60 long-haul

routes could be opened profitably on the transpacific market

and between Europe and Asia, these in addition to the 250 routes

in operation today. Almost all of these potential new routes

will involve a major hub airport at either one end or the other.

International air traffic will grow throughfragmentation and consolidation

• Hub by-passing

• Market development

• Frequency on thin routes

• The business traveller’s preference

• More cost-effective

• Hub dominance

• Global network

• Linking major hubs

• The logic behind alliances

FRAGMENTATION CONSOLIDATION


Hubs key to new routes success

We anticipate that overall new route development will also continue

to follow its historical pattern, which is characterised by a substantial

amount of “churning”, or the addition and removal of routes.

From the 39 new city-pairs across the Pacific opened by North

American airlines since 1990, 29 have been from their hubs.

Of the remaining 10 non-hub routes, only one has survived.

Over time, many such new routes opened on the transpacific

market have subsequently been dropped, leading to a relatively

stable total number of routes in recent years.

This has also been the case on the Europe-Asia market, where

almost 80% of traffic is carried to and from a total of 17 primary

cities. These are major centres of population and business,

whose relative importance, from an air travel perspective, has

hardly changed over time.

Routes linking smaller cities have a higher failure rate. From the

75 routes opened during the past twenty years between a

primary city in Asia and a primary city in Europe, almost 90% have

proved successful and are still in operation today. Conversely,

of the 47 routes opened between secondary or tertiary cities,

only 40% have been lucrative enough to survive.

80%of Europe-Asiatraffic carriedto and from

17 primary cities

Number of city pairs served maturing on the Trans-Pacific

12

10

8

6

4

2

0

-2

-4

-6

-8

-10

90

80

70

60

50

40

30

20

10

0

New city pairs Dropped city pairs Total city pairs

Number of routes Total city pairs

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

High failure rate on routes linking smaller cities

50

40

30

20

10

0

Number of routes

(%) represent share of transpacific seats

% share of transpacific seatsRoutes tried in the last 20 years Routes operated in 2003

Primary Primary (70%)

Primary Secondary

(21%)

Primary Tertiary (9%)

Not linked to a primary city

(0%)

Source: OAG.



… but bulk of traffic growthfrom consolidation

The largest routes will grow

According to the US Department of Transportation, the Trans-

Atlantic deregulation of the 1990s promoted airline alliances,

stimulated new, rather than diverted existing traffic, reduced fares

and encouraged traffic through hubs to a greater extent than

point to point. Indeed, large routes between “primary” cities,

such as New York – London or Paris – Chicago, have easily

maintained a stable share of capacity over 40%. Once established,

new routes not linking primary to primary cities have grown at

a much slower pace (+21% over 1994 to 2004) than those linking

primary to primary cities (+87%).

North Atlantic network evolution

100

70

80

90

60

50

40

10

20

30

0

% of seats growth 1994-2004

32%of lost seats

47% of additional seats

21% of additional seats

(+2,700 monthly seats per route)

87% of additional seats(+14,500 monthly seats per route)

10-year growthstructure of Primary-Primary routes

10-year growthstructure of other routes

Seats added after the route is opened

Seats offered at the opening of a new route

Seats lost when routes are dropped

Consolidation of the Atlantic market

100

80

60

40

20

0

Cumulative share of seats

Number of airlines1993 2003

1 5 9 13 17 21 25 29 33 37 41 45 49

Europe USA

Consolidation &Alliance effect

Deregulationand alliances

resulted inconsolidation

on transatlanticmarket

Airline alliances have also influenced consolidation over

the Trans-Atlantic, as the top 10 carriers have increased their

share of capacity by 5 points since the first US-European bilateral

agreement.

Although new routes will open, network development has been

largely driven by growing O&D markets between major population

centres, with future growth making these flows even more

important.


Growing urbanisation

Bulk of air travel generated by concentration of populations

Today, only five cities worldwide have more than 20 million

inhabitants. Based on current projections, by 2020 this number

will have grown to sixteen – including ten in the dynamic Asia-

Pacific region. GDP in the countries where these mega-cities are

located is expected to double by 2020.

The bulk of air travel will continue to be generated by these

concentrations of population and the associated business and

industry in and around them. This is where most of the people

with a high propensity to travel are and where they want to go.

