PA Consulting and Oxera: Five major trends in aviation

12 December 2014

In the coming decades, the aviation industry will face five major trends, ranging from changing passenger demands, to new technological developments and increased sustainability pressures. For stakeholders in the industry’s ecosystem, such as airlines and airports, the key to success will lie in the manner with which business models are adapted to meet the demands of the changing landscape.

In a joint white paper from PA Consulting Group and Oxera Consulting, the state of the global airline industry is explored in detail. The aim of the white paper is to explore different key drivers that may affect the industry by 2034, and to create four possible future scenarios based on possible development within those drivers, to give interested parties contexts for long term decision making.

Historic growth
Globally, as it stands, there are 36.4 million flights per year, connecting 3864 airports and serving 3.1 billion people. While passenger numbers have grown steadily, from around 1 billion in 1993 to their standing today, the growth is distributed unevenly between developing and developed markets. Asian passenger numbers have been increasing by 8% annually over the last two decades, while for Canada and the U.S., the increase has been 2.5%. Within the period, the cost of air travel has declining by approximately 30%.

Passenger flight growth

A number of factors have influenced the increase in passenger numbers, the report notes. The introduction of low-cost carriers has led to structural changes within the industry, reducing the price of flights and opening up the market to lower income passengers; flying is no longer the playground of jet setters. Another factor influencing the declining cost is the liberalisation of airspace, granting carriers increased access to international air-hubs as well as permitting more frequent connections. The building and expansion of airports, to facilitate the increased passenger numbers, created economics of scale has further reduced costs.

Flying in the future - Five long term trends
The white paper from the consulting firms also looks toward the future, and highlights that between now and 2034 the aviation industry – which includes airports, airlines, OEMs, governments and regulators – will face five major market developments and trends. An overview:

Five long term trends for the aviation industry’

Several key aspects will according to the authors influence future demand on aviation and affect business models. Changing demographics, both in mature as well as emerging markets, and urbanisation will change passenger demand across the globe, while the rising middle class in developing states will create greater potential for expenditure of disposable income on flights. As a result of changing ‘supply chains’ in the business landscape international demand from business travellers will increasingly shift to new hubs, and will force airlines and airports to re-optimise their long term strategy. Changing and uncertain commodity prices is another area which business models need to account.

Development in technology is expected to affect demand on the aviation industry in a number of ways: developing fuel efficient and light planes will boost efficiency and decrease dependence on commodity price fluctuations; advanced security screening may reduce transit costs and queue burdens on passengers; communication advances may create different incentives to travel, with on board internet making business trips more productive.

Consumer experience
In recent years a growing concern for the aviation industry, the customer experience, is regarded as a key conditioning factor of future demand. The perception of safety is in the long term interest of aviation industry demand, and while air travel is very safe, recent highly publicised accidents may undermined confidence. In addition, volatility in the cost of air travel may decrease demand, especially as low-cost carriers will need to compete with disruptive technologies such as automated cars, as well as high speed maglev trains on short- to medium-haul trips. For both airports and airlines, and other stakeholders in the value chain, carefully managing the customer touchpoints will more than ever separate the wheat from the chaff.

PA Consulting - Oxera

Pressures on sustainability will continue to grow, and in the light of uncertainty the speed with which business models will need to change will be dependent on contextual factors. The European Union has for instance already included aviation in the emissions trading scheme which affects the overall costs of aviation. Uncertainties about the way Asian economies will deal with environmental issues, may if environmental protection policies are introduce, create barriers to growth.

Government policy and regulation
The way government interacts with the aviation industry may create uncertainties, with less subsidised growth for airports and other aviation infrastructure prominent examples. Tax uncertainty on the airlines, as governments look to create incentives to reduce environmental impacts, may affect the growth potential for regional or global airline industries; changes in the rules surrounding airspace may become more open or more constrained, conditioned by geo-political changes.

