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Tailwinds: 2014 airline industry trends


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In our second edition of Tailwinds, we provide an overview of the current state of the airline industry on a global level. Included is a special report on the "connected airline" that discusses how …

In our second edition of Tailwinds, we provide an overview of the current state of the airline industry on a global level. Included is a special report on the "connected airline" that discusses how new technologies are transforming the way airlines do business. Part one looks at key metrics in the global airline industry, such as growth and operating income as well as expense patterns since 2004. Part two examines how airlines can thrive in an increasingly competitive environment.


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  • 1. Spotlight: The connected airline Tailwinds 2014 airline industry trends
  • 2. Welcome to our second edition of Tailwinds, a publication for the airline industry. This edition provides an overview of the current state of the industry on a global level. It includes a special report on the ‘connected airline’ that discusses how new technologies are transforming the way airlines do business. Part one looks at key metrics in the global airline industry, such as growth and operating income as well as expense patterns since 2004. The overall picture is favorable. Revenues are at an all-time high, driven by passenger traffic rather than cargo. Expense growth is up as a result of increases in non-fuel items, such as labor and maintenance. The regional outlook shows North American carriers in the most favorable position, followed by Asia- Pacific carriers. All carriers face more aggressive competition in the coming year: an expansion of the low-cost carrier (LCC) business model, the rapid growth of airlines in the Middle East, and an increase in joint ventures to allow more international flights. Part two examines how airlines can thrive in an increasingly competitive environment. Thanks to advances in technology and analytics, airlines can now use the massive amounts of data on hand to become a ‘connected airline.’ A connected airline gets the right information to the right places at the right time, which helps to improve decision-making and resolve operational problems in the short-term and reduce costs and increase revenue in the long-term.
  • 3. Table of contents Part one: Current global industry trends 2 Part two: The connected airline 8 Contacts 13
  • 4. 2 Tailwinds: 2014 airline industry trends Revenue and pricing Global airline revenues are estimated to have reached a new high in 2013 of $708 billion (Figure 1). Growth has been driven by increased passenger revenue as a result of more flights and scheduled passengers. However, cargo revenue declined for the second consecutive year even as freight tonnage increased. Passenger and cargo pricing were both weaker, and the passenger yield declined despite a minor uptick in load factors. Nevertheless, the industry has been adding more passenger capacity in light of relatively robust traffic growth numbers. Cargo performance continued to suffer from overcapacity. The problem has been exacerbated by the addition of belly capacity as part of a larger passenger fleet. This challenge is likely to worsen in coming years because of new deliveries of wide- body aircraft. Demand, on the other hand, is being negatively affected by a continuing modal shift to alternative forms of transport, including marine, rail and ground. In addition, given that cargo is a non-core business for many airlines, it can suffer from a general lack of capacity and pricing discipline. As Figure 2 shows, both passenger and cargo yields have grown at an average annual rate far below consumer prices over the last ten years, with 2.6 percent average passenger yield growth and 1.2 Part one: Current global industry trends Figure 1: Global commercial airline revenue ($ bil) Passenger Cargo Source: International Air Transport Association (IATA), International Civil Aviation Organization (ICAO) 0 100 200 300 400 500 600 700 800 2014f2013e201220112010 579 636 679 708 743 66 67 62 60 60 445 497 538 566 596 68 72 79 82 87 Other Note: (e) estimated and (f) forecast Figure 2: Global airline passenger and cargo yield growth vs. CPI (%) Sources: IATA, ICAO, International Monetary Fund Passenger yield Cargo yield Consumer prices -20% -15% -10% -5% 0% 5% 10% 15% 20% 2014f2013e201220112010200920082007200620052004
