The Changing Trends in the International Airline Industry

Dr Frankie O’Connell

Annual Tourism Policy Workshop

Dromoland, 2016

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Number of passengers carried worldwide (1991 – 2015) B

illio

ns

of

pas

sen

gers

Source: O’Connell, IATA, ICAO, AEA, AAPA, ATA, AACO

Passenger Traffic transported by different airline* business models

2003 - 2015

2003 2015 % change

Full Service Airlines 1.3 billion 2.17 billion 67%

* Share by top 200 world airlines

Low Cost Carriers 178 million 862 million 384%

Regional Airlines 147 million 107 million -27%

Charter Airlines 83 million 78 million -6%

Total 1.7 billion 3.21 billion 89%

Source: O’Connell, ICAO, AEA, ATA, AAPA, AACO

19

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01

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0%

10%

20%

30%

40%

North America South East Asia Western Europe

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

50%

60%

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

1996 - 2016

Source: O’Connell Analysis from OAG, 2016

Geographical Distribution of Passenger Traffic*

2000 - 2015

Passengers 2000 Passengers 2015 % Change

(millions) (millions)

North America 726 924 27%

Europe 420 868 107%

* Share by top 200 world airlines

Central/South America 82 181 120%

Middle East 44 173 293%

Africa 29 34 17%

Total 1.67 billion 3.21 billion 92%

Source: O’Connell, ICAO, AEA, ATA, AAPA, AACO

Asia-Pacific 378 1,035 174%

1974

1979

1984

1989

1994

1999

2004

2009

2015 0

2

4

6

8

10

12

14

16 ICAO data

2034

Air traffic has doubled every 15 years

2019

2024

2029

RP

Ks

(Tri

llio

ns)

World Traffic Forecast (measured in RPKs)

1972 - 2034

Source: ICAO and Airbus GMF 2015

What is driving this traffic?

Traffic is also expected to over the next 15 years

Airbus forecast

Main Drivers for Traffic Growth

People exploring – Tourism (e.g. Egypt)

More economic prosperity – growing middle class (now at 2.7 billion people) Dynamic growth in emerging markets (China, India, Asia Pacific, Latin America) Continued growth of Low Cost Carriers (particularly in Asia) Greater and continued market liberalisation worldwide More demand for overseas holidays and for short-breaks Wealthier people buying second homes overseas

Businesses Travel is strongly connected to International Trade and Commerce Strong correlation between Economic Prosperity and growth in Traffic 215 million people live outside their country of birth (many family and friends will visit)

700,000 foreign students study in the US for example (many family and friends will visit)

Asia Pacific

Europe

North America

Middle East

Latin America

CIS

Africa

0 1,000 2,000 3,000 4,000 5,000 6,000

Long term growth prospects of air traffic (2015- 2035) In terms of Revenue Passenger Kilometres (demand)

S

ourc

e: A

irbus

Gen

eral

Mar

ket

Fore

cast

2016

2015 traffic

2015

Revenue Passenger Kilometres

2016 - 2035 traffic

2015 - 2035

0

5,000

10,000

15,000

20,000 19,580 aircraft

2016 Global Fleet

2035 Global Fleet

39,820

Source: Airbus General Market Forecasts 2016

These 33,000 new planes will be worth around US$5 trillion over the next 20 years

Fleet evolution 2016 - 2035

Nu

mb

er o

f ai

rcra

ft w

orl

dw

ide

6,750 Still be in service

12,830 Replacement aircraft

20,240 Aircraft needed for New Growth 25,000

30,000

35,000

40,000

33,070 New Aircraft by 2035

&

&

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2014

$0 $5

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

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

Net Profit/Loss

Ne

t P

rofi

t /

Loss

(U

S$ B

illio

ns)

20

15

Air

line

Rev

enu

es (

US$

Bill

ion

s)

&

&

& & & & &

& & & & &

& & &

& & &

&

&

&

&

& & &

Total Airline Revenues &

$800

$0

$400

$600

$200

$100

$300

$700

$500

Net Profit/Loss and Revenues for World Commercial Airlines

1978 - 2015

Source: O’Connell analysis from ICAO and IATA

Total Revenues ($751 billion)

Total Net Profit ($35.3 billion)

Proportion of Total Revenues to Total Net Profit (2015 data)

Source: IATA

$19.4

$0

$5

$10

$15

$20

$25

$-5

$ B

illio

ns

2015 Net Profit by Region

$6.9 $5.8

$1.4

$-0.3 $-0.3

North American Carriers made 58% of the Total Profits

• North American carriers made $22.48 profit per passenger

• European carriers made $7.55 profit per passenger

• Asian carriers made $4.89 profit per passenger

The US carriers ...... Protectionism

United, American Airlines, Delta and Southwest control 80% of the US Domestic market

