Boeing

Traffic and market outlook

Methodology

Current Market Outlook is a noncyclical forecast that looks beyond short-term market shocks to address underlying trends in the aviation industry. Its travel-demand forecast covers 63 intra- and interregional traffic flows.

Different traffic flows have various driving influences and are modeled accordingly. For example, some flows may emphasize development GDP per capita (economic activity) while other flows may be influenced by local-market factors, such as industry consolidation.

Generally, various influences on a region's air-travel growth can be grouped into three categories: economic-activity, ease-of-travel, and local-market factors. Some factors of market demand, such as GDP, are easy to quantify; but others — for example, liberalization — are more difficult to assess and may be causing an even greater effect on market performance. When such factors are present, forecasting air-transport demand requires deeper analysis.

Economic activity is the most easily understood and quantified key factor in traffic flow. It includes

  • National and regional GDP development.
  • Per-capita income and population trends.
  • Labor-force composition.
  • International trade, economic, and investment links.

 

However, there is a risk that economic activity — the most readily understood factor in traffic flow — can be overstated as a driving force when there is a traffic downturn. An important variable to be considered is ease of travel.

Ease of travel is a factor that can experience improvements in many ways. Some of the more common examples include

  • More open air-services agreements between countries (e.g., the 2015 revised US-Mexico agreement).
  • Liberalized domestic-market regulation.
  • Emerging technology (e.g., new airplanes enabling new routes).
  • Business-model innovation (e.g., low-cost airlines driving down fares).
  • Airline-network improvements (e.g., new nonstop city pairs or greater frequency).

 

Local markets as a factor in forecasting air-travel flow is not directly related to either macroeconomic trends or ease of travel, but its impact on air-travel growth can be considerable. One notable example is when from 2009 to 2015 the US domestic market experienced essentially no growth in airline capacity. Given that load factors were already high, little headroom was left for traffic growth. As a result, traffic growth during this period was anemic, although the economy as a whole grew by 13 percent. Consolidation of the US airline industry during this time contributed to this disconnect, as did the reluctance of US airlines to increase capacity in a time of high fuel prices. These factors were not replicated in a similar combination anywhere else in the world.

What drives travel air growth?

Resilient, growing market expected to continue

Short-term effects on air travel

Although the air-transport industry is subject to occasional market shocks, the industry's demand is resilient; services are often seen as essential, and spending on discretionary trips for vacations or family events is frequently high priority. 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 the structure of an economy can also result in short-term effects. For example, although the slow-down in China's GDP growth attracted much notice in the media, air travel continued to perform well. The reason: Chinese consumer sectors, which drive travel behavior, remained strong, while heavy industrial production and fixed investments weighed on top-line growth, feeding the headlines.

Demand for air travel is evolving

Demand dynamics shift according to different stages 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-cost 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, the funds needed to travel, consumer confidence, service pricing, and service quality (for example, 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 islands or poorly connected land masses necessitating more air travel.

Key indicators

As discussed in the Methodology section, GDP is one of the key indicators within the aviation-market sector. IHS Economics is estimating that the world GDP will grow approximately 2.9 percent annually over the next 20 years. Based on the expected growth in GDP, as well as regional variations, airline passenger traffic is expected to grow at an annual rate of 4.8 percent and air cargo traffic at 4.2 percent.

As the aviation industry grows we continue to see diversification among world airlines. Twenty years ago, travelers were most likely flying on an airline based in North America or Europe. Today about 48 percent of travelers are flying on airlines based in North America and Europe. It is anticipated that 20 years from now this number will shrink to 37 percent. We see that as regions around the world expand their aviation industry, their share of the market continues to grow and increases the strength in traffic flows.

Over the next 20 years, it is predicted that China's domestic traffic will overtake North America as the world's largest air-traffic markets. The geographic location of the Middle East allows airlines in the region to take advantage of connecting almost any two points in the world with one connection, and this will help increase traffic in markets touching the Middle East. Growth within Central America and the Caribbean markets continues to be stimulated by ongoing liberalization.

Emerging markets are driving the economic growth

World traffic varies by market

Air travel becoming more diverse geographically

Fleet developments

In 2015, there were approximately 22,510 jet airplanes in service, a number that is expected to double over the next 20 years to an in-service fleet of 45,240 airplanes. To achieve that, 39,620 new airplanes will be needed, and 28,140 of them, or 71 percent of the total, will be single-aisle airplanes. Additionally, 9,100 new widebody airplanes will be required. Regionally, the need for new airplanes is well balanced: Asia will require 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 20 percent.

Many factors can drive the demand 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.

In the next 10 years, the number of single-aisle and widebody airplanes entering the replacement zone 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 annual number of widebody airplanes reaching 25 years of age currently averages 100, but will increase to well over 200 annually by the beginning of the next decade. 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, and an approximate replacement rate of 3 percent. 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 61 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 43 percent of demand during the next 20 years — a figure that has increased nearly every year as more fleets in emerging markets launch replacement cycles in the 20-year time frame.

Delivery demand is diverse

Delivery demand is diverse

Older, less efficient airplanes will be replaced with more efficient, newer generation airplanes

Significant growth in replacement requirement

Network carriers drive the demand in single-aisle growth

Several factors continue to drive the global demand for new single-aisle airplanes, including large replacement needs in the advanced economies, steady passenger-traffic growth in the Asia-Pacific region, and the ongoing success and expansion of the low-cost business model around the globe. A dominant 60 percent share of new-passenger airplane demand in the single-aisle category is driven by the network carriers, and represents 17,000 airplanes. Low-cost carriers and charter or inclusive-tour operators make up the balance for new single-aisle airplane demand, or 11,000 airplanes.

