2 June 2017
Aviation Embarks on Second Golden Age with Asia Taking the Helm
After many years in the doldrums, the global aviation industry has apparently bounced back into profitability, at least according to delegates to this year's Aviation Festival Asia, but can this long-awaited renaissance be sustained?
"Ours is an industry fraught with dangers and uncertainties," said Conrad Clifford, the International Air Transport Association's (IATA) Regional Vice-president for the APAC region, speaking at the opening ceremony of the Aviation Festival Asia 2017. His words, however, did not necessarily betoken a crisis in the sector. In fact, quite the opposite.
Continuing his keynote address, he said: "Fuel-price hikes, currency-exchange fluctuations, natural disasters, air crashes, wars, political upheaval, terrorism, we've had to contend with them all. As a consequence, the global aviation industry has shown a profit in just three of the past 50 years. Somehow, though, I am optimistic, perhaps because those three years are 2015, 2016 and, in all likelihood, 2017.
"The industry has changed and the future is bright. Aviation has entered a second golden age. Whether in the case of full-service carriers [FSCs] or low-cost carriers [LCCs], this has been ushered in by the 3Cs – the consolidation of airlines, improved route capacity management and charging for everything."
Expanding on this, Clifford outlined the record profits recorded by the global aviation industry in 2016, with more than half the US$35.6 billion total coming from the North American market ($20.3 billion). For 2017, he cited IATA figures predicting a fall in profitability to $29.8 billion, largely on account of widely anticipated fuel-prices rises.
Overall, he said, North America will remain by far the largest aviation market, with Europe in second place, a position the Asia-Pacific region is fast encroaching upon. Indeed in 2017, in profit terms, the estimated $6.3 billion stemming from Asia-Pacific activity will be second only to North America's $18.1 billion.
Acknowledging this changing of the guard, Clifford said: "While North America is still currently the largest market, the truly big populations are in Asia. In 2015, of the top 10 passenger markets, four were in Asia – China, Japan, India and Indonesia. Overall, the US was the number-one market, with China in second place. By 2035, it is likely that China will overtake the US, while India will leapfrog from seventh place to third and Indonesia from 10th to fifth. India is the world's fastest-growing aviation market, expanding by a stunning 25% year on year.
"While many FSCs have done well, in particular the top four US airlines – American, United, Delta and Southwest – it's the world's LCCs that enjoy truly enormous margins, with Ryanair taking the lead with 41%. In fact, the top 10 budget carriers all have margins in excess of 26%. In the very near future, this list may well be dominated by Asian fliers.
"In Southeast Asia, LCCs are already in a commanding role, accounting for the majority of domestic seats. In the Philippines, for instance, the share is almost 70%. In China, though, LCCs account for barely 7% of domestic seats, a shortfall that many are keen to exploit. In line with this, Asian airlines are expected to buy some 14,330 new aircraft over the next 20 years, with 10,370 of these destined for LCCs."
Spring Airlines, China's first LCC, began operating in 2005, with a six-year moratorium then blocking the launch of any new airlines until 2013. Since then, seven Chinese airlines have switched to the LCC model or established dedicated budget sub-brands – 9 Air, China United Airlines, Juneyao Airlines, Lucky Air, Ruili Airlines, Urumqi Air and West Air. Spring, however, remains the largest single player, though its share of the budget sector has dropped from 40.2% in 2015 to 28.9% last year.
Addressing the crucial role digital communications plays in China's budget-airline sector, Jonathan Hutt, Spring's Social Media Director, said: "There are now 659 million active social-media users on the mainland. Significantly, 63.1% of the population has purchased something online, with 90% of these transactions conducted via a mobile device. This is a clear indication that China is well ahead of the curve in terms of the integration of e-commerce and social media.
"Overall, some 85% of our customers are under 35, with many of them favouring mobile as their primary means of communications and purchase. To be truly effective, social-media marketing must take a multi-channel approach. For our part, on WeChat alone, we plan to have 10 million followers by 2018, representing a potential revenue stream of $72.8 million."
Sharing his perspective on China, Andrew Cowen, the Chief Executive of HK Express, Hong Kong's first LCC, said: "The number of outbound travellers from China has been growing by about 17% a year. There were 120 million such trips in 2015 and we estimate there will be close to 220 million in 2025, with Japan and destinations within the ASEAN bloc being the most popular choices for mainland tourists.
"This growth is being driven by the expansion of China's middle class, the relaxation of visa requirements by several countries and the rising number of young travellers – typically more savvy, more adventurous and better able to speak English than previous generations. For our part, 67% of our customers are now 35 or under."
China, though, is not the only show in town in terms of surging tourist numbers, with Krishnamurthi Shyam Sundar, Chief Executive of Air India Express, keen to stress the potential of his own home market. He said: "Indians take 100 million domestic flights a year, as well as 60 million outbound foreign flights. As yet, LCC penetration is very low, while incomes are rising fast. It is clear there is enormous scope for future developments here.
"At present, one new passenger aircraft is added to India's overall fleet every week. There is, however, a problem in terms of infrastructure, both with regard to airports and overall connectivity. I see the way forward as dispersing the airports away from the core cities. This will allow airlines to tap into a number of currently unserved markets."
Taking a different view as to India's optimal development route, Raj Andrande, Business and Development Vice-president for Bangalore International Airport, said: "In five to six years' time, the Indian air-travel market will be facing major problems. There is a real need to expand the existing airports, the proven air-travel hubs – Ahmedabad, Bangalore, Chennai, Delhi, Hyderabad, Kolkata, Mumbai and Pune. They need to become more efficient, while also expanding their carrying capacity."
According to the CAPA Centre for Aviation, a Sydney-based specialist market-intelligence company, India's domestic air-travel market is now the world's third largest, after the US and China. At the same time, the country's domestic fares are among the lowest in the world, due to the fact that 80% of such flights are provided by budget carriers.
Issuing a word of warning, however, the Centre's latest report states: "Based on projected growth rates, the 40 largest airports in India will exceed their design capacities within the next 10 years. At present, there is a serious concern that there is no long-term vision as to how handle the looming capacity shortfall."
More optimistic as to prospects within his own market was Rick Howell, Chief Operations Adviser for Cebu Pacific, the Philippines' largest airline in terms of passenger numbers. Assessing the future of his own operation, he said: "A third of the world's population is within four hours' flight of this region. In the years ahead, LCCs – such as ourselves – will be investing more in long-haul, cost and fuel-efficient aircraft, allowing us to open up new destinations, including Australia and the Middle East.
"For us, e-commerce has been a huge driver. We are the largest e-commerce player in the country, as well as the largest recipient of credit-card payments. Our philosophy has been to make it cheap, make it fun and not to be afraid of investing for the long-haul."
Aviation Festival Asia 2017 took place from 21-22 February at the Suntec Singapore International Convention and Exhibition Centre.
Ronald Hee, Special Correspondent, Singapore