Investment aligns with a rapidly expanding global aviation industry

The aviation sector is experiencing rapid growth worldwide, propelled by booming tourism industries, lower airfares and the push for greater connectivity in an increasingly globalised economy. Middle-class expansion has also spurred growth in air travel, as more people are able to afford flights for holidays or business-related travel. According to Boeing, commercial airlines saw annual average passenger growth of 6.2% between 2012 and 2017. The manufacturer also estimated that by 2036 an additional 41,000 plane deliveries will need to be fulfilled in order to meet service needs for both passengers and cargo. To accommodate these developments, civil aviation authorities and airlines are investing in airport infrastructure, route expansion and fleet capacity, among other efforts. However, the speed at which the industry is growing poses challenges, particularly in regard to human resource needs, safety and congestion, leading to concern that the industry is expanding too rapidly. Significant investment will be needed in all areas of aviation to ensure it is ready to meet long-term demands.

Full Throttle

The International Air Transport Association (IATA) estimated that the profits of the global commercial airline industry would increase from $34.5bn in 2017 to $38.4bn in 2018. Growth in emerging markets will likely continue to be driven by the low-cost carrier (LCC) segment, which in recent years has transformed air travel from a luxury to an affordable means of transportation. Since 2008 fares have decreased by an approximate average of 0.9% per year, in large part due to the impact of LCCs on market competition. This has enabled a greater number of people to choose air travel, particularly those in growing middle-class economies where disposable income is on the rise.

The tourism and aviation industries continue to enjoy a symbiotic relationship. With record numbers of tourists travelling by air, the IATA projects that flyers worldwide will spend $776bn on travel in 2018. Successful tourism promotion campaigns, growth in e-commerce and the development of niche markets have triggered greater demand for airline services, leading to improved connectivity for emerging-market destinations.

Challenges & Potential

Air travel remains cost prohibitive in some regions, namely Africa, where the LCC segment has yet to take hold and there are few options to fly between countries. As of February 2018 foreign airlines covered 80% of the continent’s air travel. The largest country by area, Algeria, has 36 airports, and between 2015 and 2016 its commercial flights increased by 9%. Nevertheless, challenges remain with the high cost of infrastructure upkeep and minimal investment in tourism. Similarly, passenger travel is increasing significantly in Nigeria: its airports are expected to handle 33.7m travellers in 2035, up from 8.5m in 2016. To accommodate this growth, its infrastructure will need to be modernised and expanded, which could help make Nigeria a regional transit centre.

In January 2018, 23 African countries agreed to launch the Single African Air Transport Market, with the intention of reducing bureaucratic intervention and airfares and increasing the number of direct flights between countries. It also provides a framework for easing visa requirements, which will likely trigger tourism growth in the signatory markets.

In South-east Asia, regional integration is fuelling aviation’s growth, as it expands to meet the needs of business travellers, and trade and logistics operations. Dexter Comendador, president and CEO of Philippines AirAsia, told OBG, “Aviation is leading the way when it comes to integrating ASEAN economies, creating links and demonstrating the benefits of regional partnerships.” In 2016 there were more than 230 commercial airlines in the Asia-Pacific region, making up an estimated 27% of the world’s commercial aircraft fleet.

While air travel has become more accessible, rapid service expansion has also led to traffic congestion, delays and concerns about environmental impact. This has prompted new initiatives, including reforms to the regulatory framework for aeroplane carbon dioxide emissions and design solutions to improve fuel efficiency. To combat rising congestion, the UAE recently launched a new air traffic control system – an industry first. Developed by the General Civil Aviation Authority, the Airspace Restructuring Project was launched in December 2017. The new system uses satellites, aeroplane computers and performance-based navigation to guide aircraft along their routes, rather than transmissions from terrestrial beacons.

Friendlier Skies

May 2018 brought an end to long-standing tensions between US and Gulf carriers with the signing of the Partnership for Open and Fair Skies (POFS) policy. Previously, Gulf carriers faced pushback from US industry figures who have argued that they are at a disadvantage due to alleged government financial support for airlines like Emirates, Qatar Airways and Etihad Airways. According to the POFS, carrier subsidies violated the open skies agreement, while carriers unfairly benefitted from fifth freedom routes, which allow flights operated by Gulf carriers to depart from foreign soil. Gulf governments have denied the accusations. Under the POFS agreement, UAE carriers will disclose their accounting records and refrain from adding fifth freedom routes to US airports. It is unlikely that this will bring about any major changes, though the end of the disagreement bodes well for the industry.

Boeing

Aircraft manufacturers are set to enjoy sustained growth alongside rising demand for new routes and bigger fleets. Demand for narrow-body aircraft will primarily come from the LCC segment, while major carriers will continue to diversify their fleets with longhaul aircraft. In 2017 narrow-body aircraft comprised 64% of the global fleet; by 2036 it is forecast to be about 75%. Boeing estimated that 38% of orders for commercial aircraft will come from the Asia-Pacific region over the period 2017 to 2036.

In April 2018 Indonesian LCC Lion Air confirmed a purchase agreement with Boeing for $6.2bn. The deal will add 50 Boeing 737 MAX 10 aircraft to Lion Air’s fleet, with the first expected for delivery in 2020. For Airbus, business in the Gulf has sustained its A380 programme, with Emirates signing an order for 20 new aircraft in 2018, with the possibility of adding another 16. The A380 has a 575-passenger capacity and has become increasingly popular for long-haul flights. However, only 13 airlines have purchased the A380, and many of the world’s airports do not have runways that are long enough to accommodate it. New airport construction projects, including Istanbul’s third airport, will likely support the A380 and similar long-haul craft.

