What Are The Factors Behind Soaring Air Travel Growth?

+6.17%
Upside
15.35
Market
16.30
Trefis
AAL: American Airlines logo
AAL
American Airlines

Air travel worldwide is likely to double over the next two decades, driven by factors such as low air fares, higher living standards, and an  expected recovery in the world gross domestic production (GDP). However, this growth in enplaned passengers is expected to be uneven, given the changing population and demographic scenarios in different parts (developed and developing economies) of the world.

Uneven Growth

While most of the growth in air traffic is estimated to come from the emerging economies of India, China, and Brazil (5% to 7%), the U.S. will remain the second highest contributor to incremental air traffic in absolute numbers.

Relevant Articles
  1. Should You Pick American Airlines Stock At $14 After A 6% Fall In A Week?
  2. With 20% Gains This Month Is Alaska Air A Better Pick Than American Airlines Stock?
  3. Which Airlines Stock Will Offer Better Returns – American Or United?
  4. What To Expect From American Airlines’ Q2?
  5. Will American Airlines Stock Recover To Its Pre-Inflation-Shock Level?
  6. Pick Either American Airlines Stock Or Its Peer – Both May Offer Similar Returns

air4

*O-D passengers refers to origin-destination passengers (doesn’t include stop-overs or connecting destinations)

Further,  U.S. air traffic growth, at an estimated 3%, is the highest as compared to its peers among the developed nations. The growth in the U.S. air traffic is primarily supported by cheap air tickets and higher living standards due to the expected recovery of the U.S. economy going forward. Within the U.S. as well, the growth would be extremely disproportionate, coming from the high-income class more than low or middle income. While at the lower end, a person will make one trip per person in 25 years (low income group), at the upper end the number of trips made by a person in a year will be more than 1 (high income group).

air5

Drivers of Air Traffic:

1.Higher living standards

Rising GDP, and consequently, disposable income and living standards, result in an increased demand for air travel for both business and leisure purposes. Although living standards is one of the most important determinants of the number of enplaned passengers, it is important only until a point. As can be seen in the graph below, despite highest GDP per capita, countries like Switzerland and Norway compare to those like Hong Kong and Singapore, in terms of flights per capita.

air6

Source: International Air Transport Association (IATA)

More than developed economies, higher living standards propel the growth in air traffic for emerging economies as their propensity to spend can grow at a much higher pace, and their markets haven’t reached maturity yet. Research by International Air Transport Association (IATA) also says that countries on a growth curve up to approximately US$20,000 per capita witness correspondingly faster increases in the number of flights taken per person per year.

This is also closely linked to globalization, where the average distance traveled tends to increase as people take long-haul holidays and do business in countries which now have more favorable political and social environments.

You can refer to our article, Upside Scenario: Air Traffic Under Liberal Economic Policies, to study the effect of the change in living standards on an airline’s air traffic (revenue passenger miles). Further, please use our interactive charts below to study the impact of various drivers, like revenue passenger miles, on our price estimate for the company.

2.Demographics

Recent studies by International Air Transport Association (IATA) have concluded that working age population makes more trips than its older and younger counterparts. As a result, countries witnessing a shift in demographic trends in favor of working-age population are likely to see higher growth in their air traffic.

air7

Source: International Air Transport Association (IATA)

3.Cost of Travel

Cost of travel is essentially the price paid by the customer to buy an air ticket. As air travel becomes cheaper, a larger number of people are able to afford it, resulting in an increase in traffic. In the last few years, the unit cost per trip has been on a downtrend, due to improvements in airline efficiency and increased competition. This development has been further supported by the fall in crude oil prices in 2014, cutting airfares by around 40% in real (i.e. inflation-adjusted) terms since the mid-1970s. However, there is a huge scope for these costs to come down further, given the fleet replacement program many airlines have undertaken to become more cost efficient, and the continued slump in oil prices.

air8

Source: International Air Transport Association (IATA)

Greater liberalization of air markets has the potential to increase global air traffic growth by over 1% per year. However, in case of hostile situations (terror attacks) resulting in closed boundaries, we may see a downside in air traffic growth of only 1.6%, as opposed to the base case of 4% growth.

Please refer to our interactive charts below to study the impact of various drivers, like fuel costs, on our price estimate for the company.

Have more questions about American Airlines (NYSE:AAL)? See the following links:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for American Airlines

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research