Chief Economist s Report 22 February 2017 IATA Legal Symposium, Washington Brian Pearce Chief Economist, IATA Airline Industry Economics Advisory Workshop 2016 1
Themes 1. World economy still stuck on low-growth path 2. Demand for air travel strong but cargo challenged 3. Still great value for consumers and the wider economy 4. Investors seeing value created for 1 st time, but not everywhere 5. Industry facing threat of disruption Airline Industry Economics Advisory Workshop 2016 2
World economy stuck on low-growth path 5 IMF forecasts of global economic growth (using market exchange rates), % y-o-y 4 3 2 1 April 2013 April 2014 April 2015 April 2016 January 2017 Latest data point 0-1 -2-3 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: IMF World Economic Outlook databases
Partly because of the debt overhang % of GDP % of GDP 280 270 Developed economies 260 250 240 230 220 Developing economies 210 200 1999 2001 2003 2005 2007 2009 2011 2013 2015 Source: Bank for International Settlement database Outstanding debt of non-financial sector, % of GDP 190 180 170 160 150 140 130 120 110 100
% change over previous year But also the retreat from globalization 15 World GDP and cross-border trade growth 10 5 World trade growth World GDP growth 0-5 -10-15 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: IMF World Economic Outlook and the World Trade Organization
% change over previous year Poor demographics in some major economies 4.0 Labour force growth 3.0 2.0 1.0 0.0-1.0 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 Note: Only +0.1% pa without net immigration US China Japan Germany Source: Oxford Economics
% interest rate Billion US$ The exhaustion of monetary policies 10 9 8 7 6 5 4 3 2 1 US federal funds target rate and balance sheet assets US Federal Reserve Bank assets US fed funds 0 1985 1990 1995 2000 2005 2010 2015 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 Source: Haver
% GDP And, until 2015, fiscal austerity policies 2.5 Change in structural government deficit, as % GDP 2 1.5 Eurozone US Fiscal tightening 1 0.5 0-0.5-1 2011 2012 2013 2014 2015 2016 2017 Fiscal relaxation Source: IMF World Economic Outlook databases
Billion US$ Billion US$ Demand for air travel strong, but cargo challenged 600 Airline revenues, tickets, cargo and ancillaries Passenger ticket revenue 120 500 400 300 200 100 0 Ancillary revenue Cargo revenue 2000 2002 2004 2006 2008 2010 2012 2014 2016 100 80 60 40 20 0 Source: IATA Economics using data from PaxIS+, IdeaWorks, CargoIS, ICAO and IATA Statistics
Large potential in populous but (currently) poor markets Source: IATA Economics using data from PaxIS+ and Oxford Economics
Centre of gravity of air travel shifting fast towards China 1914 2004 2015 2035 Source: IATA Economics using data from PaxIS+
Millions Chinese tourist outflows begin to dominate 140 120 100 Tourist departures, million China Germany US 80 60 40 20 Japan 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 Source: IATA Economics using data from Tourism Economics Decision Metrics database
% change over previous year Cargo faces weak world trade but boom in e-commerce 25% 20% 15% 10% 5% Growth in world trade and (US) e-commerce sales Growth in e-commerce sales Growth in world trade 0% -5% -10% -15% -20% -25% 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: IATA Economics using data from Netherlands CPB and Haver
Air travel delivering increasing value for consumers 1000 900 800 700 600 500 400 300 200 100 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: IATA using data from PaxIS+ and Oxford Economics Average worldwide return fare, US$ Average return fare, adjusted for CPI inflation Average return fare
Connections and low costs benefit the wider economy Number of unique city-pairs US$/RTK in 2014US$ 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 Unique city-pairs and real transport costs Unique city-pair connections Real transport costs 1995 1999 2003 2007 2011 2015 Source: IATA Economic Performance of the Airline Industry, End-Year 2016 report 3.00 2.50 2.00 1.50 1.00 0.50
At last investors are getting a normal return % of invested capital 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Return on capital invested in airlines 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: IATA Economic Performance of the Airline Industry, End-Year 2016 report Cost of capital (WACC) Return on capital (ROIC)
But airline profitability still challenged outside the US 15% Net post-tax profit margins 10% 2015 2016 5% 0% -5% -10% N America Europe Asia Pacific Midle East L America Africa Source: IATA Economic Performance of the Airline Industry, End-Year 2016 report
Balance sheets in some regions remain weak Adjusted net debt/ebitdar 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 Adjusted net debt/ebitdar by region 2.0 2011 2012 2013 2014 2015 Source: IATA Economic Performance of the Airline Industry, End-Year 2016 report Latin America Asia Pacific Europe North America
Is the future more normality or disruption? Replicability of the US and North Atlantic experience Ownership & control barriers under pressure Empowered consumers and the data aggregators Airline Industry Economics Advisory Workshop 2016 19
Replicability of the US and N Atlantic experience Consolidation? Open Skies allowing ATI-JVs? Focus on ROIC and capital productivity? Move away from commoditized seat/schedule product? Airline Industry Economics Advisory Workshop 2016 20
Ownership & control barriers under pressure Cross-border JVs in Asia and Latin America Minority shareholding in foreign airlines Chinese acquisitions and tourism/economic interests Airline Industry Economics Advisory Workshop 2016 21
Empowered consumers and the data aggregators Hand-held information availability + social media platforms Transparency Personalization Opportunity - NDC/FFP data Challenge GDSs or is it the data aggregators? Airline Industry Economics Advisory Workshop 2016 22
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