  • 5. 3Tailwinds: 2014 airline industry trends percent average cargo yield growth compared to four percent average global consumer price growth. In addition, airline yields tend to be more volatile than global consumer prices. Airline passenger and cargo yields are also far below the 10-year average operating expense growth rate of 8.3%. These yield data indicate that airline pricing power is still quite modest relative to other inflation comparisons. Low-cost carriers (LCCs) continued to gain global market share, restraining the yields of the legacy carriers. LCC’s share of global capacity increased to over 25 percent in 2013.1 Profitability Airlines saw some operating expense relief in 2013 as a result of lower fuel prices. Fuel expense was flat from 2012–2013 even as capacity and consumption grew. A reduction in jet fuel crack spread in 2013 also contributed to lower jet fuel costs. (Figure 3). The replacement of older aircraft with newer, more fuel-efficient models should help airlines to continue to control fuel expense. But there has been a significant and steady rise in non-fuel expense since 2009 (Figure 4), indicating an increase in labor and maintenance costs. Figure 4: Global revenue and operating expenses ($ bil) Non-fuel Fuel Revenue Source: IATA, ICAO 0 100 200 300 400 500 600 700 800 2014f2013e201220112010 139 176 210 211 210 412 446 455 473 498 Figure 3: Jet fuel crack spread ($/barrel), fuel consumption (bil/gal) Jet fuel crack spread Crude oil price, Brent Jet fuel consumption Source: IATA 0 50 100 150 20132012201120102009 50 55 60 65 70 75 80
  • 6. 4 Tailwinds: 2014 airline industry trends The growth in non-fuel expenses limited operating margins. Labor and maintenance are typically the largest non-fuel operating expenses for airlines. It is unlikely that airlines will see much relief from a labor cost perspective because of the expected growth in the demand for pilots and maintenance technicians. Boeing has forecasted that 498,000 new commercial airline pilots and 556,000 new maintenance technicians will be needed to operate new aircraft Figure 5: Global operating and net margins (%) Net margin Operating margin Source: IATA, ICAO 0% 1% 2% 3% 4% 5% 2014f2013e201220112010 4.7% 2.6% 3.3% 1.8% 2.2% 1.1% 2.2% 1.3% 5.0% 3.3% in the global fleet over the next 20 years.2 Increased pilot training requirements, an aging workforce (with mandatory retirements), and global competition for pilots are contributing to this demand.3 In addition, until the newer, more efficient aircraft are delivered, the fleet will require more maintenance, contributing to non-fuel expense inflation. Despite the growth of non-fuel operating expenses, airlines are seeing generally better margins since the economic downturn in 2008–2009. While fuel prices are down year-over-year, the net profits since 2010 can be mostly attributed to higher revenues, combined with the high operating leverage inherent in airline business models (Figure 5).
  • 7. 5Tailwinds: 2014 airline industry trends Global results by region There was a wide range of margin performance by region, with North America taking a significant lead in the EBIT (earnings before interest and taxes) margin (Figure 6). In addition, North American carriers now account for almost half of the global industry net profit, up from about a quarter in 2010 (Figure 7). Carriers in this region have benefitted from a wave of domestic consolidation and capacity discipline. Asia-Pacific carriers also earned relatively high EBIT margins, despite contributing less to the overall global net profit. Many of the airlines in the Asia-Pacific region have been helped by the growth of the middle- class and corresponding increases in passenger traffic. European EBIT margins improved as the region attempted to move past recession and sovereign debt issues. Nevertheless, the economic environment remained sluggish. Also, European airlines have been grappling with increased competition from well-funded Middle East carriers on intercontinental routes. In fact, Middle East carriers have placed a record number of orders for new wide-body aircraft for the next decade.4 To compete, the European airlines may be facing additional consolidation as seen in the US during the past decade in an attempt to strengthen the industry. Europe Figure 6: EBIT margin by region (%) 2013e 2012 Source: IATA 3.4% 4.8% 1.3% 3.3% 4.1% 3.0% 3.1% -0.4% 3.8% -0.5% 1.5% 0.7% -1 0 1 2 3 4 5 AfricaLatin AmericaMiddle EastAsia-PacificEuropeNorth America Figure 7: Global net profits by region (%) North America Europe Asia-Pacific Latin America Africa & Middle East Source: IATA 0% 20% 40% 60% 80% 100% 2013 2010 22% 10% 58% 5%5% 45% 13% 25% 12%5%
