PA Consulting and Oxera: Five major trends in aviation

12 December 2014
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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.