World regions

Globalized demand

As emerging markets continue to grow and new business models expand, the customer base for airplanes is becoming increasingly diverse. In 1995, airlines in Europe or North America carried more than 64 percent of all traffic. By 2035, that share will shrink to 37 percent, with Asia Pacific and Middle East airlines becoming more prominent in global aviation.

The low-cost business model is becoming a viable option in emerging markets, offering passengers access to a wider range of destinations and the opportunity to choose the speed and convenience of flying rather than traditional modes of transportation. In addition, new, efficient widebody airplanes are enabling smaller operators in developing economies to compete on longer routes traditionally dominated by foreign carriers. The range and economics of these airplanes are also enabling the emergence of the long-haul low-cost business model, which is dramatically expanding the number of long-haul nonstop city pairs offered. Rapidly evolving aviation product offerings and growth in emerging markets are broadening the geographical balance of airplane demand, spurring a worldwide requirement for over 39,600 new jet airplanes, valued at $5.9 trillion.

Regional focus

Each region will respond to its unique situation and conditions with specialized airplane requirements. Middle East airlines continue to favor widebody airplanes and premium passenger services to leverage the area's geographic advantages and prominence in business travel. Airlines in Europe and North America are responding to growing competition from low-cost carriers by replacing older, fuel-inefficient airplanes with new and more economical single-aisle models. The large installed airplane base in these regions generates a need for a considerable number of replacement airplanes, even though growth is slower than in other parts of the world. In Asia, rising demand across the board will require a mix of single-aisle and widebody airplanes.

All regions will face similar challenges of fuel-price volatility, emission-control regimes, and ever-increasing airport and airspace congestion as the growing world fleet tries to keep pace with burgeoning international and local demand for air travel.

Market value: $5.9 trillion

Key indicators and new airplanes

Asia new airplanes: 15,130

Growing market

The Asia region continues to demonstrate vigorous economic growth at a rate of 4.1 percent per year, outpacing the global average by 2.9 percent. Driven by China and India as the main engines of growth, the region's share of world GDP is projected to rise from 31 percent today to 39 percent by 2035. The significant growth rate in this emerging market is expected to continue. As a result, airlines, airport capacity, and passenger traffic are expected to experience a robust growth rate in the next 20 years. Demand in commercial aviation is also coming from the continuing expansion of the middle class in Asia, where a greater sector of the population is reaching income levels that make flying more affordable. Despite the presence of geopolitical conflict and currency fluctuation, Asia's airlines are estimated to have earned a net profit of $5.8 billion in 2015 and are projected to earn a net profit of $6.1 billion in 2016.

Changing industry structure

Liberalization is responsible for significant expansion in Asia's aviation industry. Changes, such as open skies, enable the air-travel market in the region to expand beyond national boundaries and support airlines in implementing new low-cost carrier (LCC) business models, which is a viable and growing option for this emerging market. In addition to airlines being able to operate to new locations, easing of visa regulations is now allowing passengers to travel more broadly.

To expand outside their home markets, many airlines have created international joint-venture subsidiaries, avoiding restrictions on foreign ownership. Subsidiaries often embrace the LCC model, which was originally designed for short-haul leisure traffic flying single-aisle airplanes at the lowest possible fares. However, the trend is slowly shifting to also target corporate travel, where operating widebody airplanes with a premium cabin in medium-haul markets provides a viable alternative to network carriers for business travelers. LCC carriers support air-travel growth by making it more affordable and accessible, thereby meeting the emerging travel demands of the region's growing middle class.

Fast growing Low Cost Carriers in Asia

LCC's continue to gain share within Asia

Future Demand

Asia is gaining prominence in global aviation and is expected to become the world's leading travel market. Total air traffic for the region is forecast to grow at an average of 6.0 percent, and by 2035, passenger traffic throughout Asia will constitute 48.7 percent of global passenger traffic. Driven by the region's strong economic development, highly effective industry structure, and increasing accessibility of air transport services, more than 100 million new passengers are projected to enter the market annually.

