Business and Market Environment

According to IHS Economics, the world economy shows potential to grow at or above average rates for the next several years. Low oil prices and increased consumer confidence will be key near-term drivers, while pent-up demand and available production capacity provide longer-term potential. However, economic and social reform toward sustainable growth in developing, emerging, and advanced economies alike will be needed to realize long-term economic growth.

In the nearer term, global economic growth continued accelerating in 2014, putting the world economy on an increasingly firm footing. Further moderate economic acceleration, helped by lower oil prices and monetary policy stimulus (most prominently in Europe and Japan), characterizes the medium-term forecast.

Although effects differ from country to country, lower oil prices represent a net gain for global economic growth as resources are shifted to more efficient economies on average, and consumer spending is stimulated in the world’s largest oil-importing economies. As a net beneficiary of low oil prices, the United States will be a locomotive of global growth, with a steadily improving labor market likely bolstering domestic demand even after the effects of cyclical oil prices diminish.

Europe and Japan, meanwhile, show signs of a gradual recovery as decisive monetary stimulus in each region serves as a tailwind to economic growth, and structural reforms undertaken in several European economies will slowly pay off in higher growth rates. Revived economic activity in these key global markets will stimulate global trade to achieve growth rates nearing long-term averages.

Emerging markets

Overall, the long-term outlook for many emerging markets remains bright given the ongoing structural transformation of economic systems. With income levels rising, consumer spending, particularly in Asia, is well positioned on an upward trajectory.

However, although a boon for many commodity-importing countries, low oil prices pose major revenue challenges for the world’s large-commodity exporters. In combination with exchange-rate depreciation, this trend could grow into inflationary pressures and corresponding capital movements. For example, Brazil’s economy has stalled in the face of falling energy revenue and a less-ambitious reform agenda. Russia, meanwhile, has fallen into a deep recession due to in part declining oil revenues and severe exchange rate depreciation.

Although a net beneficiary of low oil prices, China is experiencing slower growth, though at more sustainable levels as its economy matures. With a necessary reduction in excess capacity in real estate and parts of manufacturing, and with a challenging process of rebalancing the banking system, cyclical forces will represent a noticeable drag on short-term growth. Policy reform and solid fundamentals support medium-term growth.

India recently started unlocking its potential and is now on its way to becoming the fastest growing large emerging market—an achievement widely credited to the new government’s business-friendly policy reforms.

World economy continues acceleration

Emerging markets outlook remains bright

Passenger traffic

Airline passenger traffic grew nearly six percent in 2014 despite relatively weak global GDP growth. The global airline industry grew at or above the long-term growth rate for three consecutive years on sound fundamentals, while productivity continued to increase on historically high airplane utilization and passenger load factors. Specifically, load factors in 2014 improved slightly to 80 percent, showing that airlines are matching demand without oversupplying capacity.

China and the Middle East once again led all regions with double-digit traffic growth. Europe traffic grew at five percent in 2014, far outpacing economic growth, while North America traffic grew more than two percent. Carriers in the Asia Pacific (excluding China) region and Latin America saw slower growth in 2014 due to a softer economy than prior years. With lower fuel prices and an improving economic environment in 2015, passenger traffic is expect to once again grow above the long-term trend.

Passenger traffic resilient

Airline productivity rising

Air cargo markets building on recovery

In 2014, the air cargo market built on the recovery that began in the second quarter of 2013. Global traffic volume growth was close to the long-term average for the full year, and segment profitability began to improve aided by lower oil prices. Capacity metrics also improved as utilization of large freighters returned to recent highs.

Many signals point to global air cargo continuing to sustain on-trend growth. Global trade forecasts indicate an improving market, with trade set to grow at rates of about five percent on average over the next several years. In addition, the outlook for improving global economic growth supports stronger air cargo growth. Accelerating growth in economies with a higher proportion of consumer spending, such as the United States, also points to higher demand for air cargo. Core demand for air cargo in the longer term remains strong owing to continuing product innovation, global interdependence, and the imperative for reliability and speed.

World air cargo traffic has grown

Improving profitability in a dynamic financial environment

Strong demand, efficiency initiatives, and falling oil prices in the fourth quarter helped airlines nearly double industry net profit to US$20 billion in 2014 over 2013, while achieving the highest industry net margin in more than three decades. Airline financials are expected to continue on this trend as airlines continue to focus on reducing costs and boosting revenues. Over the past decade, the airline industry has achieved seven percent compound annual revenue growth, which is more than double that of global economic growth. On the cost side, the sharp decline in oil prices is a significant near-term tailwind, with fuel averaging 25 percent of airline cost structures. In addition, lower oil prices provide a stimulant to consumer incomes, and thus create an opportunity to open additional routes and frequencies that might not have been profitable at higher oil price levels.

In addition to dealing with more volatile oil prices, airlines are also accounting for a recent significant strengthening of the US dollar due to the varying economic prospects previously discussed. In some regions, this currency volatility will temper the near-term benefit of lower fuel prices as fuel, airplane financing, and other costs are often paid in US dollars. Depending on an airline's network structure, large movements in foreign exchange rates can also affect international volumes and revenues owing to changes in traveler purchasing power. Although increased financial market volatility will be a headwind for some airlines, many have hedging tactics in place to smooth the effects, and the overall airline profit outlook remains strong owing to solid demand fundamentals and lower fuel prices.

Oil price volatility returns

Volatile exchange rates, stronger US dollar