  • 8. 6 Tailwinds: 2013 airline industry trends has already seen the formation of 3 mega carriers (Lufthansa, IAG, Air France-KLM) like the US, but has much more smaller airlines left than in the US. EBIT margins for the Latin American airlines were up. However, according to IATA (International Airline Transport Association),5 improvements to regional infrastructure have been trailing traffic growth, which could affect the airlines. In an effort to deal with this issue, Brazil has offered numerous airport concessions in order to bring in more investment ahead of the 2014 World Cup and 2016 Olympic Games. Outlook for 2014 1) The low-cost carrier (LCC) model will likely evolve in western markets, and the concept should gain more traction in Asia. Western LCCs are likely to continue their push into international markets. Pending regulatory approval, Norwegian Air is planning to launch a new transatlantic service out of Ireland, which will use 787s and pilots from Asia. In addition, Southwest is assuming AirTran’s international routes, and CEO Kelly has commented that they will have opportunities to expand their international service. Canada’s WestJet has recently announced a transatlantic route to Ireland.6 The net effect of these moves is likely to be greater pressure on international yields. While the LCC business model is less developed in Asia, there will be significant growth as carriers target nearby emerging markets. For example, Aviation Daily reports that the Civil Aviation Administration of China has urged domestic airlines to consider moving to a budget/LCC business model7 and China Airlines announced near the end of 2013 that it would be setting up a joint venture with Singapore’s Tigerair in order to target the Taiwan market.8 2) Middle East carriers will likely become even more of a competitive threat on international routes. Middle East carriers are well-funded and their costs tend to be lower. Fuel and labor costs are generally cheaper in this region than in more developed parts of the world. Gulf-based airlines are buying new, fuel-efficient aircraft in large numbers, often with financing help from US and European export credit agencies. They also benefit from government investment in infrastructure and advantageous tax environments. In addition, these carriers are blessed with an advantageous geographic location, which places them at the cross-roads of Asia and Europe. 3) Carriers are likely to remain more conservative in their capacity planning relative to previous cycles. In the years following past global recessions, annual percentage capacity growth peaked at double- digit levels. However, capacity increases following the 2009 global recession were much more measured. Consolidation in certain geographies as well as a focus on yield improvement led to improved capacity rationalization. The challenge moving forward is that many new aircraft will be delivered over the next several years and
  • 9. 7Tailwinds: 2013 airline industry trends Figure 8: Global commercial aircraft orders, deliveries & retirements Orders Deliveries Retirements Source: Airline Monitor 0 500 1000 1500 2000 2500 3000 3500 4000 2014f2013e201220112010 serve to modernize the existing fleet (Figure 8). While some carriers may try to grow market share by keeping some of their older equipment in service, high fuel costs will reinforce stated intentions to retire older equipment, leading most airlines to remain capacity disciplined. 4) Airlines will push for more joint ventures (JVs) and antitrust immunity agreements (ATIs) to target international growth. Some airlines in Asia are using the LCC model in JVs with other Asian airlines in an effort to capture more international traffic. More airlines will pursue new JVs and ATIs (subject to open skies agreements)9 to allow them to offer more direct flights on transatlantic and transpacific routes and enhance their ability to compete.