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BDO administrates Flybmi amid aviation industry turbulence

21 February 2019

Around 400 jobs in the UK, Germany, Sweden and Belgium have been lost following the collapse of commercial airliner Flybmi. The administration, which will be overseen by professionals from BDO, constitutes the third failure of a commercial carrier since the start of 2019, with the industry having suffered from sustained turbulence for the duration of last year.

The initial 4 a.m. announcement informing customers that Britain’s longest-surviving airline, Monarch, had been placed into administration meant that many passengers arrived at airports only to find their flights cancelled and holiday plans inconvenienced, while many were left with no means of returning to the UK. Beyond the immediate ramifications, however, the collapse of Monarch also drew to a close six years of steady improvement for commercial carriers across the world. 

Since the economic shock of 2011 – an echo of the 2008 financial crisis – the number of commercial airlines falling into administration across the world declined at a relatively consistent rate. According to data from – barring an anomaly of a year which saw only four airlines falter in 2014 – the number of collapses in the sector declined continuously. In 2017, the figure stood at just 10, compared to a huge 46 in 2011, and a  staggering 61 in 2008.

Global number of airlines to have failed since 2005

Following Monarch’s precipitous fall, however, the situation once more seems to have commenced a nose-dive in the following year. 15 airlines failed in 2018, and less than two months into 2019, another three have followed suit. That puts 2019 on pace to reach 24 airline collapses. 

The latest of these firms to spiral into administration is Flybmi, an East Midlands-based airline which until February operated 17 regional jet aircraft on routes to 25 European cities. The company operated more than 600 flights a week from regional airports including Bristol, Newcastle, Aberdeen and the East Midlands.

News of the firm’s demise emerged as it cancelled hundreds of flights at short notice over the space of a single weekend, leaving many passengers stranded and out of pocket. Flybmi advised customers to seek refunds from credit and debit card companies, or to rebook with other airlines, before eventually appointing administrators from professional services firm BDO.

The appointment, initially reported by UK paper The Telegraph, came following a weekend of chaos, with passengers and staff desperate for information, but without an administrator to turn to, as authorities had remained tight-lipped on the matter. The process was reportedly delayed until the following Monday by a Scottish law which prevents insolvency specialists being appointed over the weekend.

Turbulence ahead

Commenting on the task at hand, BDO Business Restructuring Partner and joint administrator Tony Nygate said, “As joint administrators, we are taking all necessary steps to ensure customers, staff and suppliers are supported through the administration process. Our job is to maximise recoveries and minimise distress for all parties, acting as smoothly and swiftly as possible.”

Administrators from the firm now face questions over what preparations were in place prior to the carrier’s collapse, including actions that could have softened the blow for thousands of stranded passengers. Meanwhile, some 376 employees in the UK, Germany, Sweden and Belgium have been made redundant, with the remainder staying to assist with the administration. Unions have since demanded urgent talks with Flybmi’s administrators, with Unite, which represents about 40 of the airline’s 376 staff, calling for a buyer to be found in order to ensure wages are paid in full.

Unite Regional Secretary Paresh Patel told the press, “Unite is shocked and saddened by the news that Flybmi has gone into administration…  This is a terrible blow for the airline’s workforce and their families, as well as the East Midlands economy. We will be giving maximum support to our members who work for the airline across the UK at this very difficult time for them.”

The Brexit process seems to have played a key role in the downfall of Flybmi. Airlines are required by law to purchase carbon credits to offset their carbon emissions – something which until recently was subsidised through a free allocation of credits by European authorities. Now, however, Brussels has excluded UK firms from their allocation of credits ahead of the UK’s divorce from the EU in March, and it is anticipated that this may  well lead to more casualties in both the airline industry, and the broader British economy.

Glen Flannery, a Partner at law firm CMS, told The Telegraph, “The European Commission has started to implement its No Deal Brexit contingency plans. With effect from January 1st, it has temporarily suspended the UK’s free allocation of carbon allowances, auctioning, and the exchange of international credits. This has created a huge amount of uncertainty for UK participants, the full effects of which have yet to play out.”