Boeing

Economic environment

While longer-term factors remain in place to support accelerating economic growth, the world economy in 2015 was unable to break out of the recent pattern of steady but below long-term average growth. Moreover, GDP performance was unevenly distributed across countries. In particular, low commodity prices, political uncertainties, and financial market volatilities made it difficult for some countries to live up to their economic potential. Oil prices averaged around US$50 in 2015, roughly half the 2014 average value. Prices for many other commodities plummeted as well. Driven predominantly by supply-side factors, lower oil prices were likely a net positive for the global economy; yet, from a more nuanced perspective, while these lower prices have been a major benefit for some countries, they have created a formidable challenge for others.

Most advanced economies, such as those of the United States and the European Union, benefit from the lower cost of commodity imports and see their economies driven by strong consumer spending. But growth isn’t solely the result of low oil prices, as labor and housing markets have improved and monetary support remains strong — despite the US Federal Reserve raising interest rates for the first time since the Great Recession.

Among emerging markets there are many beneficiaries of lower commodity prices, as evidenced by China, where consumption remains strong and supportive of air travel growth amid a slowdown in aggregate economic activity. On the other hand, many emerging markets that are more dependent on export revenue from natural resource extraction are seeing increased economic pressure. In many cases, declining export revenue goes hand in hand with slower GDP growth, increased capital outflow, and depreciated exchange rates. In several countries, political uncertainties exacerbate the fragile economic situation and further reduce near-term growth prospects by lowering investment incentives. These developments highlight the need for many countries to diversify and reform economic systems to enhance and fully realize their growth potential.

Despite current challenges, IHS Economics sees global growth accelerating significantly and sustainably for the remainder of the decade. This acceleration will be led by a growth uptick in emerging markets and further sustained growth in large advanced economies. The latter, in particular, will benefit from central bank support, reduced economic-policy frictions surrounding European sovereign debt challenges, and the strengthening consumption effects of low energy prices in a global environment of plentiful but underutilized production capacity.

Global GDP growth

Exchange rates: US Dollar strength continues

Oil volatility returns

Fast growing and resilient passenger markets

Passenger traffic continues to show impressive expansion and resilience on a global scale. 2015 marked a continued acceleration in growth and the sixth year of above-trend growth, despite an economic backdrop characterized by tepid GDP growth. Globally, load factors are around 80 percent and utilization remains at or near record levels. Demand growth outpaced capacity in all major world regions except for the Middle East, where double-digit traffic growth was surpassed by even higher-capacity additions. One likely reason for the strong market performance can be found in the composition of GDP growth in many parts of the world. Large markets such as the United States, Europe, or China all see relative strength in the consumer-related parts of the economy. Although a sharp slowdown in specific and less travel-intensive sectors are a drag on overall GDP numbers, most citizens enjoy improved consumption opportunities and are willing to increase spending on services such as travel and tourism. This trend is reinforced by the removal of structural impediments to travel, such as visa restrictions, unlocking demand for travel warranted by rising income levels of an expanding global middle class. Another key factor is the increased efficiency of airline business models in bringing air travel to consumers around the world. Low-cost carriers continue to expand into new markets while other airlines use their geographic location to increase ease of global travel or offer new routes, enabled by new-technology airplanes and more efficient operations. In addition, current low fuel prices allow airlines to manage capacity and fares to meet and stimulate demand more effectively.

Passenger traffic resilient due to multiple factors

Airline Productivity Rising

Airline traffic growth exceeding airline capacity growth

Air cargo markets looking to resume growth

Despite a strong start to the year when the US west coast seaport troubles boosted air cargo temporarily, 2015 was a year of many challenges for air cargo. Global trade stalled towards the middle of the year amid uncertainty emanating from Chinese manufacturing and globally weak industrial production. With fewer goods produced around the world, there was less trade. However, throughout the second half of the year, the global trade picture has been modestly improving. There are now signs that international trade is picking up speed throughout 2016 and major economic forecasters see growth averaging around 4 percent for the remainder of the decade. Globalization might not witness the extraordinary expansion of the early 2000s, but expansion isn’t over. Trade will allow productivity increases in global-production chains and expand availability and variety of products to consumers around the world. The many benefits of a global and open economy have motivated policy makers to advance free-trade initiatives of historic proportions. If rapidly implemented, the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership will stimulate global commerce and provide long-run growth potential for international trade and the air cargo industry.

Air cargo market

Record profitability highlights healthy airline financials

With 2015 average fuel prices about 50 percent lower than in 2014, airline profitability has been elevated to record levels. Net profits reached around US$35 billion in 2015. With further fuel-price declines and the reduced impact of fuel-price hedging, this number is likely to be surpassed in 2016. Net margins improved globally as well, reaching 4.9 percent in 2015 and expected to top 5 percent in 2016 — numbers not seen for almost a half century. With a strong local currency and a consolidated industry structure, US airlines are the most profitable on average, accounting for more than half the global industry’s profits. For airlines outside the United States, currency depreciation often moderated the gains from fuel prices, as did more intense competition. Airlines are using the improved financial position to undertake productivity-enhancing investments that will allow future healthy growth. These investments include interior upgrades, operational improvements, and acquisition of new, efficient airplanes.

Industry experiencing record profitability

North America leading industry profitability