  • 10. 8 Tailwinds: 2014 airline industry trends • Further integration between airlines and airport IT infrastructure and operations can yield as much as $2.5 billion and could further increase the efficiency of airline on-airport operations.13 Many airlines now find themselves at a crossroads. They can continue to chip away at inefficiencies and realize small, incremental improvements, or they can apply advanced technologies and achieve step function advancements in operational and financial performance. Convergence of technological advances While technological advances in the industry have been developing for some time, it is only recently that they are converging in a “game changing” way. Airlines can now collect massive quantities of data from sensors on the aircraft, analyze the data to turn them into actionable information, and then disseminate that information in real-time to resources dispersed throughout the operation. This process can help airlines to improve decision-making and resolve or even avoid problems. Airlines have made great strides in the last decade by improving operating performance, controlling costs, enhancing customer relationships, and increasing profit margins. But the rules of the game keep changing. New competitors, with inventive and often lower-cost business models, are operating in established and emerging markets, challenging larger incumbents on their own turf. Also, customers have become more demanding and knowledgeable, as they can easily compare prices and services across airlines and share positive and negative experiences with vast networks of people in seconds. To compete successfully and maintain profitability requires that airlines make the most of their opportunities to further streamline and improve processes. A look at several key indicators on an industry-wide level highlights some of the existing opportunities for reducing costs and increasing revenues: • Flight delays and cancellations cost US airlines an estimated $7.2 billion annually.10 • Mishandled bags, 26 million in 2012, cost airlines nearly $3 billion.11 • Suboptimal fleet deployment choices cost US airlines nearly nearly $4.8 billion.12 Further enabled by more recent advances in networking and mobile devices, the connected airline is now not just a concept, but a reality. Pilots carry real-time flight and navigation information on tablets, crew members customize in-flight service using passenger profiles on handheld devices, and passengers rely on Wi-Fi for productivity and enjoyment, not just in airports but in-flight as well.14 Part two: The connected airline
  • 11. 9Tailwinds: 2014 airline industry trends Figure 9: Legacy airline approach to stakeholders and information management Airport data Source: PwC analysis Aircraft data Tech ops data Crew data Pax data Figure 10: Connected airline approach to stakeholders and information management Crew Airport Dispatch Traveler Bags Aircraft Tech Ops Source: PwC Analysis The challenge—and the opportunity As shown in Figure 9, traditional airline organizations operate in siloes, with each major stakeholder independently managing data and prioritizing investments for its own ends. Figure 10 illustrates the concept of the connected airline, where the most relevant information is easily available to all stakeholders, when and wherever needed. The dissemination of information is pivotal to building a connected airline that can address many of the issues facing the industry today. The examples on the following page highlight how getting the right information to the right places at the right time can help airlines improve results:
  • 12. 10 Tailwinds: 2013 airline industry trends • Airlines can improve air-and land- side operational coordination, leading to better slot planning and increased airport asset efficiency, by consolidating airport and airline data across stakeholders and their separate IT systems (Figure 11). • Airlines can better predict and prepare for maintenance events, leading to improved aircraft utilization and reduced turnaround time and maintenance costs, by correlating aircraft operating data (e.g., the instances of hard landings and turbulence) with component reliability data. • By taking a holistic approach to IROPS (irregular operations) management (incorporating crew, network, fleet, and passenger data and inputs), airlines can accelerate decision-making to minimize the disruption to customers and the operation. For a network carrier interested in premium passenger satisfaction, assigning a customer value to each passenger would allow the airline to optimize re-accommodation and re-scheduling and minimize disruptions to high-value frequent flyers. For LCCs, the goal might be different. If an LCC wants to minimize cash outlays for hotels and meals, it could apply an algorithm that would minimize overnight disruptions to passengers. • Airlines can increase merchandising revenue and reduce the cost of supply chain fulfillment by correlating passenger data across multiple channels and better matching supply with demand. Through loyalty programs, in-flight sales, and social media, airlines can learn much about their passengers’ buying behavior. These behaviors can then be analyzed to help determine how best to sell to passengers, increasing merchandising revenue, and shared with vendor management to more accurately predict and procure needed parts, catering, and other goods and services. The value of pursuing the connected airline is derived from capturing these opportunities (and many others) by leveraging and correlating existing data sources