KEY POINTS
· Passenger travel on international markets was up 3.2% in November year-on-year, overall. This is a slowdown on October, and although part of the weakness could be attributed to temporary factors, there are reasons for concern that a downtrend is developing;
· Both economy and premium travel weakened, but there was a notable deceleration in first and business class travel. Economy class travel was up 3.4% year-on-year, while premium travel was only 0.7% higher in November. The first chart below shows that passenger numbers have declined over the past few months;
· At the route-level, the weakness in air travel in November was mostly a result of the Europe-Far East market. The strikes at Lufthansa caused some downward impact on the year-on-year comparison. But further slowdown in the Chinese economy could be eroding demand, particularly for business-related air travel, which raises concerns that a downtrend is emerging;
· Growth on the within Europe travel market, which has supported expansion in passenger numbers during the recent past, was also slow in November. The strikes would also explain part of the weakness on this market. But given that this market also includes segment traffic on longer haul journeys, it also could be impacted by economic slowdown in other parts of the world;
· The outlook for international passenger growth remains mixed because growth during the recent past has been narrowly based and supported by the Within Europe and North Atlantic markets. Weakness in other regions, like Asia, has become more of a concern with the November data showing signs of a downtrend developing.
· The first chart above shows developments in international air passenger numbers by seat class. Throughout much of 2015, increases in economy class air travel volumes have been supported by the fall in oil prices, which has led to lower fares. Economy class leisure travel is more price sensitive than business-related premium class travel. Premium passenger numbers have been growing but at a relatively slower pace due to overall weakness in business travel demand drivers.
· Over the past few months, we have seen weakness on the Within Far East market, which suggests that adverse economic developments in parts of Asia have started to place downward pressure on air travel demand. In addition, in November we saw weak performance on the Europe – Far East market, which was a key contributor to the overall slowdown. Whilst some of the November result can be attributed to the strikes at Lufthansa, further slowdown in the Chinese economy has raised concerns that the weakness in Asia is causing the broader decline in international passenger numbers over the past few months, as can be seen in the first chart above.
Premium Traffic Monitor November 2015
· In 2013 and early 2014, when premium travel was expanding at a faster pace than economy travel, there was a slight boost to the share of premium travel from total travel. This was positive for airline yield growth and revenues. That trend did not continue into 2015, with relatively stronger growth in economy class travel placing downward pressure on the share of premium seats from the total. As noted in the previous section, economy class leisure travel, the relatively more price sensitive travel market, has been given a boost by falling fares.
· Even though there has been no gain in premium’s share of total traffic, growth on longer-haul markets has been robust. This has helped to support premium yields on some markets. In turn, this has supported the financial performance of the longer-haul network airlines, compared to shorter-haul, mainly leisure travel-focused, airlines in some, though not all, regions.
The lagged impact of weakness in world trade and industrial production in late 2014 was apparent in the sluggish growth trend for premium travel at the start of 2015. Improvements in advanced economies, particularly in Europe, started to revive the trend in international air travel (both travel classes) toward the end of Q1 2015. These positive developments remain intact, but the deepening weakness in the Chinese economy is now raising concerns that the positive trend may be coming to a halt.
TRAFFIC GROWTH BY MAJOR ROUTE
· Premium class travel was just 0.7% higher in November, a slowdown on the October result of 3.9%. The deceleration in premium passenger growth was mostly driven by the Europe – Far East market, which fell 2.3% year-on-year. Given the strikes at Lufthansa as well as the notable volatility in monthly volumes, part of this weakness is likely a result of temporary factors. That said, GDP growth in China for 2015 overall was 6.9%, which is a further slowdown on 2014 (7.3%). The impacts on underlying demand for business-related travel could be starting to appear now, as the trend in overall international passenger growth is starting to show decline.
· Another area of weakness in November was the within Europe travel market, which was up just 0.3% year-on-year – the same result in both travel classes. As has been discussed above, the weak November result is at last in part based on passing impacts. Inflation and growth remain subdued in the Eurozone, but most indications suggest that modest improvements are expected to continue. This bodes well for the Within Europe market. That said, some of this market contains segment traffic that is part of longer haul journeys – these could be impacted by developing economic weakness in other parts of the world.
· By contrast, the recent improvements on the North Atlantic market were sustained in November, with total international passengers numbers up 5.7% year-on-year. Although it is not clear if the US economy has recovered adequately from the recession to tolerate an increase in interest rates, indicators continue to suggest that improvements are on track, which bodes well for air travel demand. And while economic conditions in the Eurozone remain fragile, growth has been positive and steady for several months now. Better performance of Eurozone economies has helped support business-related air travel across the North Atlantic.
· Consistent with developments in China, the Within Far East market was among the weakest performers in November, for premium traffic in particular, up just 0.2% year-on-year. Trade to/from the region has recovered notable declines in H1 2015, but there has been no further growth over more recent months. The result of these developments is a weakening demand base for business-related travel.
IATA Economics Conctact: Julie Perovic [email protected]
20th January 2016
