Demand growth is expected to be the strongest in emerging economies, such as those in Asia-Pacific, Middle East, Latin America and parts of Africa, as the growing middle class in these countries have an appetite and income for travel.
NEW YORK – The demand for air travel is expected to double over the next 20 years. To be able to accommodate this growth, the global airline industry needs to adapt swiftly to three key challenges– infrastructure, fuel prices and talent – according to Tailwinds 2015, PwC‘s annual state of the global airline industry report.
“Prospects for the global airline industry are promising, as megatrends including shifts in global economic power and demographics and the accelerating urbanization in emerging economies are increasing the demand for air travel,” said Jonathan Kletzel, U.S. Transportation and Logistics practice leader, PwC. “There is a need, however, for industry players to invest in infrastructure upgrades and effective fuel price volatility programs while also addressing aging talent and the growing trained labor shortage. We are in an era in which flexibility and adaptability are the essential enablers of growth.”
According to the report, there has been a surge in aircraft orders in the past four years, resulting in a record-breaking backlog of orders, due to increased air travel and airlines purchasing new fuel-efficient models. Demand growth is expected to be the strongest in emerging economies, such as those in Asia-Pacific, Middle East, Latin America and parts of Africa, as the growing middle class in these countries have an appetite and income for travel. In mature economies of Europe and North America, the aircraft demand is driven by new-found profitability as well as the availability of relatively inexpensive financing to upgrade their aging fleets.
Increased demand for air travel requires not only additional aircraft, but also the infrastructure to support their operation, including airports and air traffic control. According to PwC, more than two-thirds of airline CEOs are concerned about inadequate infrastructure as a barrier to growth. Due to insufficient funding, limited political alignment, and concerns over environmental impacts, this will continue to be a challenge in accommodating the projected growth in passengers and aircraft.
PwC sees infrastructure limitations to be most acutely felt in rapidly developing markets, especially China, India and Latin America—regions that are projected to see the biggest jumps in the number of air passengers. If left unaddressed, PwC’s report says congestion will not only affect airline and aviation-related revenue, but also restrain regional economic growth.
The largest impact on airline profitability in the first quarter came from the steep reduction in fuel prices at year-end. Oil prices have increased recently again, but PwC says it is still fairly low, at $64 per barrel compared to $102 in April of 2014 – a 37 percent decrease. According to a special report by PwC, Fuel Price Volatility: How are Airlines Responding to the Challenge?, lower prices mean that globally, airlines will spend $70 billion less on fuel this year than in 2014. However, the true impact of reduced fuel prices on the industry will not be measured until existing fuel-hedging contracts expire, while airlines that are completely unhedged are seeing the most immediate financial benefits. PwC says carriers should take into consideration that fuel prices may return to higher levels when pursuing their commercial and hedging strategies.
Lower fuel costs in the near-term will help airlines rebuild their assets and reinvest after navigating years of financial losses, especially in replacing and modernizing aging fleets, enhancing their products and improving infrastructure, according to PwC. “Regardless of the mix of strategies carriers pursue, the most agile operators will find that planning for volatile fuel price environments can create opportunities in the coming quarters as well as the long term,” said Kletzel.
“Many airlines did not lower airfares in the face of recent reduced fuel prices, and thus were able to manage higher margins,” continued Kletzel. “While fuel prices are contributing to profitability in the industry, it is unlikely that airlines will see relief from a labor cost perspective due to expected growth in the demand for pilots and maintenance technicians.”
PwC’s report reveals that there are two emerging workforce challenges facing airlines and other aviation entities such as airports and air navigation service providers: the need to hire 2.7 million new aviation industry employees by 2025, and attracting and training skilled pilots and mechanics. These challenges are compounded as the growth rate for aviation jobs is projected to outpace the overall workforce growth rate. To combat these challenges, 75 percent of airline CEOs are planning to increase their investment in talent management strategies and capabilities over the next year, according to the report.
Airlines competing in the “war for talent,” are taking financial and operational ownership by investing in training tools for pilots’ academies and programs, and organizing roadshows to educate and generate excitement for careers in aviation. The report says this is a unique opportunity for airlines to effectively partner with governments and educational institutions to begin to address future workforce needs today.
PWC – Tailwinds Rising Passenger Demand
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She holds a Bachelor's degree in Communication & Mass Media from Panteion University of Political & Social Studies of Athens and she has been editor and editor-in-chief in various economic magazines and newspapers.
