Protectionist rhetoric has swept several major economies, which has translated into a dismantling of trade relationships and regimes. Fuelled by isolationist policies, a retraction from decades of progress toward greater global economic integration will have adverse effects on many industrial sectors spanning many economies. Because aviation has strong links to the global economy and to local development through commerce and tourism, these new barriers will inevitably restrain the efficient flow of people, goods and services. Air transport very much relies on open markets to grow.
The pendulums of the geopolitical climate and the aviation industry have been moving in opposite directions. On the one hand, passenger traffic remains resilient in the face of downside risks to the global economy, posting annual growth rates above historical averages. With the cost of travel decreasing in many markets and middle-class populations burgeoning in emerging markets, tourism has remained irrepressible. Even considering the heightened geopolitical tensions and downside economic risks that have persisted in certain parts of the world, passenger numbers are estimated to have reached 8.8 billion in 2018, growing by 6.4% compared to the previous year. This increase is slightly above the 5.1% Compound Annual Growth Rate (CAGR) for passenger traffic from 2008 to 2018. However, with the spectre of uncertainty hanging over major economies, many pundits point to signs of economic weakness on the horizon. With trade relations fragmenting and global output growth moderating, airport traffic may be adversely affected by these downside risks. In 2018 the air cargo market did not fare as well as passenger traffic. Air cargo is an important component of the global trading system for the shipment of high value-added goods. The impact of tariff walls imposed between China and the US are already apparent. Global year-over-year volume fell 1.7% in December 2018 against the previous year, bringing growth for 2018 overall to 3.4%. If these isolationist policies persist, their adverse effects will continue to stifle output growth in many countries. Economies that rely more on exports or carry higher debt loads will be most sensitive to a downturn, further exacerbating economic conditions. The contagion effect of such a downturn could quickly spread into the aviation sector.
Climate change represents yet another important challenge for the aviation industry. Aviation stakeholders have pledged to a 50% reduction in net carbon emissions by 2050. While this is a concerted effort across the air transport ecosystem, it could be achieved, in large part, through replacing older fleets with a new generation of aircraft which will emit less carbon. Other enhanced technologies will act in tandem with fleet renewal to reduce aviation-industry emissions. A new term has entered the consciousness of a generation of travellers, especially in parts of Europe. “Flygskam,” which means “flight shame”, is a recently invented Swedish word to encourage people not to fly. Despite a strong commitment by the aviation industry to reduce emissions, other competing modes of transport—such as high-speed rail—which have lower carbon footprints could cannibalize parts of the aviation market on certain route segments. While it is still too early to identify the impact of this new social trend, the downside risks are evident and could potentially curb air transport demand.
The airport industry is engaged in a high-wire balancing act: downside risks threaten to curb air transport demand whereas upside risks, which are already omnipresent, challenge future growth in key markets facing supply-side bottlenecks. On the upside, airport operators face capacity constraints that have intensified bottlenecks. With ACI World’s global medium-term forecast showing almost 30% growth in passenger numbers from 2018 to 2023, many national governments face the predicament of surging air transport demand outstripping available airport infrastructure. More than 200 airports require slot coordination because they have insufficient capacity to meet demand at all times of the day. Coordination based on global standards helps to maximize the utilization of existing capacity, avoiding delays, and improving the passenger experience.
All regions of the world have airports that are experiencing capacity constraints to varying degrees. In less than the past decade, many parts of East, South and South-East Asia have experienced rapid surges in air transport demand whereby airports have almost reached or exceeded their passenger capacities. While races to develop larger greenfield hub airports to accommodate demand and ensure connectivity are under way in many markets such as China, other regions are more limited in their ability to expand. Not only is Europe limited in its ability to build new airports, but limitations on its airspace act as an additional impediment. According to Eurocontrol, an intergovernmental organization that monitors air traffic management (ATM), under the most likely scenario 1.5 million flights—160 million passengers—will be unable to fly by 2040. An estimated 470,000 passengers will be delayed 1 to 2 hours per day in 2040, compared to 50,000 delayed passengers per day in 2016.