to better predict, manage, and react to changes in the daily operation of the airline. Delayed bags re-routing Figure 11: Optimizing the turn cycle Ground Control Ramp Operations Gate Operations Air Traffic Control Flight Stage/ Activity Flight Stage/ Activity In-flight • Slot planning • Route plans Arrival • Runway to gate taxi In-flight • Slot planning • Route plans Gate • Passenger boarding • Flight close Ramp • Baggage load Departure • Taxi runway to gate Ramp • Cleaning • Fueling • Baggage unload Gate • Disembark • Crew change Connecting bags Maintenance alerts Taxiway/ Ramp Congestion Ramp Crew ETA Real-time Gate Availability Catering usage ATC mgmt Dispatch/ weather Airport ramp control Other airline systems Catering vendors Baggage mgmt PSS DHS (Homeland Sec) Sample Airline/ Airport/ Industry System Updated, crew, bags Delayed passengers, crew Updated flt plan Wind/Wx updates Security line queue time Departure alignment Real-time passenger & bags boarding Source: PwC analysis
  • 13. 11Tailwinds: 2013 airline industry trends Moving forward Many airlines are reluctant to establish their own connected airline program. Some fear the process will be costly and time-consuming, crowding out other critical initiatives. Others perceive the skills gap to be too large, with insufficient in-house capabilities like data analytics, system integration, business process redesign, and change management. Still others are waiting for OEMs to develop a commercial, off-the- shelf solution that can easily be implemented. However, airlines need not wait until all stars are aligned. They can start building a connected airline with small scale projects that not only mitigate risks, but help demonstrate the utility of the concept. Early wins can often be generated using existing data and returns then reinvested in further development or other initiatives. One yardstick to use in choosing early projects is how quickly they can provide value and create momentum. To ensure the business case is realized and benefits are captured, the initial test cases selected must be based on actual airline operating data and measurable through ROI and other benchmarked financial metrics. An example of a good test case might be to increase pre-day-of- departure ancillary sales through improved customer targeting and the introduction of new products, services, and pricing models. Another test case might be to improve asset utilization through the implementation of a needs-based maintenance program that reduces aircraft downtime. At the start of a project, an airline must select a suitable champion. This champion, who will serve as the project manager, has to pull together a cross-functional team, spanning multiple business owners and diverse corporate function owners. With a cross-functional team, the project manager must bridge the gaps between the functional and technology silos, helping to ensure that information flows seamlessly throughout the organization. The end result The connected airline provides information where and when it’s needed to optimize airline operations and the customer experience. It allows relevant stakeholders to make better decisions by giving them the information they need to do so. It can lead to better aircraft utilization and dependability, reducing turnaround times and maintenance costs. It can minimize transfer times for flyers and shorten the time it takes to reach destinations. It enables more effective collaboration among the different organizational functions, making workers more productive and efficient. In a time of rapidly expanding competition, the connected airline can help build and maintain competitive advantage.
  • 14. Tailwinds: 2013 airline industry trends12 Endnotes 1 2 3 In regard to the increase in pilot training requirements, we do note that the safety performance of the industry is strong: 2013 had the fewest passenger fatalities since 1996, see 4 5 6 “Irish Eyes Could Smile on WestJet,” Aviation Daily, November 18, 2013 7 “Challenges Loom in 2014 for Asia-Pacific Airlines,” Aviation Daily, December 31, 2013 8 “China Airlines, Tigerair to launch Taiwanese LLC,” Flightglobal, December 16, 2013 9 For example, see: “Delta Shifts Focus From Japan as Trans-Pacific Hub; Move Underscores Growing Importance of China, Elsewhere in Asia,” Wall Street Journal, February 10, 2014 and “Delta and Virgin Atlantic Launch Joint Venture,” Flight International, December 31, 2013 10 Airlines for America, "Annual and Per-Minute Cost of Delays to U.S. Airlines," published May, 2013. 11 SITA 2013 baggage report. 12 Strategy& 2013 Fleet Deployment Index Study 13 Strategy& analysis 14 PwC Experience Radar 2013: Lessons Learned from the Airline Industry, October 2013.
  • 15. © 2014 PwC. All rights reserved. “PwC” and “PwC US” refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. Jonathan Kletzel US Transportation & Logistics Leader +1 (312) 298 6869 Dirk deWaart US Transportation & Logistics Advisory Principal +1 (213) 830-8374 Richard Wysong US Transportation & Logistics Director, Advisory +1 (415) 498 5353 Alexander T. Stillman US Transportation & Logistics Director, Advisory +1 (202) 487 8086 Bryan Terry US Transportation & Logistics Director, Advisory +1 (678) 419 1540 Michael J. Portnoy, CFA Senior Manager, Research & Analytics +1 (813) 348 7805 For general inquiries, contact: Diana Garsia US Transportation & Logistics Marketing Senior Manager +1 (973) 236 7264 Contacts To have a deeper conversation about the subjects discussed in this report, please contact the following PwC airline/transportation specialists: