Boeing

Traffic and market outlook

Methodology

Current Market Outlook is a long-term, noncyclical forecast that looks beyond short-term shocks to address underlying trends in the aviation industry. Travel demand is forecast for 63 intraregional and interregional traffic flows. Key indicators include

  • GDP development.
  • Worldwide commerce.
  • Population.
  • Labor-force composition.
  • International trade as a share of GDP.
  • Emerging technology (e.g., new airplanes with improved economics and capabilities).
  • Business-model innovation.
  • Quality of service (e.g., new nonstop city pairs, greater frequencies).
  • Travel attractiveness.
  • Industry competitiveness and infrastructure.
  • Openness of air services and domestic airline regulation.

These factors are examined for each of the traffic flows. Different flows have different drivers and are therefore modeled differently. For example, flows touching emerging markets may emphasize GDP per capita, while mature markets may be driven more by trends over time.

Forecasting requires more than data, however—it also requires judgment. The future of a market is not simply an extension of past performance. Some factors that drive demand, such as GDP, are easy to quantify, but other, more difficult to quantify factors, such as liberalization, may have an even greater effect on market performance. When such factors are present, forecasting air transport demand requires more judgment than when the same factors are absent.

Short-term effects on air travel

Although the air transport industry is subject to occasional shocks, demand is resilient; services are often seen as essential, and discretionary trips such as vacations or family events are often high-priority items. Over the past 30 years, the aviation industry has experienced recessions, oil-price shocks, near pandemics, wars, and security threats, yet traffic has continued to grow on average at 5 percent annually.

Changes in industrial structure can also result in short-term effects. For example, after a period of consolidation, U.S. airlines have been adjusting capacity to meet demand, and although traffic growth has been minimal, airline profitability has improved. Conversely, low-fare carriers in other markets stimulate air travel through their competitive responses to falling fares and broadening networks.

Demand for air travel is evolving

Demand dynamics differ for different levels of a country's economic development. Emerging markets throughout the world have shown that air travel is one of the first discretionary expenditures to be added as consumers join the global middle class. As emerging market demand begins to develop, it may take the form of nonscheduled services to leisure destinations. Later, the same demand may migrate to scheduled services of low-fare carriers or to network airlines.

In developed markets, demand for essential travel has been met, so growth comes from discretionary travel. GDP per capita matters less in these market contexts. Factors such as the availability of vacation days earned and the funds needed to travel, consumer confidence, service pricing, and service quality (e.g., the availability of nonstop flights), tend to have a greater impact.

Within a given region, propensity to travel as measured in trips or in revenue passenger kilometers (RPK) generally increases with per capita income. This increase varies considerably. Generally, markets that are more open are more responsive to changes in per capita income because airlines are freer to add routes, frequencies, and seats to capture demand. In a more regulated environment, demand may increase with GDP per capita, but lower service quality and higher pricing may restrain travel growth. Geography may also influence travel within a region, with island geographies or poorly connected land masses necessitating more air travel than might otherwise be the case.

Drivers of air travel demand

Air travel is resilient and growing

Propensity to travel increases with income

Market growth is driving demand

As the airline industry produces record operating results and continues to order and implement new airplanes, it’s worthwhile to review the size and scope of commercial aviation today and the composition of future demand.

Compared with 2013 levels, industry traffic (RPK) grew approximately 6 percent in 2014—the fourth consecutive year of growth at or above 5 percent.

  • In passenger terms, this growth translated to an additional 150 million to 170 million passengers over the 2013 levels of more than 3.1 billion.
  • To carry this additional traffic, approximately 900 additional airplanes, 4 to 4.5 percent of the installed fleet, were needed.
  • In addition, annual industry replacement requirements in 2014 numbered approximately 2 to 3 percent of the installed fleet, or approximately 500 airplanes.
  • This total of approximately 1,400 new airplanes represented 6.5 percent of the in-service jet fleet. A combination of other factors, including increased airplane utilization, increased load factors, and used-airplane transactions, covered excess demand.

Over the long term, these growth and replacement dynamics will continue balancing the growth and replacement needs of an ever-expanding fleet base. With a solid foundation of economic development, increased trade, and increasing efficiency, annual airplane demand is projected to increase 35 to 40 percent over the next decade.

Market growth driving demand

Key indicators

As discussed in the "Methodology" section, GDP is a strong indicator for the Current Market Outlook. IHS Economics is forecasting GDP to grow at 3.1 percent over the next 20 years. Regional variations are prevalent, with emerging regions growing above world trend and more mature economies growing below world trend.

Based on the expected growth in GDP, airline passenger traffic is projected to grow at 4.9 percent and air cargo traffic at 4.7 percent. As with the economy, world traffic varies by market. Over the next two decades, fast growth in China’s domestic market will make it the largest domestic market in the world, and traffic within Asia is set to become the largest travel market.

The favorable location of the airlines in the Middle East allows them to link many parts of the world with one-stop flights, which will help drive higher-than-average growth on those routes. The strong economy in North America is strengthening domestic traffic. And diversification continues in the passenger market. Twenty years ago, the majority of passengers traveled on airlines based in Europe or North America, but today that number has shrunk to 49 percent, and by 2034, it will be 39 percent.

Emerging markets are driving growth

World traffic varies by market

Air travel becoming more diverse

Fleet developments

In 2014, there were approximately 21,600 airplanes in service, a number that is expected to double over the next 20 years to an in-service fleet of 43,560 airplanes. To achieve that number, 38,050 new airplanes will be needed, and 26,730 of them, or 70 percent, will be single-aisle airplanes. Additionally, 8,830 new widebody airplanes will be needed. Regionally, the need for new airplanes is well balanced—Asia will need approximately 40 percent; Europe and North America combined will need approximately 40 percent; and together, the Middle East, Latin America, Africa, and CIS will need the remaining 26 percent.

Because aviation has been a growth business strongly tied to economic expansion and development, much of the demand focuses on industry growth requirements. But how are replacement dynamics evolving? Historically, 2 to 4 percent of the in-service fleet is removed from service annually. In the past few years, that number has been 500 to 700 airplanes per year, of which 350 to 400 were single aisle, and 150 to 200 were widebody, plus regional jets.

Many factors can drive the need for replacement. Age is the primary one, but others include relative airplane economics, maintenance requirements, and the overall market environment. In recent years, high fuel costs have played a larger role in influencing decisions to remove airplanes from service, especially in the single-aisle category. On the other hand, the lack of availability of widebody airplanes has challenged airlines’ ability to remove certain types from service as rapidly as desired. So far in 2015, however, a more favorable environment has provided airlines with some near-term flexibility to manage aging fleets while growing capacity.

In the next 10 years, the number of single-aisle and widebody airplanes entering the zone of replacement will double. The number of single-aisle airplanes reaching 25 years of age has traditionally averaged 250 to 275 annually, but that figure will double to more than 500 by the beginning of the next decade. Meanwhile, the number of widebody airplanes reaching 25 years of age currently averages approximately 100 annually but will increase to well over 200 during the same period. These numbers are in addition to the more than 1,400 single-aisle, widebody, and freighter airplanes still in service after more than 25 years.

To continue growing globally at the expected annual rate of nearly 5 percent, the airline industry needs an approximate net annual increase in fleet size of 4 percent, with approximately 3 percent replacement. Since fleet replacement is largely less optional than fleet growth, it provides a solid, stable base for long-term demand for new airplanes. The two largest fleet domiciles, Europe and North America, are expected to need well over 50 percent of their new deliveries to replace older, less efficient airplanes, as are the mature Northeast Asia and Oceania regions, thereby balancing the growth across emerging and developing markets in Asia, Latin America, and Africa.

Our long-term view of market demand is that airplane replacement will form 42 percent—a figure that has increased nearly every year as more fleets in emerging markets launch replacement cycles in the 20-year timeframe.

Delivery demand is diverse

Delivery demand is diverse

Fleet replacement

Significant growth in replacement requirement

Substantial and growing portion of projected demand

Single aisle growth remains strong

The current single-aisle fleet consists of approximately 14,100 airplanes. North America leads with more than 3,800 in service. Over the next 20 years, the single-aisle market will continue to enjoy robust demand—26,730 airplanes, valued at $2.8 trillion. With that as the backdrop, the following paragraphs cover long-term demand for single-aisle airplanes and some facts about and projections for the 737 fleet.

A simple average of single-aisle demand is more than 110 airplanes per month, excluding deliveries for noncommercial (private, military, government) uses. But current industry production levels are below 90.

Over the past decade, the global single-aisle market has changed substantially owing to many key dynamics, including the significant growth and development of low cost carriers (LCC), consolidation in European and North American markets, the impact of fuel prices, and continued market fragmentation. So how do these changes affect demand for single-aisle airplanes now and in the future?

Looking at the composition of single-aisle deliveries over the past decade, the backlog for the future, and how the two relate to trends in seat size and airplane aging, we see the following:

  • Early 2000s. Fuel prices were low, and deliveries split evenly between small (42 percent) and medium (48 percent) single-aisle airplanes, with the remaining 10 percent in the large (737-900, A321) model category.
  • Mid to late 2000s. As fuel prices tripled and LCCs rapidly expanded, focusing on unit costs and new point-to-point services, total deliveries shifted substantially (60 percent) to the middle (737-800, A320) model category.
  • 2010s. Approximately 80 percent of deliveries in the past five years were for the middle model category of the single-aisle families. Sustained high fuel prices and competition pushed seat densities higher and unit costs lower. Balancing these factors was the need to retain the versatility of right-sized fleets, for efficient expansion through increased frequencies and new direct routes.
  • Near-term backlog. Approximately 75 percent of firm orders are in the middle-model category. Also, there was an uptick in orders for the large single-aisle airplanes, reflecting aging 757 (and early A321) models due for replacement in the next five to seven years.
  • Single-aisle aging. Looking deeper, the market is entering a period between now and 2020 during which
  • Large single-aisle airplanes are expected to briefly represent up to 30 percent of the aging (25 years old and older) single-aisle fleet. (Beyond 2020, the share will fall to approximately 10 to 20 percent.)
  • Large single-aisle airplanes will represent 23 percent of the near-term backlog.
  • Densification and up-gauging. Over the past decade, through seat densification and modest up-gauging, numbers of single-aisle seats have increased an average of approximately 1 to 1.5 seats per year—from 139 per flight in 2004 to 152 seats in 2014. We project that this slow trend will continue over the next decade as airlines continue to move to the heart of the market (737-800 and A320) airplanes.

These facts are the basis for our confidence that the heart of the global market will continue to converge toward the 160-seat size. And as fuel-price volatility resumes in the near term, we expect this trend to strengthen as lower prices expand stimulation and fragmentation opportunities that are possible only with the risk-reward benefits of airplanes such as the 737-800.

As the market continues to develop and expand, so do LCC business models. In fact, as airlines further innovate their product and network offerings, increasing differentiation is emerging within the broad LCC market. For example, some carriers are offering more amenities, others are capturing more ancillary fees, and still others are exploring longer mission distances.

These innovations drive airline efforts to grow profitably—through a combination of cost efficiency and increased revenue—in the most optimal way for the competitive environments in which they operate.

The 737 MAX 200, with its capacity to seat up to 200 passengers, offers a compelling market opportunity in an emerging segment of this LCC market by maximizing efficiency, revenue, and flexibility while minimizing overall risk. Over the past four years, more than 1,200 airplanes, or more than 40 percent of the approximately 3,000 single-aisle airplanes produced for the market, have been delivered to LCCs worldwide. And approximately 40 percent of the 20-year single-aisle deliveries—400 to 500 airplanes every year—will be in this market segment.

Regional variation in single aisle fleet

Single-aisle market converging at center

10-year single-aisle trend

LCC expansion continues

Capability, efficiency, and flexibility drive growth in the widebody fleet

Airlines value the capabilities and flexibility that today's widebody airplanes, such as the 787, 777, and 747-8, provide. These families of products allow airlines to perform profitably on routes in their network by using the right-sized airplane and range capability. Airplanes of the future—such as the 777X—are being designed to fit well with these families.

The widebody fleet continues to grow as airlines expand their international presence. Over the next 20 years, Boeing forecasts that long-haul international traffic will grow 5 percent annually. This growth is driving a need for 8,830 new airplanes, valued at $2.7 trillion. As airlines continue to diversify their fleets, we see a need for 4,770 airplanes in the small category (i.e., 787-8, 787-9), 3,520 in the medium category (i.e., 787-10, 777, 777X), and 540 in large category (i.e., 747-8i).