With multiple restructuring and Merging of the Business they have stripped away costs

which was significantly aided by Chapter 11 bankruptcy

US Carriers are Controlling Capacity: They are only adding 1 to 2% seat capacity each

year to the domestic market – consequently the Load Factors are averaging 84% with

breakeven Load Factors of 74%

Limits foreign ownership to just 25% ... Serving as a Barrier to Entry

Domestic market

International market

•The Airline Alliances dominate the International markets

•Anti Trust Immunity allows the carriers to jointly fix fares, fix schedules & share revenues

•Norwegian has 2% market share across North Atlantic but has had to wait 3 years for

its Irish Licence and 1 year for its UK Licence. This application falls within the EU-US’

open skies’ deal – it is usually concluded within 2 months. Multiple excuses rendered

particularly around Labour staffing ........... Protecting the Joint Ventures of ATI

The US carriers have made Net Profits of $56 billion in over the last 6.5 years

2003 2010 2011 2012 2013 2014

0

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60

Total Passengers (Transatlantic flights)

Mill

ion

s o

f p

asse

nge

rs

Sourc

e: U

S D

OT

, 2

015

The Impact of Anti Trust Immunity

on North Atlantic Traffic

% of passengers on Immunized Carriers on Transatlantic market

76.8%

86.8%

79.7% 87.4% 86.9%

79.8%

• In 2014, the 3 big US legacy carriers generated around $3.4 billion in operating profit, from their International operations. $3.1 billion was generated from its N Atlantic operations

• A significant amount of traffic is increasingly concentrated into a few airlines

$545

2000 2014

$0

$100

$200

$300

$400

$500

$600

$700

$800

$666 +$121 +22%

Average one-way transatlantic fare*

Source: Hawaiian Airlines * After adjusting for inflation

$0

$200

$400

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$800

Operating Revenues

World Airline Revenues and Expenses 1991 - 2015

Source: ICAO and IATA

$ B

illi

on

s

Operating Expenses

SIN $ Million Passenger Revenue 7,893.4 Cargo 999.4 Others 2,793.3 Total Operating Revenue 11,686.1 Total Operating Expenses 11,210.0

Singapore Airlines 2015/16 financials

Operating Profit $476.1

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$0

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Total Revenues

Mil

lion

s

Total Expenses

Operating Revenues and Expenses So

urc

e: S

ing

apo

re A

irli

nes

The volatility of Jet Fuel and Crude Oil Prices ($/barrel) 2008–2016

US$

Do

llars

Sou

rce:

Pla

tts

an

d IA

TA

In 2014 Airlines (worldwide) spent $Billions on Fuel? $226 Billion In 2016 Airlines (worldwide) are estimated to spent? $127 Billion (44% less)

Cathay Pacific Fuel Hedging Issues 2015 data

2016: 62% of its Fuel at $85 per barrel

2017: 51% of its Fuel at $89 per barrel

2018: 44% of its Fuel at $81 per barrel

Fuel has fallen by 70% since 2014

• For the first 6 months of 2016, Cathay posted fuel

hedging losses of:

• For the second 6 months– it will incur the same losses

$580 million

Newer Disruptive Competition impacting Global Aviation

Newer Competition

•Gulf Carrier Competition

•Turkish Airlines

•Long Haul Low Cost Carriers

Gulf Carrier Competition

Emirates Network Summer 2016

Qatar Airways Network Summer 2016

Indian Subcontinent to USA – dynamics have changed

Almost 25% of the world’s population lives in the Indian subcontinent

Share of U.S. to Indian Subcontinent bookings

Source: Restoring Open Skies Indian Subcontinent includes: India, Pakistan, Bangladesh, Nepal, Sri Lanka and Maldives

)

) )

) )

) )

39% 38% 36%

39% 37% 36%

34%

2008 2009 2010 2011 2012 2013 2014

0%

10%

20%

30%

40%

50%

US and JV )

)

) )

) )

12%

19%

24% 28%

31% 32%

40%

3 Gulf carriers )

)

)

JV partners include: Delta (Air France/KLM, V Australia, Alitalia, Virgin Atlantic); American Airlines (British Airways/Iberia,

Qantas, JAL); United Airlines (Lufthansa, Swiss, Brussels, Austrian , Air Canada, ANA)

0

100

200

300

400

500

600

In Service

The number of wide body passenger aircraft in service & on order

for the big 3 European, Asia and Gulf carriers (March 2016 data)

Source: O’Connell analysis from Airline annual report and Flightglobal 2016

On Order

Num

ber

of

wid

e body

air

craf

t

43,596

British Airways

Lufthansa

Air France

Cathay Pacific

Singapore Airlines

Japan Airlines

0

50,000

100,000

150,000

75,728

Emirates

Qatar Airways

Etihad Airways

195,852 200,000

Num

ber

of

Sea

ts o

n O

rder

The number of wide body Seats on order for the Big 3

European, Asian and Gulf carriers (March 2016 data)