Boeing has forecast air cargo transport to increase yearly by 4.2% until 2036. This has triggered a demand for more dedicated freighters and passenger planes with larger cargo holds, and Boeing expects resulting manufacturing deals to reach approximately $6trn. However, major Western companies may lose significant orders in the wake of US President Donald Trump’s May 2018 decision to withdraw from the Joint Comprehensive Plan of Action, otherwise known as the Iran nuclear deal. Airbus and Boeing were among the manufacturers that previously signed a total of $38bn in orders from Iranian carriers, all of which will face cancellation if sanctions are reimposed. Nevertheless, manufacturers are poised for long-term growth as the aviation industry continues its rapid expansion.

New Heights

Annual passenger increases and higher competition in global tourism and aviation markets are driving investment in air transport infrastructure to boost capacity and accommodate growing fleets. While many airports are refurbishing or extending runways to accommodate wide-body aircraft, other countries are embarking on bigger plans to position themselves as regional anchors for passenger or freight transport.

Guillermo Dietrich, Argentina’s minister of transport, announced in April 2018 that 30 airports around the country had been upgraded or were slated for refurbishing or expansion. The country is seeing rapid growth in aviation, driven by strong government support and increasing competition brought by new players aiming to capitalise on the country’s budding inward tourism.

Jordan’s King Hussein Airport has also been subject to upgrades to its physical and digital infrastructure, with the intention of creating a regional cargo hub well positioned to serve re-emerging markets like Iraq. A public-private partnership (PPP) recently added a third, $274m terminal to Ghana’s Kotoka International Airport to increase its passenger capacity and encourage more foreign carriers to open routes to and from the facility.

Thailand is looking to tap into the growing maintenance, repair and overhaul (MRO) industry as part of its $46bn plans to transform the Eastern Economic Corridor into an integrated hub for advanced services and manufacturing. In late 2017 Airbus signed a memorandum of understanding with Thai Airways to establish a $338m MRO centre at U-Tapao International Airport, where a PPP will work to expand annual passenger handling capacity from 3m to 15m. With the value of Asia’s MRO industry expected to reach $664bn by 2027, Thailand’s economy is poised for a significant boost on the strength of this initiative.

Sky’s the Limit

Istanbul’s third airport, which was set to open partially in late 2018 but had yet to open as of early 2019, will host the world’s largest terminal under one roof. The facility will have a passenger capacity of 90m and take over the majority of commercial air traffic from Atatürk Airport. Due to Turkey’s strategic geographic location, Istanbul already functions as a transit point between Europe and Asia, and the new airport could likely establish itself as a gateway to Africa. In February 2018 Turkish Airlines added its 52nd destination in Africa, maintaining a significant lead over competitor airlines. Emirates has the second-highest number of flights to Africa, with 22.

In 2015 Mexico began construction on a new international airport, near the capital, to help relieve pressure on the existing airport. Federico Patiño Márquez, former CEO of Mexico City Airport Group, told OBG, “Since 2013 traffic at Benito Juárez International Airport has grown an annual average of 9%, leaving it saturated and operating at almost 100% capacity.” The $13.3bn facility was to be the first major commercial airport to be built in North America since the mid-1990s, with an expected passenger capacity of 50m; however, it was cancelled in late 2018 by the incoming administration of President Andres Manuel López Obrador.

Prior to the cancellation – at which point the airport was reportedly about one-third completed – it was the world’s second largest airport under construction, after Istanbul, and would have been six times the size of Mexico City International. Though the new airport promised to solve capacity constraints, and leverage Mexico’s strategic geographic location between North and South America, the project was not without controversy, and it was the subject of contentious debate during the 2018 presidential campaign. Critics said it carried an unnecessarily high cost, and that the location was a poor choice given difficult terrain and vulnerability to earthquakes. President López Obrador instead aims to add two runways to the nearby Santa Lucía military air base, which can then be connected to Benito Juárez International Airport, located 47 km away, for a combined cost of $3.5bn. Benito Juárez International Airport and Toluca International Airport would both see upgrades under the plan, with the latter to be connected by train to Mexico City.

Training Zone

As airlines continue to expand, the industry is struggling to meet demand for qualified personnel, particularly in positions that require meticulous training and adherence to strict international standards. According to 2017 Boeing estimates, global commercial aviation will require an additional 2.1m workers – pilots, maintenance staff, cabin crew and air traffic controllers – by 2036. The highest demand is expected to come from Asia Pacific, where the industry will need to fill approximately 817,000 positions. While this presents an opportunity for job growth, greater investment in education is needed to ensure that emerging markets do not rely on recruiting abroad.

Latin America is facing similar challenges. “There is a personnel shortage across the board, but particularly with pilots,” Abelardo Muñoz-Martin, industry affairs director at Aeroméxico, told OBG. “Airlines can buy new planes, but if fleet growth happens faster than pilot training, they are not going to take off.” To meet this challenge, joint initiatives between airlines and schools will be rolled out to create a sustainable environment for recruitment. In the summer of 2018 Aeroméxico Formacion launched a programme in partnership with Canadian aviation training firm CAE and Universidad IEU to train commercial pilots and crew members.

Some airlines are partnering with flight schools to funnel student pilots directly into jobs as first officers as soon as they become qualified. In Sharjah, Air Arabia has begun sourcing its first officers from Alpha Aviation Academy, in which it has a 51% stake. Other UAE-based carriers, including Emirates and Etihad, have adopted this model to effectively recruit from a limited pool of personnel. Training costs can be prohibitive, but sponsorship could help more individuals to enter the field.

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The Report: Abu Dhabi 2019

Transport chapter from The Report: Abu Dhabi 2019

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