Amazingly even with this massive increase in fuel the average domestic fare in the last ten years has only risen $1.81 since 2000 to $316.27 (adjusted for inflation), illustrating the dearth of pricing power airlines have when it comes to managing their ticketing revenue stream. This fact should illustrate why ancillary revenue has become such a core component to achieving the thinnest of margins.
The incredible shrinking North American aircraft market
By Jon Ostrower on May 17, 2011 in Uncategorised
A forecast of summer air travel released Monday by the Air Transport Association (ATA) reveals some fascinating figures about US carriers an aircraft market that been steadily shrinking over the past decade – driven down by consolidation, recession, the threat of terrorism and other exogenous shocks.
ATA expects 2.24 million passengers will fly daily aboard US airlines this summer, up 34,000 passengers per day from 2010, transporting 206.2 million fliers from June through August. That figure is about 1.5% higher than last year 203.1 million passengers flew on US carriers during the same period a year prior.
While the figures show modest year over year growth, there are importantly underlying facts that tell us a lot about the state of the fleet in the US. According to Boeing and ATA, on an absolute basis the North American fleet has shrunk by nearly 1,000 aircraft since the end of 2001, a 12% drop from 8,056 aircraft to 7,096 at the close of 2010.
During that same period the fuel consumption dropped 15% from 20.5 billion gallons in 2001 to fuel to around 17.5 billion gallons at the start of this year, a drop of 3 percentage points higher than the decline of the US fleet over the same period, indicating the increasing fuel efficiency of the the fleet.
Though staggeringly the fuel bill for US carriers has climbed from $15 billion to $50 billion annually and now accounts for $0.33 on every dollar spent by airlines today. By comparison in 2010, the International Air Transport Association says $0.26 on every dollar spent worldwide was for fuel. Engine and airframe maintenance accounted for just $0.13 of every dollar spent.
Looking two decades into the future, Boeing’s own current market outlook spread across the past half-decade tell the story as well. The 2006 20-year outlook for North America forecast 9,450 new aircraft being delivered with an annual traffic growth rate of 3.6%. Four years later, Boeing’s own numbers are 24% lower, anticipating 7,200 deliveries from 2010 to 2029 and an annual growth rate of 2.4%.
Yet, even with this steady decade-long reduction in size, North America remains the single largest market for narrowbody aircraft, with Boeing estimating that 78% of total deliveries to the US and Canada over the next twenty years will be to replace aircraft in service today.
When it comes to developing new and updating existing aircraft, these figures paint an interesting picture of what airlines will need from airframers in the coming decade. Fuel, once a relatively small fractional share of operating cost, has become the largest and most flexible cost lever to pull; whether it’s with winglets, precision navigation, weight and drag reduction, engine improvements or new aircraft. The question becomes how to pull that lever and how much do you spend as an aircraft maker pulling it to the benefit of airlines.