Over the past 20 years, airlines have moved away from the large widebody airplanes as they focus on flexibility and efficiency and seek an increased mix of all widebody airplane sizes. In 1994, the large-size airplane accounted for 24 percent of widebody airplanes. Today, that number has dropped to 15 percent, and by 2034, the large widebody airplane will account for only 5 percent of the widebody fleet. With this reduction in the number of large widebody airplanes, we have seen a slight decline in the average number of seats flown, but we expect this number to grow slightly as airlines increase the number of medium widebody airplanes they operate. Between 1994 and 2004, there was a .3 percent reduction in the average number of seats per airplane, but over the past 10 years, there has been an average annual increase of .5 percent.

The characteristics of the market and the airlines in those markets also influence the size and types of airplanes needed:

  • Asia, an emerging player in the long-haul international market as well as a burgeoning regional aviation market, will rely heavily on the small and medium widebody airplanes. These size categories provide not only the smaller airplanes such as the 787-8 and 787-9, which helps take risk out of new markets, but it also has the 777 and 777X, which will provide the size and range for markets such as North America.
  • Europe is ranked number two for new deliveries of small widebody airplanes. This size of airplane allows airlines to connect secondary markets to larger hubs as they explore ways to remain competitive.
  • The Middle East will take delivery of the greatest number large widebody airplanes and the second greatest number medium widebody airplanes because of the number of people transiting through the region. The location of the Middle East makes it easy for passengers to fly to just about any place in the world with only one stop.

Outlook: 8,800 deliveries

Focusing on efficiency and flexibility

Air cargo traffic rebounds to historic growth rates

Air cargo market recovery continued in 2014, with traffic returning to historic growth rates. The two primary indicators of future traffic are the trends in world economies and international trade. Both are forecast to continue growing strongly and lead to a return to capacity balance and profitable yields. Industries that require transport of time-sensitive and high-value commodities such as perishables, consumer electronics, high-fashion apparel, pharmaceuticals, industrial machinery, and automobile parts recognize the unparalleled speed and reliability that air freight offers. These customers see the value of air freight, which will continue to play a significant role in their shipping decisions.

Passenger airplanes and dedicated freighters both carry air cargo. Lower-hold cargo capacity on passenger flights has been expanding as airlines deploy new jetliners with excellent cargo capability, such as the 777-300ER. However, dedicated freight services offer shippers a combination of reliability, predictability, and control over timing and routing that is often superior to that of passenger operators. As a result, freighters are expected to continue carrying more than half of global air cargo traffic to satisfy the demanding requirements of that market.

As global GDP and world trade growth accelerate, air cargo traffic, measured in revenue tonne-kilometers, is projected to grow an average 4.7 percent per year over the next 20 years. This rate, in spite of exogenous shocks arising from economic and political events and natural disasters, is only slightly below the 5 percent average annual rate of the past three decades. Replacement of aging airplanes, plus the industry’s growth requirements, will create a demand for 2,340 freighter deliveries over the next 20 years. Of these, 1,420 will be passenger airplane conversions. The remaining 920 airplanes, valued at $290 billion, will be new. The overall freighter fleet will increase by more than half—from 1,720 airplanes in 2014 to 2,930 by 2034.

Over the next 20 years, Boeing forecasts a requirement for 1,020 standard-body freighters from converted passenger airplanes because of the low capital cost. Emerging markets will continue to drive strong demand.

The lower purchase price of converted freighters offers carriers opportunities when high utilization and market-dependent demand are more significant considerations than performance, efficiency, and reliability. Thus, nearly 400 widebody conversions will be needed over the forecast period.

During the forecast period, 270 medium widebody purpose-built freighters will be delivered. Express carriers are the primary operators of medium widebody aircraft, as they possess the higher-yielding small parcel and document traffic need to operate them more profitably. However, competition from less-expensive surface transport and passenger airplane lower-hold capacity constrains the use of medium widebody freighters in regional markets.

Nearly 650 new large freighters will be required where high cargo density, larger payloads, and extended range are crucial.

Freighter market value: $290B

New and converted freighters

Growth continues at longer-term rates