ISTAT Jetrader - Winter 2019 - 27

inevitably to the conclusion that, although supply and demand
is nominally in balance, there are simply too many cheap
seats being sold in the market and too few expensive ones.
As I think is now well understood, much of the global
traffic growth is being fueled by rapidly expanding middle
class populations in emerging markets. Access to and use of
air services within a population increases exponentially as
disposable income rises. This clearly separates the mature
economies of North America and Western Europe from all
of the emerging markets - in Asia, Latin America and
Africa. Since many of these emerging markets are home to
the largest populations, the potential for further growth in
passenger demand is very significant.
Worldwide passenger numbers are set to pass 4.5
billion this year and are increasing by 200 million every
year, resulting in huge pressure on existing airports and
infrastructure and driving the dramatic facility expansion that
is taking place in markets like China and India. Almost all of
the growth is coming at the low end of the market, with little
increase in premium traffic.
Airlines have the tools and technology to fill seats, but, of
course, the first casualty of over-capacity is yield. And in an
overheated market where several competitors all have overexuberant growth plans, price wars will and do break out.
Who is to blame for this race to the bottom and for putting
airlines into intensive care? The fault doesn't lie just with the
airlines - although they surely play their part.
The OEMs are also complicit, as they sell their dream
of greater efficiency, longer range and lower seat costs,
with pricing that gets ever more attractive as the order size
increases. Treating airlines like foie gras by tempting them
into committing to large, long-term fleet orders can only work
when airlines are willing and able to compete rationally and
resist the temptation to chase market share and load factor
through irrational pricing.
Another significant causal factor is the plethora of cheap
finance, from banks and lessors, that has given airlines
access to funding for new assets that should, for many,
remain out of reach.
So, what can we expect in the way of change as we look
ahead over the coming months and years? Although we have
enjoyed an unprecedented period of growth and profitability, it
seems to me that there are clear signs that the best is already
behind us. Global economic activity is slowing, traffic growth
has been trending back toward the long-term norm and airline
profitability is slowing up.
We can categorize the potential catalysts of change in
various ways. We can separate them into events that are
external to the industry and those that are internal to the
industry. We can identify potentially existential threats and
those that may be temporarily disruptive or disadvantageous.
We can also sort them into threats that we can control and
influence, and those that we can't.

Starting in the world at large, what should we be
concerned about in respect of having the potential to impact
our business? There is no shortage of media coverage and
commentary regarding what may or may not come next in
the Middle East, U.S.-China trade relations, what the North
Koreans are up to, Iran sanctions, etc. Any or all of these
has the potential to impact demand for air transportation, for
regional and global economic activity, for conflict and, as we
are once again experiencing, for oil prices.
There seems to be no clear way forward in the diplomatic
impasse that has developed between Iran and the White
House, now spilling over into the proxy war being waged in
the region and threatening to escalate into wider military
activity, presenting a heightened threat to oil supplies, which
is directly reflected in oil prices. If, as well as a return to
$100-plus oil, there was to be a serious restriction of supply,
the impact on the global economy, to say nothing of the
aviation sector, could be profound.
At the next threat level, we have a mix of potentially
existential threats and more inconvenient truths. The disruptive
impact of Brexit, the destruction of the Amazon rainforest,
breakdown of the rule of law in Hong Kong, and concerns
over climate change will all impact the lives and livelihoods of
billions, with high potential to disrupt our own aviation sector.
With one obvious exception, we as individuals or as an
industry can't influence or change any of these issues either,
but we do need to anticipate how our markets and businesses
could be affected and devise strategies to insulate from or
minimize the impact.

Although supply and demand is
nominally in balance, there are simply too
many cheap seats being sold in the market
and too few expensive ones.
The exception here of course is climate change, which
has huge potential to score a direct hit on our industry.
We have only recently seen the "flight shame" movement
develop, with an immediate effect on demand for shorthaul travel, according to SAS and others on the front line.
Inevitably, aviation's share of harmful emissions will rise,
and the weight of public opinion will increasingly encourage
governments to ban, limit or tax our airline operations.
These concerns loop back to my thesis that there are
too many cheap seats in the market and not enough
expensive ones.
Jetrader

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ISTAT Jetrader - Winter 2019

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