Source: O’Connell analysis from Airline annual report and Flightglobal 2016

Includes:

787s 777s A350s A380s

Airports in the Gulf and Development Plans 2015 ($68 billion)

Dubai (Expansion) $5.4 billion 78 80 T3, Concourse, runway, cargo

Dubai (New) $8.2 billion 0.5 160 Will be the world’s largest airport

Doha (New) $12 billion 31 50 Phase 2 will accommodate 70 m pax

Abu Dhabi (Expansion) $6.8 billion 23.3 55 Runway renovation, Midfield T, Cargo, Maint

Jeddah (Expansion) $7.2 billion 29 32 2 new Ts + upgrade Hajj Terminal

Saudi Arabia (Domestic) $ 10-15 billion 49.7 --- Upgrading 28 airports till 2020

Kuwait $3.2 billion 10.4 12 New terminal

Erbil (Iraq) $3.0 billion 1.2 --- New airport planned

Muscat & Salalah (Oman) $2.6 billion 10.7 --- Major upgrade of Oman’s 2 airports

Madinah (Saudi) $2.4 billion 4.4 --- New airport built with private investment

Baghdad (Iraq) $2.0 billion 1.5 --- 3 new Terminals and upgrades

Sohar (Oman) $1.5 billion --- --- New airport under construction

Bahrain $815 million 8.6 --- Development and upgrade

Ajman (UAE) $800 million --- --- New International airport

Amman (Queen Alia) $750 million 7.1 --- New terminal for 9 million pax

Beirut $600 million 7.3 7 Upgrade and expansion

Sana’a (Yemen) $500 million 1.8 8 New T, upgrade taxiway & runway

Sources: A

CI &

O’C

onnell

in 2015 Passengers

(US$) (millions) (2020)

Cost Passengers Planned

Details

Long Haul Low Cost Carriers

Air Asia X long-haul fleet (2016)

Currently operates 21 A330s

Aircraft on order 25 more 787-9 on order

Norwegian long-haul fleet (2016)

Currently operates 10 787s

66 A330-900neo

10 A350-900XWB

Norwegian Long Haul network – October 2016

Copenhagen - New York

Copenhagen - Bangkok

Copenhagen - Los Angeles

Copenhagen - Miami/Fort Lauderale

Oslo - New York

Oslo - Bangkok

Oslo - Miami/Fort Lauderale

Oslo - Los Angeles

Oslo - San Francisco

Oslo - Orlando

Stockholm - New York

Stockholm - Bangkok

Stockholm - Los Angeles

Stockholm - San Francisco

Stockholm - Miami/Ft Lauderale

SAS

Thai Airways

Delta Air Lines

United Airlines

Norwegian Airlines

From Scandinavia – Norwegian is Strong

2015 - 2016 data

Source: O’Connell, OAG analysis November 2016

Departing seats

12 month period July 2015 to July 2016

Kuala Lumpar - Melbourne

Kuala Lumpur - Sydney

Kuala Lumpur - Jeddah

Kuala Lumpur - Soeul (Incheon)

Kuala Lumpur - Gold Coast

AirAsia X is strong out of Malaysia July 2015 to July 2016 data

Departing seats

12 month period July 2015 to July 2016

Source: O’Connell, OAG analysis November 2016

AirAsia X from KL – 2016 AirAsia X from KL – 2012

Air Asia X Network 2012 and 2016

Air Asia X will return to Europe this October 2016

Will Air Asia X return to Europe again? • Istanbul

• Barcelona

• More to come!!

Air Asia X also has subsidiaries: Indonesia AirAsia X and Thai AirAsia X

Aspirations to add Air Asia X outposts in India & Japan and operate to the USA

Passenger Connectivity of Air Asia X

2011 2012 2013 2014

4% 4% 9%

16% Air Asia X* to Air Asia X

• Air Asia X carried 3.6 million passengers in 2015, with 56% connecting at KL

25%

38%

43% (1.4m pax)

49% (total Connecting traffic)

Air Asia X to Air Asia

34%

33%

21%

34%

• About 800,000 connected through the group’s Fly-Thru product, which offers

passengers the option of paying an extra fee to through check bags & receive a

boarding pass for the connecting flight, while 600,000 opted to self-connect.

