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Right-sizing will be a critical component in boosting airline profitability for the next 20 years, according to Bombardier's Market Forecast
As the air transport industry continues to be profitable and growing, the industry is evolving to manage the increasing demand for passenger travel. Airlines are still financially sensitive to several market drivers that wax and wane based on macroeconomic forces. The Bombardier Commercial Aircraft Market Forecast provides an industry outlook over a 20-year period by determining the long effect of these market drivers.
The world economy is expected to grow at a moderate pace for the period of this forecast. There is a broad consensus that oil prices will return to the USD 80 to USD 100 per barrel by 2030. In order to plan for economic uncertainties, airlines are embracing a financially-driven corporate culture. Profit contribution arbitration is transitioning from a network-wide basis to per-passenger basis. With the objective of increasing the profitability per passenger, airlines will invest in right-sized aircraft based on market demands. Below are five key trends from Bombardier's 2017 forecast that are poised to shape commercial aviation over the next 20 years.
1. Overcapacity and fare pressure will reduce per-passenger yields.
While unbundled fares and improved ancillary sales retail models address one part of the profitability equation: revenue growth, airlines must take action to avoid the profit seepage of serving high volumes of customers at low per-passenger yield. While industry load factors are high, there are weak spots in profitability. According to IATA, airlines in 2017 are expected to earn USD 7.69 per passenger served. This is down from the USD 9.13 earned in 2016 and the USD 10.08 earned in 2015. The average net profit margin for the industry is at 4.2 percent, down from 4.9 percent in 2016. Airlines heavily discount fares to fill empty seats, commoditizing what should be a value-added service. In some regions, even heavy discounting can't fill oversized planes. This trend is expected to persist until airlines refocus on capacity management.
2. Intra-regional routes will continue to dominate the air travel market.
Intra-regional routes represented 80 percent of global air traffic in 2016, and will continue to be the largest traffic flow segment, growing 5 percent CAGR through 2036, compared to the projected 3.8 percent CAGR growth of inter-regional travel. Intra-regional routes are also markets that generate the highest yield, but are often served by aircraft that forfeit per-passenger profit opportunities. The oldest fleet in service belongs to the small-single aisle segment, made up primarily of old-technology inefficient aircraft. Bombardier expects that all retiring regional aircraft in the 20- to 60-seat segment will need to up-gauge to large regional aircraft. This shift will also support point-to-point service on short-to-medium haul routes, creating opportunities for more profitable service models on new and previously thin routes.
3. Smaller aircraft are key to unlocking new route potential.
Over the next 20 years, more right-sized aircraft will serve more intra-regional routes. In East Asia and Oceania, for example, the 100- to 150-seat segment has already seen 20 percent growth in global city-pair routes. In this large region, there is still vast potential for growth in the low-cost carrier (LCC) model using 100-150-seat aircraft. In China, where government policy aims to stimulate growth by ensuring services to underserved markets, Tier 2 and 3 airports are still underserved. The LCC model would address under-developed connectivity with point-to-point service in this fast growing area of the world.
City pair growth around the world, where 100- to 150-seat aircraft best serves routes, will reinforce the need for airlines to right-size their fleets. South Asia could grow new routes from 650 in 2006 to over 1,200 by 2026. In Africa, city pairs are forecast to grow from 1,400 to 2,600 by 2026. In Russia and CIS, growth is also strong. The region will see 1,000 additional city pairs by 2026.
Growth by unlocking intra-regional routes is not limited to developing markets. In mature markets, like the U.S. and Europe, 100- to 150-seat aircraft services can help relieve stress on infrastructure and return service to abandoned routes. Airlines can introduce point-to-point service between underserved Tier 2 and Tier 3 airports at competitive fares levels, with high yields.
4. Airline profitability and financial stability will increase by prioritizing profit per passenger over cost per seat.
The present focus on high-volume, low-fare sales runs counter to the best interest of airlines. The strategy turns seats into low-yield commodities, which keeps the industry from reaping adequate profits from operations. Congestion and a focus on cost-per-seat instead of yield-per-passenger, have also resulted in poor passenger experience. As airlines seek to bolster profitability, they will pivot to right-sized aircraft in order to capture underserved or new intra-regional routes and relieve congestion both outside of and within the cabin. Precision-planning of intra-regional routes according to local demand, and the introduction of “closer to home" services in appropriate catchment areas will offer customers a less congested airport experience.
Right-sized aircraft will also offer better pitch and seat width, as well as passenger-friendly cabin design. This puts value back into the equation, allowing airlines to charge sustainable fares for improved services.
5. Airlines will replace aging fleets with modern, fuel efficient, and right-sized aircraft.
The retirement of existing fleets over the next 20 years will create significant demand for modern planes with greater efficiency to penetrate the market in the 100- to 150-seat segment. Large fleet replacement needs exist in the regional aircraft and small single-aisle segments. Replacement with optimized aircraft for each segment will boost profitability and efficiency.
Single-aisle aircraft in the 100- to 150-seat segment will be critical to the growth of hub-and-spoke networks as well as the establishing of competitive but profitable point-to-point short-to-medium haul routes. 86 percent of the current fleet in this segment will be ready to retire by 2036. By replacing this aging fleet with modern, more fuel efficient, right-sized aircraft airlines can develop critical engines of long-term sustainable profitability and high yields into their operating models.
The future now
Airlines can profit from these insights and start planning to right-size their fleet now, in time to secure long-term profitability. For airlines, a profitable future relies on putting these aircraft to work over the next 20 years, and beyond.
Bombardier expects the 60- to 150-seat segment to be a key catalyst to further growth, market penetration and airline profitability. The Bombardier Market Forecast estimates about 12,550 deliveries in this segment over the 2017-2036 timeframe - valued at USD 820 Billions.
Bombardier's complete report on the future of commercial aviation for the next 20 years is available for viewing.