To accommodate this significantly growing demand and modernize their fleets, over the next 20 years Asia will need 15,130 airplanes, valued at $2.35 trillion. The number of airplanes in the Asia fleet will nearly triple, from 6,350 airplanes in 2015 to 16,970 airplanes in 2035. Fast-growing LCCs within the region will help drive a need for 11,160 single aisle airplanes. Airplanes like the 787 and 777 have enabled airlines in the region to open new markets. These market dynamics will lead to regional need for 3,680 new widebody airplanes by 2035.

Air cargo also plays a crucial role in Asia. The region transports vast amounts of goods over difficult terrain and vast stretches of ocean. Many of the world's largest and most efficient cargo operators are located in the region. Carriers in the region are expected to need 320 new-production freighters and 580 converted freighters by 2035.

Strong growth in the single aisle market, average annual growth since 2005 has been 9.1%

New widebody markets started by Asian airlines

Market value $2.3 trillion

Key indicators and new airplanes

Bienvenido Cuba! New air-service agreements to boost travel to Central America (including the Caribbean)

Despite economic and political uncertainty in various regions of the globe, the North American airline industry is on a trajectory of continued growth in passenger traffic and capacity. Domestic service in the United States recorded the highest growth rates from all airline business segments. The Big 3 network carriers filled on average 86 percent of their domestic (mainline) seats as demand outpaced supply, with a year-over-year 3.5 percent increase of traffic and an increase of only 3 percent year-over-year in capacity.

As passenger traffic to Europe and South America face short-term headwinds, other regions are experiencing growth in travel to North America, notably Central America and the Caribbean. For the first time in more than a half century, there is a new air-services agreement between the United States and Cuba, signed between the respective governments in 2015. Several US airlines have applied for the initial flight frequencies to Cuba: 20 daily round-trip flights to the capital, Havana, and ten round-trips to nine other Cuban international airports. The United States Department of Transportation will award the initial frequencies to Cuba in the summer of 2016. Currently, the only scheduled air service from North America to Cuba is from Canadian gateways.

In addition to the Cuba agreement, the United States and Mexico also signed an expanded air-services agreement in December 2015, replacing the previous bilateral agreement that dated back to 1960. The current agreement restricts air service to a maximum of 30 transborder routes, with two or three airlines from each country permitted to serve. Under the new liberalized bilateral agreement, all air-service restrictions between the two countries will be lifted, a move that is viewed as the next step toward a future full open skies agreement.

Due to these new, expanded air-service agreements with Cuba and Mexico, the traffic forecast between North America and Central America increased 1.1 percentage points to 5.3 percent per annum predicted over the next 20 years. As previously mentioned, with six years of sustained growth within North America the traffic forecast has also been increased to 2.6 percent per year, up slightly by 0.2 percentage points. The expectation for a liberalized air-services agreement between the United States and China is also anticipated in the near future, which will further boost travel and trade between the two countries.

Over the next 20 years, we are forecasting a need for 8,330 new airplanes. Single-aisle airplanes are the largest forecast category, with an estimated 5,440 units representing 65 percent of demand. Due to a large installed fleet that is nearing economic retirement and the offering of new fuel-efficient airplanes, 65% of all new airplanes will be for replacement needs, slightly more than 5,400 airplanes.

North America U.S. airlines proposed jet flights to Cuba

Market value: $1.0 trillion

Key indicators and new airplanes

Strong growth despite uncertainty

Europe's aviation market remained strong in 2015 despite significant economic uncertainties. Europe's GDP grew by 1.9 percent in 2015 and is forecast to grow by 1.8 percent annually through 2035. The Association of European Airlines reports that member airlines carried approximately 307 million passengers, 4.3 percent more passenger traffic in 2015 than in 2014. Members of the European Low Fares Airline Association reported an increase in passengers of about 12.3 percent over 2014. European airlines acquired more than 240 new airplanes in 2015, of which 67 percent were single aisle.

