More optimism is on the horizon for the aviation industry, with the International Air Transport Association (IATA) announcing that airlines are globally experiencing faster growth in more than a decade.
IATA’s chief executive, Alexandre de Juniac, commented that “A brighter economic picture and lower airfares are keeping demand for travel strong”. He expects 2017 to see above-trend growth. Indeed, last year, IATA announced it expected the global airline industry to make a net profit of $29.8 billion in 2017. These comments appear to be consistent with Norton Rose Fulbright’s 2017 Global Transport Survey which we wrote about in June. That report also found the aviation sector had much to look forward to.
IATA’s market analysis report concluded that revenue passenger kilometres (RPKs) increased by 7.9 per cent in the six months prior to 30 June 2017. It demonstrated the largest first half pickup in demand since 2005. Asia-Pacific airlines were right in front according to the report, with an RPK growth rate of 10.6 per cent. Australia, by contrast, was rather flat. Domestic airlines here have been cutting capacity in an attempt to match the demand reflecting in the market.
Airport infrastructure, however, continues to be a significant issue for airlines. Airline profitability links closely with this infrastructure, which allows them to effectively conduct their operations. In 2015, a report from consultancy firm PwC expected to see the highest level of airport infrastructure in the Asia-Pacific region this decade. There is an estimated cumulative investment of US$275 billion. China will enjoy the most of this investment, with $160 billion investments from 2015 to 2025. But this is unfortunately not the end of the story. Whilst the demand for airport infrastructure is high, many Asia-Pacific nations maintain strict ownership regulations stifling foreign direct investment. We have seen airports around the world thrive because of a mixture of commercial and government investment. However, Chinese, Indonesian and Philippines laws still limit the scope for overseas investment. It is a persistent protectionist trend visible across the Asia-Pacific.
Whilst airport operating companies in Australia are subject to a 49% limit on foreign ownership, China seems to be more restrictive. Whilst Shanghai International Airport was predominantly designed by foreign companies, for example, in 2015, the Hong Kong’s stock exchange announced it would freeze buy orders for the airport after it was notified that foreign ownership topped 28%. They commented that trading could resume once the figure fell to 26%.
Furthermore, de Juniac also said that costs are on the rise for airlines. It may even lead to cheap airfares to fade. Bloomberg suggests that customers will need to pay more to fly because of higher fuel and labour costs. United States-based airlines recently also agreed to range of expensive labour contracts. It represents about $3.3 billion in higher operating expenses according to one financial analyst firm. There is indeed pressure from pilots, who urge their pay to increase. Norton Rose’s Transport Survey also reported that 72 per cent of their aviation respondents predicted a rise in fuel costs.