Rapid expansion of global air travel industry propels investment

The aviation sector is experiencing rapid growth worldwide, propelled by booming tourism industries, lower air fares and the push for greater connectivity in an increasingly globalised economy. Middle-class expansion has also spurred the rise of air travel, as more people are able to afford flights for holidays or business-related travel. According to Boeing, commercial airlines experienced annual average passenger increases of 6.2% between 2012 and 2017. The manufacturer also estimated that by 2036 an additional 41,000 plane deliveries will need to be fulfilled to meet service needs for both passengers and cargo.

To accommodate these developments, civil aviation authorities and airlines are investing in airport infrastructure, route expansion and fleet capacity, among other efforts. However, the speed at which the industry is growing poses challenges, particularly in regard to human resource needs, safety and congestion, leading to concern that the industry is expanding too rapidly. Significant investment in all areas of aviation will be needed to ensure it can meet long-term demands.

Full Throttle

The International Air Transport Association (IATA) estimates that the global commercial airline industry will see profits increase from $34.5bn in 2017 to $38.4bn in 2018. Growth in emerging markets will likely continue to be driven by the low-cost carrier (LCC) segment, which in recent years has transformed air travel from a luxury to an affordable means of transportation. Since 2008 fares have decreased by an average of 0.9% per year, in large part due to the impact of LCCs on competition. This has enabled a greater number of people to choose air travel, particularly in growing middle-classes where disposable income is rising.

The tourism and aviation industries continue to enjoy a symbiotic relationship. With record numbers of tourists travelling by air, the IATA projects that international flyers will spend $776bn on travel in 2018. Successful tourism promotion campaigns, growth in e-commerce and the development of niche markets have triggered greater demand for flights, leading to improved connectivity for emerging destinations.

Challenges & Potential

However, air travel remains cost prohibitive in some regions, namely Africa, where the LCC segment has yet to take hold and there are few options to fly between countries. As of February 2018 foreign airlines covered 80% of air travel throughout the continent. The largest African country by land coverage, Algeria has 36 airports, and between 2015 and 2016 it recorded an increase of 9.1% in commercial flights. Nevertheless, the sector remains challenged by the high costs of infrastructure upkeep and minimal investment in tourism. Similarly, Nigeria is experiencing significant increases in passenger numbers: its airports are expected to handle 33.7m travellers in 2035, up from 8.5m in 2016. To accommodate this growth, its aviation infrastructure will need to be modernised and expanded, which could ultimately help Nigeria reach its potential of becoming a hub for West Africa.

There is great potential for growth throughout the continent, and a recent agreement signed by 23 African countries aims to give it the boost it needs. The Single African Air Transport Market, launched in January 2018, is expected to reduce bureaucratic intervention and air fares, and raise the number of direct flights between countries. It also provides a framework for easing visa requirements, which will likely trigger tourism growth.

In South-east Asia, regional integration is fuelling growth in the aviation industry, which is expanding to meet the needs of business travellers, and trade and logistics operations. Dexter Comendador, president and CEO of Philippines AirAsia, told OBG, “Aviation is leading the way when it comes to integrating ASEAN economies, creating links and demonstrating the benefits of regional partnerships.” In 2016 there were more than 230 commercial airlines in the Asia-Pacific region, for an estimated 27% of the world’s commercial aircraft fleet.

While air travel has become more accessible, the rapid expansion in services has also led to air traffic congestion, delays and concerns about the industry’s impact on the environment. This has prompted new initiatives, including reforms to the regulatory framework for airplane carbon dioxide emissions and design solutions to improve fuel efficiency. To combat the rise of airspace congestion, the UAE recently launched a new air traffic control system, which is an industry first. Developed by the General Civil Aviation Authority (GCAA), the Airspace Restructuring Project was launched in December 2017. The new system adopts performance-based navigation, relying on satellites and airplane computers to guide aircraft, rather than transmissions from terrestrial beacons. The GCAA hopes that this new system will improve efficiency and capacity, preparing the region for continued industry growth.

Boeing Once, Boeing Twice

Aircraft manufacturers are set to enjoy sustained growth over the coming years as airlines around the world respond to rising demand for new routes and bigger fleets. Demand for narrow-body aircraft will primarily come from the LCC segment, while major carriers will continue to diversify their fleets with long-haul aircraft like the Airbus A380 and the Boeing 787 Dreamliner. In 2017 narrow-body aircraft comprised 64% of the global fleet; by 2036 it is forecast to be about 75%. Boeing estimated that 38% of orders for commercial aircraft will come from the Asia-Pacific region over the period 2017 to 2036.

In April 2018 Indonesian LCC Lion Air confirmed a purchase agreement with Boeing for $6.2bn. The deal will add 50 Boeing 737 MAX 10 aircraft to Lion Air’s fleet, with the first expected for delivery in 2020. For Airbus, business in the Gulf has sustained its A380 programme, with Emirates signing an order for 20 new aircraft in 2018. The deal could also see Emirates order an additional 16 craft, bringing the value of the transaction to roughly $16bn. The biggest Airbus aircraft, the A380, has a passenger capacity of 575 and has become an increasingly popular choice for long-haul flights. However, only 13 airlines have purchased the A380, and many airports don’t have runways that are long enough to accommodate it. New airport construction projects, will likely lead to further demand for the aircraft, and for similar ones suited for long-haul travel.

Cargo

Air cargo transport was forecast to increase yearly by an average of 4.2% until 2036, according to Boeing. This has triggered a demand for more dedicated freighters and passenger planes with larger cargo holds. With unprecedented numbers of aircraft orders on the books, the lead-up until then will see approximately $6trn in manufacturing deals.