The European aviation market is expected to grow during the next 20 years, with airlines forecast to acquire more than 7,500 new airplanes valued at over $1.1 trillion. Single-aisle airplanes will comprise the majority of deliveries, representing a 78 percent share of total deliveries. Although European aviation growth is slower than aviation growth in emerging economies, the region's large installed base of more than 4.600 airplanes supports substantial demand for replacement airplanes. Replacement demand will account for 56 percent of Europe's total new airplane market.

Continued strategic evolution

Airline operations in Europe continue to evolve with the launch of new ventures, routes, and business models. Norwegian Air Shuttle continues to expand their long-haul low-cost carrier (LCC) operations, while Lufthansa has launched a long-haul LCC subsidiary to compete for leisure passengers.

The introduction of the 787 has allowed operators to economically serve long-haul, nonstop markets that have not been served before. European operators have been on the forefront of this trend, with 96 long-haul routes introduced since 2012 — the most of any region.

LCCs continue to grow short-haul markets, providing over 47 percent of intra-Europe capacity in 2015. Network airlines are shifting short-haul flying to their LCC subsidiaries, and are focused on flowing long-haul passengers through their hubs with connecting itineraries. Smaller flag carriers and charter airlines must carve out a profitable niche to be able to compete in an environment where LCCs dominate short-haul, point-to-point service and large network carriers and their alliance partners exploit the cost advantages of mega-hubs for long-haul traffic.

Large Middle East airlines have captured significant long-haul share from Europe's network carriers by providing one-stop service from Europe to destinations such as India, Australia, and Southeast Asia, where the geographic advantage of Middle East carriers is greatest. In response, Europe's network carriers have shifted long-haul capacity to more profitable markets — notably the North Atlantic, where their capacity has grown over 20 percent since 2010.

LCC share within Europe approaching 50%

Market value: $1.1 trillion

Key indicators and new airplanes

Support for aviation growth

Located at the crossroads of Asia, Africa, and Europe, airlines in the Middle East are well positioned to compete for traffic connecting these continents. About 80 percent of the world's population lives within an eight-hour flight of the Persian Gulf, allowing carriers in the Middle East to aggregate traffic at their hubs and offer one-stop service between many city pairs that would not otherwise enjoy such direct itineraries.

Partnerships of various kinds also feed Middle East hubs. However, no single strategic approach has yet emerged as dominant from the organic growth in selective code sharing, equity stakes in out-of-region carriers, or membership in traditional alliances. Each of these strategies creates opportunities to coordinate schedules across international boundaries, which further enhance the appeal of services connecting the Middle East.

The 2016 Iran nuclear deal represents an impressive opportunity for the region. Iran has a large population spread across a number of significant urban centers. The country was cut off from the world for many years by economic sanctions, but this new agreement regarding the nation's nuclear program opens up channels for the removal of those sanctions and the reintegration of Iran into the world economy. Foreign investment and trade will see strong growth in Iran, while the new openness should allow airlines both inside and outside of the country to add new services. Airlines within the country now also have the opportunity to renovate their fleets¬ — an opportunity that they have been quick to act upon.

Lower oil prices challenged many Middle East economies in 2015 and 2016. Although not every country in the region has oil, many of its governments often use oil revenues in place of VATs, income taxes, or taxes on corporate profits to finance their operations. When oil prices fall below the expectations of these governments (which was typically $80 to $100 per barrel before the fourth quarter of 2014), deficits emerge, and they are prompted to cut expenditures. Further complicating the problem, lower oil prices also lead to reduced foreign investment and economic activity within the region's oil-exporting countries.

Middle East Aviation Growth Factors

Market value: $770 billion

Key indicators and new airplanes

Near-term challenges; long-term prospects

Several countries in the Latin America region are working through near-term economic challenges. The Brazilian and Venezuelan economies are contracting, and Argentina is on the edge, although the new government is taking positive action for improvement. Conversely, the economies of many other nations, including Mexico, Panama, Peru, and Colombia, are performing well and are positioned for continued expansion. Chile is still growing, although affected by the commodities slump, and Cuba is gradually opening its borders. The Latin American region has a history of cyclical ups and downs, but the fundamental drivers for future expansion remain in place: the middle class is growing, income levels are expected to rise, and the commodities and resources that have enabled growth during previous periods still remain. Overall, while the near-term economic outlook is challenging, long-term prospects for the region as a whole are promising.

