Skybound: Rapid expansion of the global industry propels investment efforts

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 growth in 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 growth 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 in order to meet service needs for both passengers and cargo. To accommodate these developments, civil aviation authorities and airlines are investing in 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 reasonable concern that the industry is expanding too rapidly.

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 approximate average of 0.9% per year, in large part due to the impact of LCCs on market competition. This has enabled a greater number of people to choose air travel, particularly those in growing middle-class economies where disposable income is on the rise.

With record numbers of tourists making use of the global air network, the IATA projects that international flyers will spend over $776bn on travel in 2018. Successful tourism promotion campaigns, growth in e-commerce and the development of niche markets have triggered greater demand for airline services, 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 help Nigeria reach its potential of becoming a hub for West Africa. There is great opportunity 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 increase the number of direct flights between countries. It also provides a framework for easing visa requirements, which will likely trigger tourism growth in the markets.

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, making up 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 (ATC) system, which is an industry first. Developed by the General Civil Aviation Authority (GCAA), the Airspace Restructuring Project (ARP) was launched in December 2017. The new system adopts performance-based navigation, through which it relies on satellites and aeroplane computers, rather than terrestrial beacons, to guide aircraft along their routes.

FRIENDLIER SKIES: May 2018 brought an end to long-standing tensions between US and Gulf carriers with the signing of the Partnership for Open and Fair Skies (POFS) policy. Previously, Gulf carriers faced pushback from US industry figures who have argued that they are at a disadvantage due to alleged government financial support for airlines like Emirates, Qatar and Etihad. According to the POFS, government subsidies for the Gulf carriers violated the open skies agreement with the US, and the carriers were unfairly benefitting from fifth freedom routes, which allow flights operated by Gulf carriers to depart from a foreign country.

However, governing bodies in the Gulf have denied the accusations, maintaining that their airlines are not recipients of unfair government subsidies. Representatives of various US carriers and aviation associations argued that these conditions could potentially threaten jobs in the US and afford the Gulf airlines an unlawful competitive advantage. Therefore, under the POFS agreement, UAE carriers will disclose their accounting records and refrain from adding fifth freedom routes to US airports in the future. It is unlikely that this move will bring about any significant changes; however, the end of the feud bodes well for the wider industry with business resuming as usual.

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. Airbus’ biggest 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 of the world’s airports don’t have runways that are long enough to accommodate it. New airport construction projects, including Istanbul’s third airport, will likely lead to further demand for the aircraft, and for similar types that are suited for long-haul travel.

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. While many airports are refurbishing runways or extending them to accommodate wide-body aircraft, other countries are aiming to position themselves as regional hubs for passenger or freight transport. 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. Already capable of handling a wide variety of aircraft, the airport is set to become the maintenance site for Airbus’ A380 in 2018. With the value of Asia’s MRO industry expected to reach $664bn by 2027, Thailand’s economy is poised for a boost on the back of this initiative.

SKY’S THE LIMIT: Istanbul’s third airport, which partially opened in October 2018, will host the world’s largest terminal under one roof. Upon full completion, the facility will have an estimated annual passenger capacity of 90m and take over the majority of commercial air traffic from Istanbul Atatürk Airport. Due to Turkey’s strategic geographical location, Istanbul has already positioned itself as a transit hub for passengers travelling between Europe and Asia. The new airport could likely establish itself as a gateway to Africa.

In 2015 Mexico commenced 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 and six runways. Federico Patiño Márquez, CEO of Mexico City Airport Group, told OBG, “Since 2013 traffic at the Benito Juárez International Airport has grown an annual average of 9%, leaving it saturated and operating at almost 100% capacity.” Patiño added that the new international airport is the world’s second largest under construction, after Istanbul’s new airport, and will be six times the size of the current one.

TRAINING ZONE: As sector expansion continues, 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, which needs to fill approximately 817,000 positions. While this presents an opportunity for job growth, greater investment in education will be needed to ensure emerging markets can meet these demands with local staff. Latin America is facing similar challenges. “There is a personnel shortage across the board, but particularly with pilots,” Abelardo Muñoz-Martin, industry affairs director 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.”

To help overcome this obstacle, airlines are partnering with schools and investing in new initiatives. In the third quarter of 2018 Aeroméxico Formacion will launch a commercial pilot and crew member training programme in partnership with global aviation trainer CAE, Aeroméxico and Universidad IEU. 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 adopted this model to guarantee their recruitment needs are met, with sponsorship provided when training costs are prohibitive for candidates.