The concentration of the demand on large O&D markets will even

accelerate as Asian urbanisation continues. For example, the

urban share of the Chinese population evolved from 20% in 1990

to 30% in 2000. By 2010, more than 40% of the anticipated

1.4 billion people will be concentrated in urban areas. By 2030,

the Chinese urbanisation rate could be approaching Japan’s.

GDP per capita in the 3 major Chinese cities is 3 to 4 times

greater than that of the country as a whole.

By 2020,

50%of Chinese

population will beconcentratedin urban areas

Bulk of air travel generated by concentration of population

2002 2020

34.9

44.0

TOKYO

2002 2020

21.15

31.85

SEOUL

2002 2020

20.25

27.4

SAO PAULO

2002 2020

21.624.9

NEW YORK

2002 2020

20.75

29.6

MEXICO

2020

20.8

LOS ANGELES

2020

20.4

ISTANBUL

2020

30.6

CAIRO2020

29.1

KARACHI

2020

21.0

DACCA

2020

28.8

MUMBAI

2020

20.8

KOLKATA

2020

36.0

DELHI

2020

23.7

MANILA

2020

23.9

JAKARTA

2020

20.8

OSAKA

Cities with population > 20 million

Origin-destination traffic between Asia and London

O&D73%

O&D76%

Connecting 27%

Connecting 24%

TokyoHong Kong

Acceleration in Chinese urbanisation

60

50

10

20

30

40

0

Urban population as % of total

1950 1970 1990 2010 2030

Source: CAA survey.

Source: United Nations.



Concentrated trade and commercedrive freight

As well as the concentration of passenger demand, large centres

of population are often a focus for wealth, trade and commerce.

This in turn drives the need for international freight, which is also

concentrated around the major population and industrial centres,

particularly in Asia. In China for example, exports to North

America have more than tripled in value since 1995, mostly driven

by a sharp increase in high-technology goods. As much as three

quarters of the high-value final assembly of computers and other

electronics manufacturing is concentrated around the three main

Chinese cities of Beijing, Shanghai and Guangzhou.

China to North America exports: threefold increase in value, high-tech goods number one

35

20

25

30

15

10

5

0

US$ BN

20031995

OtherPrimaryIntermediateHigh techFoodConsumerCapital

+430%

Fivefoldincrease of

high-tech goodstransported

by air

Source: MGI.


When less is better than more

Passengers prefer lower fares

In mature markets, although economic growth remains the key

driver, demand for air travel is increasingly driven by ticket price

and consumer confidence. As markets have progressively

matured and become more leisure-orientated, the GDP elasticity

of air travel demand has declined. In the US for example,

a 1% growth in GDP will typically result in a 1.2% growth

in domestic air travel, compared with a growth of almost 2%

in air travel some 20 years ago. In emerging markets, ticket price

is obviously a key element, as the ratio of income to international

ticket price is lower in developed countries.

Independent surveys consistently show that what really matters

to passengers is not necessarily whether the flight is direct

or from a hub, but rather the ticket price. A factor which is

becoming ever more apparent with the advent of the Internet,

low-cost carriers and the increasing numbers of business travellers

who either have their travel booked for them or are guided

by corporate travel policy.

A recent US Commerce Department survey shows that ticket

price is the number one criterion for passengers when selecting

a flight, well ahead of the availability of a non-stop service.

The survey showed, for example, that for the Japanese market,

six other factors were more important to passengers, with ticket

price first. Another recent survey conducted by IATA showed that

41% of respondents identified lower fares as the factor that now

motivates them to fly more often.

Passengers motivated by lower fares

45

35

40

30

25

20

15

10

5

0

in %

Upgrades Schedules Safety on ground

Lower fares FFP’s Safety on board

Other

17

68

41

811 11

What would motivate you to fly more frequently?

Airline criteria of choice on transpacific flights

40

30

20

10

0

% of respondents

What is your main reason for flying on this airline?

Price Frequent flier Convenient schedule Non-Stop flights Previous good experience

30%

17%14%

9%7%

Source: US Commerce Department survey (ITA). Source: IATA online survey 2003.

Ticket pricenumber one

criterion whenselecting flights

demand for air travel - the moodie davitt report · zat kmg kwe kwl nng hak syx zha bhy hkg szx mfm...

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