Passenger demand growth stays strong

International Air Transport Association (IATA) announced global passenger traffic results for August showing a strengthening of the healthy demand trend of the last few months. Total revenue passenger kilometers (RPKs) rose 6.8% compared to August 2012. Capacity increases over the year-ago period lagged demand at 5.6%. This pushed the load factor to match the record high of 83.4% set in July 2011.

“August was a positive month for passenger travel. Strong demand and capacity discipline saw load factors match the previous record high of 83.4%. The solid performance was also supported by a stabilization of emerging market weakness and renewed confidence in Europe and North America. Trading conditions are still tough with high oil prices, stiff competition and regulatory hurdles. But demand growth remains a bright spot with most indications pointing towards an acceleration in the fourth quarter,” said Tony Tyler, IATA’s Director General and CEO (see table here.)

International Passenger Markets

August international passenger demand was up 7.5% compared to the year-ago period. Capacity rose 5.6% versus August 2012 and load factor climbed 1.5 percentage points to 84.0%. All regions recorded year-over-year increases in demand.

• Asia-Pacific carriers recorded an increase of 8.6% compared to August 2012, the strongest performance among the three biggest regions. Market indicators for emerging regional markets have been weak. But downward pressure on growth appears to have eased, at least with respect to China, where latest indicators show an improvement in new export orders. With capacity up 6.3% over August 2012, load factor rose 1.7 percentage points to 81.6%.
• European carriers’ international traffic climbed 5.4% in August compared to the year-ago period, on a 3.7% rise in capacity, pushing load factor up 1.4 percentage points to 86.4%. Modest economic improvements and rising consumer confidence are supporting the growth in demand. Business confidence is also strengthening with increased manufacturing and export activity.
• North American airlines saw demand rise 5.1% over a year ago, the slowest growth for any region but still close to double the year-to-date increase of 2.7%. This is consistent with indicators of a more supportive business environment, although manufacturing activity remains below the average seen at the start of 2013. A 4.0% rise in capacity meant that load factor climbed one percentage point to 88.1%, the highest for any region. Looking ahead, the US Government shutdown is not expected to impact airline operations but could dampen demand. The 27-day shutdown in 1996, for example, resulted in delays for tens of thousands of passport and visa applications.
• Middle East carriers had the strongest year-over-year traffic growth at 15.1%. The result was positively biased from the timing of Ramadan, which occurred a month earlier (in July) in 2013. Capacity expansion was held to 10.8% which pushed up load factor 3.1 percentage points to 82.0%. The strong demand trend is expected to continue, with August data showing solid progress in non-oil producing sectors in countries such as Saudi Arabia and the United Arab Emirates.
• Latin American airlines posted a demand rise of 9.8% in August, year-over-year. Although Brazil continues to face deteriorating business confidence, Colombia, Peru and Chile, for example, are expanding and the region is also enjoying strong export activity, well above the global trend. Capacity rose 7.6% and load factor climbed 1.6 percentage points to 80.8%.
• African airlines’ traffic climbed 5.4% compared to August while capacity rose 6.5%, resulting in a 0.7 percentage point dip in load factor to 70.9%. Africa was the only region to see a decline in the load factor.

Domestic Passenger Markets

Demand for domestic travel climbed 5.6% in August compared to a year-ago. Developing markets in Asia posted double-digit demand growth and all markets showed year-over-year increases. Total domestic capacity was up 5.7% and load factor slipped fractionally to 82.4%.

• US domestic traffic rose 1.2% in August, largely in line with July’s 1.5% growth but below the year-to-date growth of 1.8%. Capacity, however, rose 2.6% compared to August 2012, dropping the load factor 1.2 percentage points to 85.8%, which still was the highest for any market. The demand environment is broadly optimistic with measures of business activity suggesting that the third quarter will maintain the faster rates of economic growth seen in the second quarter.
• China’s domestic traffic jumped 13.7% compared to the year ago. Indicators of manufacturing and services activity increased in August after reaching a post-crisis low in July. Capacity expansion (13.6%) almost matched demand growth and load factor grew 0.1 percentage point to 83.7%.
• Japan enjoyed another month of strong growth with traffic up 8.8% in August year-on-year. Japan’s economy is showing signs of steady improvement and consumer prices continue to increase, in line with government actions to end deflation. Capacity growth of 7.1% was outpaced by demand, raising the load factor to 70.7%. Even so, this is the weakest load factor among the domestic markets followed.
• Brazil’s domestic traffic rose just 0.5%, a result of both capacity reductions and sluggish demand. Capacity declined 1.2%, propelling load factor up 1.3 percentage points to 74.3%.
• Indian domestic traffic surged 15.7% in August compared to a year ago. There has been substantial volatility in growth rates in recent months but year-to-date growth of 2.8% confirms that demand has been weak overall, consistent with weakening economic conditions. Capacity rose 8.5% over August 2012 and load factor climbed 4.5 percentage points to 71.9%.
• Russian demand climbed 6.9% compared to August 2012, below the July increase of 11.9% and the year-to-date result of 9.6%. Capacity rose 7.8%, dropping load factor 0.7 percentage points to 81.7%. The healthy traffic growth occurred against a backdrop of a potentially weakening economic outlook, with manufacturing activity in contraction and employment declining at the fastest rate in four years.
• Australian domestic traffic rose 4.7% on a 2.2% rise in capacity, and load factor climbed 1.9 percentage points to 77.7%.

The Bottom Line:

The growth in demand for passenger travel highlights the important role that global connectivity plays in today’s world. “Aviation is the lifeblood of the global economy. It’s important for jobs and development that aviation’s growth is sustainable. That’s equally critical for its financial and environmental performance,” said Tyler.

“Last week we announced a revised industry outlook. Profits are weak, but moving in the right direction. In 2012 airlines made an average 1.1% net profit margin. That is expected to double to 2.2% in 2014. Cost control, consolidation, joint ventures and product innovations are among the measures that are helping airlines achieve the efficiencies needed to secure their financial futures,” said Tyler.

“This week we have a golden opportunity to secure a major step forward on environmental sustainability at the 38th Assembly of the International Civil Aviation Organization (ICAO). It is critical that the Assembly agree a way forward on a single market-based measure (MBM) to support the shared commitment of industry and governments to carbon-neutral growth from 2020. Interim regional schemes will only serve to distract policymakers and the industry at a time when we should be focused on the big picture. Finding a way forward on a global mechanism will be an historic achievement that keeps aviation at the forefront of industries managing their climate change impact,” said Tyler.

At its 2013 Annual General Meeting, IATA members overwhelmingly supported a resolution calling for the implementation of a global mandatory carbon offsetting scheme from 2020.