Outlook for aviation

Air traffic increased during 2015, even in the midst of these challenges. Passengers carried, traffic (revenue passenger kilometers — RPKs), capacity (available seat kilometers — ASKs), and passenger-load factors all grew during 2015, according to the Latin American and Caribbean Air Transport Association, again demonstrating the resilience of air travel. Airlines are adjusting capacity and rationalizing their fleets as needed to deal with the current situations and to position themselves for growth.

Challenges provide incentive for change. Brazil is proposing to raise the maximum-permitted level of foreign ownership of Brazilian airlines to 49 percent, and airlines and airline-related entities are calling for reforms on taxes, policies, and regulations that constrain growth. Mexico and the United States reached a liberalized air-services agreement in late 2015 that is on track for approval, and ratification of the US-Brazil open-skies agreement appears to be imminent. These developments produce new opportunities for cooperation through partnerships and alliances.

Economic development is a key driver in the demand for air travel, and airlines and aviation infrastructure will evolve to meet this demand. Low-cost airlines and network carriers will continue to expand intra-regionally and internationally, providing more flights and better connectivity. As more cities are connected with better air service, business and leisure travel increase, which in turn further stimulate economic growth.

Traffic and fleet forecast

Passenger traffic growth for Latin America and the Caribbean is forecast to average 5.8 percent per year for the next 20 years. The fastest growth is expected within intraregional flows, as economic conditions improve. Traffic within South America is forecast to average 6.0 percent per year through 2035.

The cyclical pattern of growth followed by stabilization in Latin America is apparent in the historical development of the fleet for the region. Most of the growth has taken place within the single-aisle fleet segment, which is consistent with the forecast for demand for new airplanes. During the most recent expansion period from 2004 through 2015, the Latin American fleet grew at an average rate of 5.2 percent per year.

The region's commercial fleet is projected to double between now and 2035, from nearly 1,550 airplanes today to more than 3,600. Latin America will need 2,960 new deliveries over the next 20 years to meet the combined demands of growth and replacement. The majority of these deliveries are expected to be in the single-class segment, reflecting the continued growth of low-cost carriers and further expansion of networks within Latin America and the Caribbean.

Latin America Fleet Evolution

Market value: $350 billion

Key indicators and new airplanes

Short-term economic headwinds

A combination of external and domestic factors caused Africa's economic activity to slow from 3.4 percent in 2014 to 3.0 percent in 2015. The region has benefitted from a much-improved business and macroeconomic environment, high commodity prices, and highly accommodative global financial conditions. However, 2015 saw a shift in external conditions with lower commodity prices, a slowdown in major trading partners, changes in foreign exchange rates and tightening borrowing conditions. Domestic factors, such as electricity shortages and political instability and conflict, contributed to unfavorable conditions in some middle-income countries. The recent downturn in commodity pricing has hurt the African economy though GDP decline is projected to slow in 2016, as prices stabilize and supply constraints ease. Pricing volatility can reduce long-term growth prospects but many policymakers have adopted better fiscal policies that have allowed them to minimize the effects of downturns in the economic environment. Despite the headwinds, the decline is projected to be short term, with a rebound commencing in 2017.

