24/02/2017

Will capacity growth outstrip air traffic?

Will capacity growth outstrip air traffic?

Year-on-year air passenger traffic growth (as measured by RPK growth) has steadily increased since 2013.  However this growth has been mirrored by the increase in aircraft capacity as measured by ASKs.  The gap between the two indicators remained relatively steady over the last four years but suddenly narrowed in 2016.  

 

The difference between traffic and capacity growth varies widely from region to region.  The Middle East, Asia Pacific and Africa have been the fastest growing regions since 2013, while India and China have continued to post double-digit growth. But declines in passenger traffic in Brazil, Russia and even Japan have lowered the global RPKs. The question is whether this traffic will rebound or not over the rest of 2017 and if not, if this will put pressure on airline load factors and profitability in 2017 and 2018.

 

The Ishka View is that the gap between capacity and passenger traffic narrowed considerably in 2016 but it is not completely matched- yet.  If global RPKs do not pick up and this gap narrows further then the industry will be forced to adjust to accommodate the wave of new aircraft scheduled for delivery in the next two to three years.

 

Traffic growth remains robust however capacity is rising at a much faster pace

 

 

Las year witnessed a dramatic narrowing of the gap between global RPK growth versus ASK growth for the first time in four years. RPKs grew by 6.3% in 2016 - driven mainly by the Asia Pacific, Latin American airlines and the Middle Eastern airlines. However, Middle Eastern airlines added capacity at a much higher rate than their domestic traffic contributing to the narrowing of the gap between traffic and capacity growth. In each of the three years prior to 2016, traffic has grown much faster than capacity. While industry ASKs grew by 6.2% in 2016, RPKs grew by 6.3% in the same year.

 

Difference between traffic and capacity growth narrowing

 

 

In the chart above, Ishka examines the extent of difference between traffic and capacity growth. Ishka analysis shows that, industry-wide the positive difference between traffic growth and capacity growth has reduced in 2016 compared to the previous years. This is due to several factors including high-profile terrorism related incidents in Europe in late 2015 and 2016, geopolitical incidents in Europe and the Middle East, the challenging economic environment in Russia, Brazil and slower growth in China. Rising oil prices have also slowed down demand. Oil prices have nearly doubled over the course of 2016 vis-à-vis the 12-year lows witnessed in 2015 and early 2016.

 

 

As mentioned earlier, while all other regions continue to increase their traffic faster than they are adding capacity, the Middle Eastern airlines have added capacity much faster than domestic traffic.  This has happened in successive years within the Middle East leading to some softness in their capacity utilisation.

 

India and China the only bright spots among BRIC nations

 

 

The domestic markets of Russia and Brazil were negatively affected by an economic recession, and a related fall in crude oil prices, geopolitical changes and negative currency exchange rates for most of 2016. However, November and December saw marked improvement in its traffic statistics – due mostly to the collapse of Transaero in November 2015 which significantly distorted the y-o-y figures for every month in 2016.

 

The domestic Indian sector has witnessed phenomenal growth since 2013. Traffic growth in India has propelled from a modest 4% in 2013 to an impressive 23.3% in 2016 which is more than double the second fastest growing sector in the world, Domestic China. Load factors of Indian airlines have also improved considerably, from 74.6% to 83.8% within four years.

 

Domestic traffic growth in Japan has shrunk to negligible levels

 

 

Domestic Japan, like domestic US is a mature domestic aviation market. It still is the second largest market in Asia after China but is likely to be overtaken by India soon. Along with Brazil, the domestic Japanese market has shrunk the most since 2013 with traffic growth falling from an impressive 5.2% (for a mature market) in 2013 to just 0.7% in 2016. However, with the Japanese carriers adjusting capacity in-line with the traffic trends, the region’s airlines have managed to substantially improve their load factors. As per IATA, at 68.6%, it is the highest load factors that domestic Japanese carriers have managed since 2000. Nevertheless, domestic Japan’s load factors are still fairly low for developed market standards. In-fact it is as low as the African market which is possibly the weakest region globally in terms of aviation.

 

The US continues to record impressive capacity utilisation. The North American airlines have been extremely disciplined with adding capacity and this has translated in the US airline industry enjoying the strongest period of profitability in a long while. Despite being under revenue and yield pressure all through 2015 and 2016, the US airlines managed to post record profitability in each of the two years.

 

The Ishka View


The gap between global traffic and capacity growth is now the lowest it has been for the last four years primarily driven by expanding Middle Eastern airlines adding additional capacity.  The concern is that capacity could exceed traffic which would ultimately hurt airline load factors and profitability. However this depends on what happens to capacity over the next two years.  The gap narrowed in 2016 considerably but the question is whether slower traffic growth across key regions such as Brazil and Russia is temporary or not. The picture of course, varies from region to region. The domestic markets of India and China continue to record impressive double digit traffic growth, particularly India which has gone from a sub 4% growth in 2013 to a phenomenal circa 23% growth in 2016 which is more than twice the second fastest growing region, China.
 
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