Another upside risk to aviation is human capital. The continued growth in air transport demand has significant implications for the professional-pilot pipeline worldwide. According to a projected 10-year review by CAE, an aviation training services company, 255,000 new airline pilots will be required to sustain and grow the commercial air transport industry globally by 2027. A combination of rapid fleet expansion and high pilot-retirement rates has created a further need to develop 180,000 first officers into new airline captains. In other words, over 50% of the pilots who will fly the world’s commercial aircraft in 10 years’ time have not yet started to train.
Global passenger traffic grew 6.4% in 2018, to a total of 8.8 billion passengers. International passenger traffic grew faster than domestic passenger traffic (6.7% versus 5.5%). While growth moderated slightly compared to 2017, passenger traffic remained resilient in the face of the global uncertainties besetting many economies. The 2018 increase is slightly above the 5.8% compounded average annual growth rate for passenger traffic from 2010 through 2018—the years following the Great Recession (see Chart 1).
Chart 1: Global passenger traffic (2008–2018)
With the exception of the Middle East, which saw passenger traffic almost flatten to 0.7% growth in 2018 because of tensions in the region and airspace restrictions placed on Qatari flights, all regions posted higher growth in passenger numbers than in 2017. International traffic remained a key driver for increases, especially in African, European, and Asia-Pacific markets. The Indian and Chinese markets were responsible for much of the Asia-Pacific region’s robust growth. Airports in these countries continued to achieve double-digit percentage growth in 2018. Overall traffic in the Asia-Pacific region grew 9.4%. In spite of the uncertainty and pending outcome of the United Kingdom’s withdrawal from the European Union (EU), Europe’s largest aviation markets continued to see passenger traffic grow substantially in 2018. Eastern European countries were major contributors to this growth. Africa has also experienced feedback loops from strong international demand. A revival of Africa’s largest economy, Nigeria, after a 2016 recession has also helped solidify domestic markets. Europe and Africa experienced growth of 6.4% and 9.4% respectively (see Chart 2).
Chart 2: Passenger traffic growth rates by region
Airports handled over 122 million tonnes of air cargo in 2018 as the market experienced a moderation in growth to 3.4% year-over-year. This came after a sharp 7.7% increase in 2017, when international trade and industrial production were buoyant with activity (see Chart 3). As inventory build-ups peaked, export orders continued to weaken at the end of 2018 and into 2019, with heightened trade tensions and erected tariff barriers affecting global supply chains.
Chart 3: Global air cargo volumes (2008–2018)
Nearly all regions posted declines in air cargo volumes in December, resulting in a year-over-year loss of 1.7% during the month. International freight volume growth was weaker than domestic growth in 2018, experiencing a modest 2.9% increase. The largest airport markets for cargo volumes handled were the Asia-Pacific, North America and Europe regions, which together handle over 85% of all air cargo globally. Those regions grew by 3%, 5.1% and 2% respectively (see Chart 4). Despite the US-driven fall-out in global trade relations, the North American domestic freight market remained strong. Growth in express delivery and online orders through e-commerce platforms remained an important driver, boosting domestic freight volume 5.8%.
Chart 4: Air cargo traffic growth rates by region
Global passenger traffic growth was subdued in the first half of 2019 as compared to previous years. A moderate increase of 3.9% year-over-year was recorded for the first six months. The global economic slowdown has already spilled over to aviation markets. Air cargo has felt an even greater impact as a result of erected tariff walls from protectionist policies. Volumes handled by the world’s major airports contracted by 3.2% in the first half of 2019. A resolution to the trade disputes will help put aviation markets back on track especially since the underlying economic fundamentals of the industry remain strong. The move toward liberal economic policies is an important enabler in the free flow of people and goods. A continued retreat from this scenario will inevitably weaken growth prospects and potentially increase the cost of air travel and the shipment of goods.
Even with the short run challenges, passenger traffic worldwide is expected to double by 2034. Over the long term, it is projected to grow at an annualized rate of 4.1%, reaching 20.9 billion by 2040. The predicted total passenger CAGR for advanced economies by this date is 2.8%, but that of the current emerging and developing economies is almost double that at 5.3%. Air cargo volumes and aircraft movements are forecast to increase at annualized rates of 2.4% and 2.0% respectively up to 2040.