Less dependency on commodity pricing

Africa is much better positioned to manage some difficult economic conditions because their dependency on commodity pricing has decreased. The region has an immensely improved business and macroeconomic environment, supporting higher investment through improved policies. According to the Doing Business report by World Bank Group, Sub-Saharan Africa made more regulatory improvements from 2013 to 2014 than any other region. Solid private-consumption growth with ongoing infrastructure investment is continuing in most of the region's low-income countries and many in the region are resisting a weakening trend and continue to post robust growth. While some countries are being negatively affected by the sharp decline in the prices of their main commodity exports, particularly the region's oil exporters, it has been a boon for others that are net importers seeing economic gain from more favorable pricing. Growth in services has expanded quickly, manufacturing output has grown, and tourism has rapidly accelerated as the number of foreign visitors doubled and receipts tripled between 2000 and 2012. Even in a period where commodity production slips, other parts of the economy have improved to reduce the impact. Of the 38 countries where data was available, 28 had more than 60 percent of their merchandise exports from commodities. Further reduction on this dependence will dampen the booms and busts of economic activity throughout the region. The World Bank projects that commodity prices will generally level out in 2016, with a recovery in 2017 projected from stronger demand, and potentially supply disruptions.

Long-term growth indicates increased demand for airplanes

Air traffic to, from, and within Africa is expected to grow by about 6.1 percent annually over the next 20 years as airplane technology continues to increase fuel efficiency, opening new international routes that were previously unattainable. Flights between Africa and Europe continue to account for the largest share of the region's air travel, although the market share is decreasing and is projected to continue the decline during the forecast period. Adding in the traffic between Africa and the Middle East and within Africa, a virtual tie for the second largest traffic flows, the top three constitute more than 86 percent of the total capacity, with intra-Africa being the fastest growing by net capacity. This growth, combined with the need to replace the region's aging fleet, will result in a demand for 1,150 new airplanes. While the majority of the demand will be for 810 single-aisle airplanes, the need for new widebody airplanes will also increase as air travel continues to grow among the expanding African middle class and long-distance visitors.

Commodity prices stabilized and are increasing

Market value: $170 billion

Key indicators and new airplanes

Current economic headwinds delay long-term future growth

2016 will prove to be another trying year for Russia and the Commonwealth of Independent States (CIS). With a projected 2.3 percent decline in the Russian GDP, only modest improvements in energy pricing, and continuing economic sanctions, the region will continue to struggle toward growth gains. However, countries less dependent on energy exports do offset the aggregate GDP decline to 0.9 percent, offering a glimpse of slow recovery back to growth territory within the next three years.

As a consequence of the economic and political challenges within the region and internationally, aviation demand within the CIS is projected to grow at a modest 3.1 percent through 2020. In 2015, a 23 percent reduction in the value of an already weakened ruble served to constrain international travel. But owing to the unique geographic demands of the CIS-member countries, which span twelve time zones, domestic traffic over 1000 kilometers has seen an impressive 13.9 percent increase in passengers carried in 2015 compared to the previous year. While the ruble remains weak against the US dollar and the euro, Russians and other CIS citizens will spend more of their discretionary income in domestic markets.

Opportunities for new markets

The economic turmoil has resulted in a retrenchment for many CIS airlines. In the near term, the net result is overcapacity, particularly for long-haul airplanes used for international travel. However, the development of low-cost carriers (LCCs) in the marketplace is creating new opportunities for more efficient use of airplanes, both domestically and in markets immediately adjacent to CIS countries. There has been a slightly increased liberalization of Russia's regulatory policy that had prevented the development of LCCs. The emergence of low-cost carriers in the marketplace should create demand for new single-aisle airplanes, which is estimated to be 810 over the next 20 years.

Long-term outlook

As the political and economic situation improves, international travel will rebound along with a requirement in the region for more twin-aisle airplanes. International traffic is expected to grow at an annual rate of 4.8 percent over the next 20 years. Concurrently, the development of low-cost carriers within the CIS market space will spur demand for single-aisle airplanes. CIS airlines will need 810 single-aisle and 170 widebody airplanes to handle the increased traffic. Additionally there is now pent-up demand for replacing an increasingly aging fleet of Russian-built airplanes. Together with older, western-built airplanes, 47 percent of deliveries will be used to replace existing stock.

It is estimated that 190 regional jets, both western and Russian built, will be required over the next twenty years; this demand is being driven by the growth that the intra-CIS region has been experiencing.

Domestic travel growing as airlines look for opportunities to expand

Market value: $140 billion

Key indicators and new airplanes