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The Future Shape of the Air Transport Industry Dr Peter Morrell Director of Research Department of Air Transport Cranfield University Brighton, 7 June 2006 Outline Future passenger market trends Short- versus long-haul? Can constraints be overcome? Business model shift

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the future shape of the air transport industry

The Future Shape of the Air Transport Industry

Dr Peter Morrell

Director of Research

Department of Air Transport

Cranfield University

Brighton, 7 June 2006

outline
Outline
  • Future passenger market trends
  • Short- versus long-haul?
  • Can constraints be overcome?
  • Business model shift
  • The airline product and segmentation
  • IFE
  • Conclusions
slide3

Future market trends

  • Strong growth expected in long-haul leisure, but security will limit potential destinations
  • Strong growth in short break holidays, with greater choice offered in terms of:

Departure times/days

Hotels and quality of service

Booking and payment processes

  • Network airlines focus on connections to their more lucrative long-haul services
  • More holiday de-packaging, but still a role for on-line consolidation
slide4

Israel

Lebanon

Nigeria

Pakistan

Sri Lanka

Thailand

Where can we go on holiday? (January 2005)

UK government advises against all travel to Somalia and Ivory Coast, and to parts of 30 other countries, including:

UK government advises against all but essential travel to CAR, Guyana, Haiti and Iraq, and to parts of 24 other countries, including:

Algeria

India

Indonesia

Israel

Nigeria

Pakistan

Philippines

Russia

source the economist 13 may 2006
Source: The Economist13 May 2006

Don’t forget outbound travel from fast-growing economies with large populations

slide6

BAA UK airport passenger profile

  • Core market of more experienced, frequent travellers
  • More independent travel by the young and ‘silver surfers’
  • Above average growth in: - long haul

- short breaks

  • More women, particularly on business
  • More non-English speakers
  • Less ‘pure’ business, more leisure and business/leisure mixes
  • Socio-economic profile closer to the average

Source: Stan Maiden, BAA Presentation, 2004

slide7

Spending patterns?

  • Rising disposable incomes
  • More flexible working, labour mobility, short breaks
  • Ageing populations (health care and pensions)
  • Early retirement (more time for travel, but savings?)
  • Competing attractions (saving/investing, sport, eating out, TV/films/gambling, more expensive car/house …)

Support ratio in China: 6 people of working age supporting each person over 65 in 2000; falls to less than 2:1 in 2050

slide8

Forecasting leisure travel

  • Leisure travel purpose:

Crash out and do nothing (usually sun/sea)

Activity (ski, dive, climb, walk, explore)

  • Greater discretionary income, lower prices, easier to purchase and good marketing
  • Travellers historically perceived the air fare as the largest component in air travel cost; no longer so on many short sectors
  • Forecasters and planners need to understand these demand drivers
slide9

UK Government forecasts: UK Residents (Passengers)

Source: UK Department for Environment, Transport & Regions: Air Traffic Forecasts for the UK 2000, May 2000

constraints fuel prices
Constraints: Fuel prices
  • Limited impact of current high fuel prices on the world economy, and thus air traffic growth rates
  • Some reduction in demand from high fuel surcharges, but more than outweighed by low cost airline growth
  • Era of $50-70 crude oil will lead to:

Economical extracting of alternative (non-OPEC) supplies

Economical application of known technologies extracting of alternative (non-OPEC) supplies

Economical application of known technologies to engine and aircraft design for greater fuel efficiency

slide11

World airlines: share of fuel in total costs

In 2005/06: British Airways: 20% compared to Singapore Airlines 24%

environmental constraints
Environmental constraints
  • Local noise concerns: major airports attract housing and industry
  • Local air quality regulations: coming soon from Brussels; a condition for new (short) runway at London Heathrow
  • Climate change: air transport currently only small contribution, but greater impact at cruise altitude
  • Proposals for aircraft engine emissions trading and an emissions tax unlikely to impose excessive cost on industry: already coping well with fuel price escalation
  • Difficult to achieve future fuel efficiency increase in excess of traffic gowth rates: but laminar flying wing estimated to give 70% reduction in fuel burn per tonne-km vs existing aircraft
slide15

Main airline business models

  • Network carriers

Global networks and hubs feeding traffic on to long-haul flights

Part of strategic alliance structure

  • Low Cost Carriers (LCCs)

Point-to-point, with self service transfers

Simple product and fare structure

  • Regional airlines

Some feed to network carriers and inter-regional low density flights with small jets or turbo-props

  • Charter/leisure specialists

Lower frequency flights to leisure destinations

Tour operator ownership: most seats still ‘packaged’

slide16

European seat-kms by airline group

19992004

Network carriers 84% 77%

Regional carriers 14% 12%

Low cost carriers 2% 11%

Total seat-kms (ASKs) per week in June 2004: 24 billion

Over same period:

LCCs increase share from 3% to 15% of total departures

Regional carriers’ departure share drops from 29% to 21%

slide17

Network vs LCC model

Both dedicated to safe and punctual flights

  • The network model adapts operations to the various market segment needs
  • The LCC model is based on lowest cost scheduled operations: assume that low fare is major requirement (passengers adapt to airline)
  • Both models increasingly see advantages of separate pricing for extra services (ancillary revenues)
slide18

Network carriers:Weighted average long-haul aircraft seats by class, 2005

Source: JP Fleets and airline websites

market segmentation by flight
Market segmentation by flight
  • More business class only flights on long-haul
  • LCCs greater focus on leisure passengers, but some (easyJet, JetBlue etc) targeting business passengers as well:

Some network airlines copying LCC tricks, and lowering service standards

LCC product generally not attractive to business, especially on longer sectors (eg no seat allocation, 30” seat pitch)

easyJet experimenting with priority boarding

ife needs long haul
IFE needs: long-haul
  • Premium class passengers

Own equipment (laptop, phone ..)?

Sleep on flight: disturbance from neighbour?

Extra revenue or include in price?

  • Economy class passengers

Lower comfort, greater need for entertainment

More children: high video/games users

Sleeping more difficult (can sleep on arrival)

Generally higher usage

Charge extra?

slide21

IFE needs: short/medium-haul

  • Premium class passengers

Own equipment (laptop, phone ..)?

Extra revenue or include in price?

  • Economy class passengers

Tight seat pitch: need for IFE on longer sectors

More children: high video/games users

Aircraft weight saving: mobile units?

Ryanair trial not successful

Charge extra?

conclusions
Conclusions
  • Large potential market if prices remain affordable
  • Business and leisure markets will both be huge, greater number of trips satisfying both demands
  • Short-haul will remain dominant in terms of passenger numbers, but growing revenue share of long-haul
  • Specialisation and ‘one-stop’ shop models of airline service will co-exist
  • LCC model will increasingly target business passengers
  • IFE needs to meet varying demands depending on flight sector length
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