However, major Western companies may lose significant orders in the wake of US President Donald Trump’s decision on May 8, 2018 to pull out of the Joint Comprehensive Plan of Action, otherwise known as the Iran Nuclear Deal. Airbus and Boeing were among the manufacturers that previously signed a total of $38bn in orders from Iranian carriers, all of which will face cancellation if sanctions are reimposed. Regardless, aircraft manufacturers are poised to enjoy continued growth over the long term as the aviation industry continues its rapid expansion.

New Heights

Facing annual passenger increases and higher competition in global tourism and aviation markets, countries around the world are investing in air transport infrastructure to boost capacity and accommodate growing fleets. Guillermo Dietrich, the Argentine minister of transport, announced in April 2018 that 30 airports around the country had been upgraded or were slated for refurbishing or expansion. The country is seeing rapid growth in its aviation industry, driven by strong government support and increasing competition brought by new players aiming to capitalise on the country’s budding tourism industry.

Jordan’s King Hussain Airport has also received upgrades to its physical and digital infrastructure. Recent investment has been prompted by the target of turning the facility into a regional cargo hub, which would be well positioned to serve re-emerging markets like Iraq. Ghana’s Kotoka International Airport is subject to a $274m expansion project, which is expected to help boost the country’s tourism industry. Carried out through a public-private partnership, the project is adding a third terminal to the airport – expected to be completed in late 2018 – which will enable it to increase its passenger capacity and encourage more foreign carriers to open routes to and from the facility.

In Asia, Thailand is looking to tap into the growing maintenance, repair and overhaul (MRO) industry as part of its $46bn plans to transform the Eastern Economic Corridor into an integrated hub for advanced services and manufacturing. In late 2017 Airbus signed a memorandum of understanding with Thai Airways to establish a $338m MRO hub at U-Tapao International Airport, where expansion works under a public-private partnership are expected to start in 2019, to increase annual passenger capacity from 3m to 15m. The airport will also become the maintenance site for Airbus A380s in 2018. With the value of Asia’s MRO industry expected to reach $664bn by 2027, Thailand’s economy is poised for a significant boost on the back of this initiative.

Sky’s the Limit

Istanbul’s third airport, set to open partially in October 2018, will host the world’s largest terminal under one roof. The facility will have an annual passenger capacity of 90m and take over the majority of commercial air traffic from Istanbul Atatürk Airport. Istanbul has already positioned itself as a transit hub for passengers travelling between Europe and Asia, and the new airport could also establish itself as a gateway to Africa. As of February 2018 Turkish Airlines operated 52 routes in Africa, maintaining a significant lead over competitor airlines. Emirates has the second-highest number of routes to Africa, with 22 destinations.

In 2015 Mexico began construction of a new international airport near its capital city. The $13.3bn facility is the first major commercial airport to be constructed in North America since the mid-1990s, and it is expected to have an annual passenger capacity of 50m. Federico Patiño Márquez, CEO of Mexico City Airport Group, told OBG, “Since 2013 traffic at the existing Benito Juárez International Airport has grown 9% annually, leaving it saturated and operating at almost 100% capacity.” According to Patiño, the new airport will be the world’s second largest after Istanbul’s new airport, and will be six times the size of the existing one. Leveraging its geographical position between North and South America, the facility could fulfil Mexico’s potential for becoming a transport hub for the two continents.

Though the new airport promises to solve current capacity constraints, the project has not been without controversy. Funded 70% by the private sector and 30% by the public, the project has been the subject of contentious debate during Mexico’s presidential campaign, with some candidates promising to cancel it if they are elected. While many industry players argue that the new airport is necessary to address the current capacity constraints, critics say the project carries an unnecessarily high cost and that the location was a poor choice given the difficult terrain and vulnerability to earthquakes. Nonetheless, developers are confident that these hurdles can be overcome, and the airport is slated to open its doors in 2020.

Training Zone

As airlines continue to expand with new routes and growing fleets, the industry is struggling to meet demand for qualified personnel, particularly in positions that require meticulous training and adherence to strict international standards. According to 2017 Boeing estimates, the global commercial aviation industry will require an additional 2.1m pilots, maintenance staff, cabin crew, air traffic controllers and other workers by 2036. The highest demand is expected to come from the Asia-Pacific region, where the industry will need to fill approximately 817,000 positions. While this presents a positive opportunity for job growth, greater investment in education will be needed to ensure that emerging markets can meet these demands with local staff.

Latin America is also facing similar recruitment challenges. “There is a personnel shortage across the board, but particularly with pilots,” Abelardo Muñoz-Martin, head of research and public affairs at Aeroméxico, told OBG. “Airlines can buy new planes, but if fleet growth happens faster than pilot training, they are not going to take off. This is a problem worldwide.” He also explained that Mexico’s current labour law requires pilots, flight attendants and ATC staff to be citizens by birth, and without second nationalities. Reforming this law could give the industry a much-needed boost, but given that this is the norm across Latin America, it is unlikely that a change will happen soon. Instead, there are hopes that new joint initiatives between airlines and universities will create a sustainable environment for recruitment.

Some airlines around the world are partnering with flight schools to funnel student pilots directly into jobs as first officers as soon as they meet their qualifications. In the UAE, Sharjah’s Air Arabia has begun sourcing its first officers from Alpha Aviation Academy, in which it has a 51% stake. Other UAE-based carriers, including Emirates and Etihad, have also adopted this model. Training costs can be prohibitive for prospective pilots, but sponsorship could enable more to enter the field.