Industry story Empowering industry profitability despite challenges
Air transport connected more cities at lowered cost
In 2018, airlines continued to increase the number of city-pair routes globally. Almost 22,000 city pairs are now regularly serviced by airlines. This is an increase of 1,300 over the number of city-pair connections in 2017. Strong improvements in connectivity and in costs over the past two decades—the real, inflation-adjusted cost of air transport has halved in the past 20 years and declined further in 2018—help to ensure that aviation, the “business of freedom,” continues to distribute its array of benefits to consumers, suppliers, and economies globally.
1. Unique city pairs and real transport costs
Air transport supported economic growth and prosperity through tourism and trade
Air transport is central to world tourism and trade. Tourists traveling internationally by air are estimated to have spent about $850 billion in 2018, an increase of more than 10% over 2017. The additional number of city-pair connections and the lower cost of air transport also boosts trade in goods and services and heightens foreign direct investment and other important economic flows. Air transport accounts for only a small, less than 1%, proportion of world trade by volume but for a much larger share by value, of about 33%. In 2018, the value of goods carried by air is estimated to have been $6.7 trillion.
2. Air tourist spending and value of trade carried by air
Air travel was more accessible for more people
Worldwide air passenger numbers continued to rise, exceeding 4.3 billion journeys in 2018. Connecting cities directly cuts the cost of air transport by saving time for shippers and travelers. Combined with cheaper fares, this enables more people to fly more often. In 2000, the average citizen flew just once every 44 months. In 2018, the time between trips had halved, to just 21 months.
3. Accessibility of air travel
Passenger demand was again robust
Demand for air passenger services remained strong in 2018, with industry-wide revenue passenger kilometers (RPK) increasing 7.4%. This represented a slowdown from the decade-high pace recorded in 2017, of about 8%, but still exceeded the long-run industry average growth rate by around 2 percentage points. Air passenger demand was underpinned by a generally solid global economic backdrop, especially earlier in the year, which, in turn, supports jobs, incomes, and business activity, and by fierce competition in the industry, which helps to ensure airfares remain affordable to travelers.
4. RPK versus world GDP growth
China added the most passenger journeys
There were close to 4 billion origin-destination (O-D) passenger journeys worldwide in 2018. Among them, domestic routes within China again provided the largest incremental increase in passenger trips, adding just under 50 million journeys. The domestic markets of the United States and India once more ranked second and third, with around 30 million and 18 million more passenger journeys, respectively. Of the main markets that IATA regularly tracks, India’s domestic market showed the fastest growth in passenger numbers, which increased 18.5% in 2018. That India recorded its 50th consecutive month of double-digit, year-on-year growth in RPK in October highlights the consistently strong performance of its market
5. Top 10 increasing O-D markets
6. Largest O-D air passenger markets
The US O-D passenger market remained the world’s largest
Although China’s domestic market added the most passenger journeys in 2018, the US domestic market—where almost 590 million passenger journeys were undertaken in 2018—continues to be the world’s largest single O-D market. China comes second, with 515 million, followed by India some distance back, at 116 million. Unsurprisingly, domestic markets dominated the rankings. The top 12 markets accounted for almost half of the total number of O-D passenger journeys in 2018.
Air freight demand growth eased
Air freight grew slightly in 2018 compared with 2017. Buoyed by the global inventory restocking cycle, industry-wide freight tonne kilometers (FTK) increased 9.7% in 2017. In 2018, FTK likewise grew, but a mere 3.4%. This was in line with global trade volumes, which trended broadly sideways in the first part of 2018 and contracted in the year’s fourth quarter. The lesser increase for air freight also reflected the typical slowdown following an inventory rebuild.
The second half of the year also saw the industry face a number of headwinds. There was a moderation in world trade—a result in part of the heightened trade tensions between the United States and China—and a deterioration in some leading indicators, such as the new export orders component of the global Purchasing Managers Index. Having said that, not all air freight sectors were equally affected. E-commerce and pharmaceuticals continued to perform strongly.
7. Air freight versus global goods trade growth
8. Regional passenger and freight demand outcomes
Regional outcomes for passenger and freight demand were mixed
Regions saw varied performance in passenger and freight demand in 2018. Airlines from Asia-Pacific led the way in passenger growth, which increased 9.5% in that region, followed by airlines in Europe and in Latin America. For freight, it was the Latin American carriers that outperformed, followed by carriers in North America. Freight volumes for African airlines were broadly stable in 2018, but this should be viewed in the context of their robust 24% growth in volume in 2017.
9. Industry passenger and freight load factors
Passenger load factor achieved a record as demand growth exceeded capacity
Available seat kilometers (ASK) increased 6.9% globally in 2018 compared with 2017, slightly lower than the 7.4% RPK increase in passenger demand. As a result, the passenger load factor (PLF) ticked up slightly to a record 81.9%. The PLF has risen more than 10 percentage points over the past 15 years. And this increase is behind the improved industry financial performance of recent years. Available freight tonne kilometers (AFTK), meanwhile, grew 4.5% year on year, easily outpacing the 3.4% growth in FTK. The freight load factor, therefore, fell about 1 percentage point in 2018, partly unwinding 2017’s gain.
10. World oil and jet fuel prices
Oil prices had a bumpy ride
The jet fuel price opened the year under review about $80 a barrel and was initially stable. At the end of the year’s first quarter, though, the fuel price began to track upward, increasing more than 20%, to peak at $96 per barrel in October 2018. In November and December, however, market sentiment turned sharply down amid signs of a deteriorating global economy and strong supply from US tight oil producers. The price quickly tumbled, falling more than 25% to end the year averaging about $72 in December. The price of jet fuel has subsequently begun to rise in the early months of 2019. But the sharp and unanticipated nature of the decline at year-end means that many airlines that hedge their fuel exposure are unlikely to have seen much benefit from the price adjustment so far.
11. Breakeven and achieved load factors
Airlines raised their achieved load factor and maintained a gap above the breakeven level
With oil prices, interest rates, and such other key costs as labor rising further in 2018, the estimate for the industry-wide breakeven load factor increased to 65.9%. Aided, however, by the record PLF cited previously, the combined achieved load factor also rose, enabling airlines to maintain a solid gap above the level required for financial breakeven. The gap between the breakeven and achieved load factors is driving profitability and returns and was again a critical contributor to the industry’s financial performance in 2018.
Another solid financial performance generated an above cost of capital return for the fourth consecutive year
12. Industry return on investment and the cost of capital
13. Regional profit performance
14. Airline profitability per passenger
Regional financial performance was again mixed
Regionally, the industry’s financial performance remained considerably varied. The financial performance of the North American airlines continued to lead the way, delivering an operating (EBIT) margin of 9.1% in 2018. Airlines in Europe, Asia-Pacific, and Latin America also yielded solid profitability, while carriers in the Middle East and in Africa faced especially challenging operating environments.
On a per passenger basis, the airline industry is a high-volume, low-margin industry. Considering net profits on a per passenger basis highlights this and presents an alternative perspective on regional airline profitability. By this measure, the industry generated a modest $6.85 per passenger in 2018. Regionally, the North American carriers were the best performers, earning $14.66 per passenger. At the other end of the spectrum were airlines in Africa and Latin America. In aggregate, they averaged a loss of $1.09 and $1.65, respectively, for every passenger they carried.