The rationale for new single-aisle airplanes varies by region. The long-term need for replacement of older-technology airplanes continues to outpace growth demand in the advanced economies of Europe, Northeast Asia, North America, and Oceania. New-airplane demand in Africa, China, India, Latin America, and the Middle East is primarily for growth needs to meet the anticipated increase of passenger traffic.

Asia-Pacific, Europe, and North America are the three largest market regions for new single-aisle airplanes, and they represent 80 percent of all single-aisle demand. Listed below are trends highlighting the increased demand in each of these regions:

  • Asia-Pacific passenger traffic is forecast to grow at an above-average rate of 6.0 percent per year, and the majority of all anticipated single-aisle orders, which is expected to be 75 percent of overall orders, will serve the growth ambitions of the region's airlines, for both domestic and international service. At least 70 percent of all new single-aisle orders is forecasted to be airplanes in the medium-sized category.
  • Contrary to other regions, all airline business segments in Europe are expected to replace a majority of their single-aisle airplanes over the next twenty years. At an aggregate level, single-aisle airplane demand in Europe is primarily for replacement needs, representing 45 percent of all demand in the region. Medium-sized airplanes are forecast to be the airplane of choice for many of the region's operators.
  • Over the next 20 years, only the network carriers in North America will require a greater number of single-aisle airplanes for their fleet replacement needs, or 1,940 airplanes. The North American network carriers' appetite for single-aisle airplanes is based primarily on the replacement of older, less-fuel-efficient jets with new-technology, fuel-efficient, single-aisle airplanes, including from the Boeing 737 MAX family. The next generation of these fuel-efficient Boeing 737 jets is scheduled for delivery in 2017, launching with Southwest Airlines. We estimate the majority of all new deliveries in this region will be in the medium-sized airplane category.

Regional variation in single aisle aircraft

Business model variation in single aisle aircraft

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

Airlines make widebody-order decisions based on the airplanes' versatility, asking questions such as does the airplane have the efficiency to open new routes, does it have the ability to go longer distances, and will it provide the right amount of seats for the market. As airlines continue to focus on versatility, we have seen a move from larger widebody airplane types to smaller widebodies. In 1995, the large-size widebody airplane accounted for 36 percent of the in-service fleet; today that number has shrunk to 11 percent, and by the time we get to 2035, it will be 5 percent of the market share. The Boeing smaller-widebody product family — the 787, 777, and 747-8i — goes above and beyond answering airlines' requirements for this category. Over the next 20 years airlines will need 8,170 new widebody airplanes for passenger service.

The characteristics of a market and its airlines 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 small and medium widebody airplanes. These size categories consist not only of smaller airplanes such as the 787-8 and 787-9 that help take risk out of new routes, but they also include the 777 and 777X, which provide the size and range required for serving long routes such as North American destinations.
  • Europe is ranked No. 2 for new deliveries of small widebody airplanes, a size which allows airlines to connect secondary markets to larger hubs as they explore ways to remain competitive.
  • The Middle East, because of the number of people transiting through the region, will take delivery of the greatest number of large widebody airplanes and the second greatest number of medium widebody airplanes. The location of the Middle East makes it a hub for passengers to fly to almost any place in the world with only one stop.

Opening new markets

Airlines moving from large airplanes to small and medium widebodies

Air cargo growth forecast to resume

After a period of stagnation that followed the global economic slowdown, air-cargo traffic started to recover in late 2013. This recovery continued through 2014 and, with the aid of the US West Coast port labor dispute that extended into the first quarter of 2015, world air-cargo volume grew about 5 percent by year-end.

In the second quarter of 2015, global trade and industrial production slumped. As a result, air-cargo growth slowed with world air-cargo volume growing about 2 percent for the year. This is a temporary situation; the world economy and industrial production, which are primary leading indicators of air cargo traffic, are forecast to recover and return to long-term trend growth rates in 2017. In turn, air-cargo traffic will grow, and sustained growth should lead to improvements in capacity balance and yields.

There is continued demand for the speed and reliability benefits that air freight offers. Industries that require transport of time-sensitive and high-value commodities such as perishables, consumer electronics, high-fashion apparel, pharmaceuticals, industrial machinery, and automobile components recognize the value of air freight, and this value will continue to play a significant role in their shipping decisions. The restructuring of logistics chains to serve the rapidly growing e-commerce industry also requires the unique capabilities that air cargo provides and offers a new area of growth.

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 to satisfy the demanding requirements of that market.

As global GDP and world-trade growth accelerate, air cargo traffic, as measured in revenue tonne-kilometers, is projected to grow an average 4.2 percent per year over the next 20 years. World air-cargo volume, in spite of exogenous shocks arising from economic and political events and natural disasters, grew an average of 5.2 percent per year over the last three decades. Replacement of aging airplanes, plus the industry's growth requirements, will create a demand for 2,370 freighter deliveries over the next 20 years. Of these, 1,440 will be passenger-airplane conversions. The remaining 930 airplanes, valued at $270 billion, will be new. The overall freighter fleet will increase by more than half — from 1,770 airplanes in 2015 to 3,010 by 2035.

Future freighter deliveries will be led by demand for large widebodies

New freighter demand - 930 new, 1,440 converted