• Scoot will operate to Athens in 2017

• Talks circulating that JetStar may also operate flights to Europe

Snapshot of the long haul routes operated by today’s Long Haul LCCs

LCC / LCC Group Longest Route Flight Time Aircraft Type Seats Seat Configuration

Eurowings Cologne - Phuket 12 hours A330-200 330 21B, 48 PE, 261E

Norwegian Copenhagen - Los Angeles 10.5 hours 787-8 291 32PE, 259E

Jetstar Airways Melbourne-Honolulu 10 hours 787-8 335 21PE, 314E

Air Canada rouge Toronto - Athens 9.5 hours 767-300ER 280 24PE, 35E+, 221E

Azul Sao Paulo - Lisbon 10 hours A330-200 271 21B, 100E+, 151E

Cebu Pacific Manila - Riyadh 10 hours A330-300 436 436E with 30' pitch

WestJet Vancouver - London 10 hours 767-300ER 262 24PE, 238E

Scoot Singapore - Jeddah 9 hours 787-8 375 35B, 45E+, 295E

AirAsia X Kuala Lumpur - Jeddah 9.5 hours A330-300 377 12B, 365E

Aer Lingus’s changing Business model

March 2004 Summer 2016

Short Haul Route Structure

European Route structure 2002 European Route structure 2016

Short Haul is Low Cost

Source: SRS Analyser

Summer network 2016

Aer Lingus Global Network

Weekly Flights between the US and Ireland

for July 2000 - 2016

Source: OAG

Aer Lingus 53

Delta 14

Continental/United 14

Others 6

Total 87

2000

47

7

14

US Airways 14

0

82

2004

American Airlines

61

28

21

12

7

0

129

2010

41

21

25

7

7

0

101

2013

48

24

26

21

14

0

133

2016

81

21

42

35

Merged

with AA

2

181

2008

• Aer Lingus carried 1.1 million pax from N. America to/from Ireland in 2015 .. $

Of those 333,000 passengers who transferred on Aer Lingus

• 125,000 transferred at Dublin for other points in the UK worth $100 million

• 39,000 transferred at Dublin for other points in France worth $29 million

• 38,000 transferred at Dublin for other points in Italy worth $28 million

• 34,000 transferred at Dublin for other points in Germany worth $24 million

• Dublin airport advantages: US Pre-clearance Immigration and new Terminal

663m

Aer Lingus Transfer Traffic data for 2015

• 333,000 of those passengers transferred at Dublin to other points in Europe and to

N. America worth $255 million

Sourc

ed:

Pax

IS

Conclusion

• Global Airline traffic will continue to grow by around 5% per year for

decades to come

• A large part of this growth will come form Asia and from Emerging Markets

• A whopping 33,000 new aircraft will be delivered over the next 20 years

worth around US$5 trillion – Huge opportunity for Irish Leasing

• The profit margins for the industry overall remains low – Ancillary Revenue

will continue to gain a lot of traction

• The US carriers are generating the world’s highest profits significantly

helped by Protectionism

• Relatively new entrant Gulf Carriers with high-end in-flight products are

changing the flows of International traffic.

• Meanwhile Turkish Airlines are growing exponentially

• Long Haul Low Cost carriers are just now beginning to make an impact

Thank you all very much

March 2004 Summer 2016

Short Haul Route Structure

European Route structure 2002 European Route structure 2016

Short Haul is Low Cost

Source: SRS Analyser

Summer network 2016

Aer Lingus Global Network

Weekly Flights between the US and Ireland

for July 2000 - 2016

Source: OAG

Aer Lingus 53

Delta 14

Continental/United 14

Others 6

Total 87

2000

47

7

14

US Airways 14

0

82

2004

American Airlines

61

28

21

12

7

0

129

2010

41

21

25

7

7

0

101

2013

48

24

26

21

14

0

133

2016

81

21

42

35

Merged

with AA

2

181

2008

• Aer Lingus carried 1.1 million pax from N. America to/from Ireland in 2015 .. $

Of those 333,000 passengers who transferred on Aer Lingus

• 125,000 transferred at Dublin for other points in the UK worth $100 million

• 39,000 transferred at Dublin for other points in France worth $29 million

• 38,000 transferred at Dublin for other points in Italy worth $28 million

• 34,000 transferred at Dublin for other points in Germany worth $24 million

• Dublin airport advantages: US Pre-clearance Immigration and new Terminal

663m

Aer Lingus Transfer Traffic data for 2015

• 333,000 of those passengers transferred at Dublin to other points in Europe and to

N. America worth $255 million

Sourc

ed:

Pax

IS

2011 2012 2013 2014 2015

0 3,000 6,000 9,000

12,000 15,000 18,000 21,000 24,000 27,000 30,000

Glasgow '

' " '

London Gatwick )

)

) )

)

Edinburgh &

&

&

&

'

Manchester +

+

+

+

+ +

London Heathrow

Number of passengers transferring at Dublin on Aer Lingus

and Stobart Air to the USA from selected UK airports

P

asse

ng

ers

Tra

nsf

erri

ng

Source: MIDT data