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Analysis

No Limit in Sight as Airline Industry Soars

Fri, 12/01/2017 - 17:39

Just in 2016, almost 3.7 billion passengers took to the skies, a 6.7 percent increase over the previous year. The importance of aviation in today’s world cannot be understated. “Aviation brings people together, transports vital medicines to patients in need and facilitates the exchange of experiences and ideas,” says Alexandre de Juniac, Director General and CEO of IATA.
The industry’s growth is such that companies must find ways to accommodate the increase in passengers and transported goods. “Every day, 9.8 million passengers take 104,000 flights around the world, while goods valuing US$18.6 billion are carried globally in air cargo. This volume of activity is projected to double over the next 20 years and the increasing demand for flights has pushed companies to their limits, with many now struggling to supply seats and cargo space,” says Melvin Cintron, Regional Director of ICAO.
IATA says the aviation sector reported revenues of US$705 billion for total net profits of US$34.8 billion in 2016. The association also reported that revenue passenger miles (RPM) grew by 6.3 percent in comparison to 2015, and passenger load factor reached 80.5 percent.
“Airlines have made major efforts to make flying more affordable. Thus, a much greater number of passengers are traveling today than 10 or 20 years ago. The average roundtrip ticket price has fallen 64 percent since 1996 and this has democratized air travel,” says Cuitláhuac Gutiérrez, Country Manager of IATA Mexico.
Among the main market drivers at a global level are low-cost carriers (LLC). ICAO explains that LLCs have played a major role in the expansion of aviation over the past quarter century and the organization expects these players to continue having an influential role going forward. LCCs have achieved success by identifying what prospective passengers are willing to pay for and developing different payment methods based on that. These carriers also greatly save on costs by maximizing operational efficiency, usually by utilizing a single type of aircraft, which simplifies maintenance as well as pilot and flight attendant training.
The sector is also evolving thanks to the introduction of new technologies demanded by the passengers themselves. “Passengers are expecting similar levels of connectivity while on an airplane as in their homes,” says Antonio Quintanilla, President and Director General of Thales Mexico. Passengers can now control an increasing number of details from their cellphones, from check-in to baggage tracking. “We expect technology to facilitate further improvements for passengers and to usher in changes at airports as well that could speed up security processes and allow boarding with automated access gates,” says Gutierrez. Although the sector is growing, not all regions are doing so at the same rate. IATA reports that North American airlines earned about four times more per passenger than Asia-Pacific and European airlines. Latin American and Middle East carriers barely broke even, while African carriers reported losses. However, Gutiérrez expects Latin America to keep flourishing. “In Latin America, air travel is accessible for more people than ever and this is one of the reasons why we expect the number of passengers in the region to double between 2015 and 2035,” he says.
MEXICO FLYING HIGH
Mexico appears to be in an even better position than the rest of Latin America. According to the World Bank, the number of flights in Mexico is expanding at a much faster clip than elsewhere in the region. In 2016, Mexican domestic aviation grew 15.6 percent due to a stable economy that underpinned the purchasing power of Mexican citizens. In the previous year, Mexican domestic aviation similarly grew 15.2 percent. In that year, domestic aviation in Latin America increased just 4.8 percent.
“In Mexico, the aviation industry contributes positively to the national economy, generating more than 1 million direct and indirect jobs and contributes 2.9 percent to the national GDP. This represents more than US$35 billion annually and reflects the importance of aviation for Mexico,” says Gutierrez. In 2016, 82.7 million passengers flew on commercial airlines, 10.7 percent more than in 2015, according to DGAC. National airlines saw passenger growth of 13.4 percent to reach 53.6 million passengers, while international carriers grew 6 percent to reach 29.1 million passengers to and from Mexico.  
As they were globally, LCCs were also important players locally. “Low-cost flights have grown exponentially, making it possible for many people to travel by plane and leading airlines to make significant changes,” says Miguel Peláez, Director General of DGAC. According to DGAC, LCCs Viva Aerobus and Volaris move almost 50 percent of Mexico’s passengers for local destinations. A short study by El Financiero indicates that these two airlines have the lowest ticket costs of all Mexican airlines. “The domestic market has been consolidating for the past years as airlines identified and segmented their products according to the needs of passengers,” says Sergio Allard, President of CANAERO.
“The sector has an enormous opportunity for growth and consolidation,” says Gutiérrez, who mentions that the biggest threats hovering over the market are over-onerous taxation, high operating costs and the lack of a stable regulatory framework. “Air transport needs smart regulation, efficient operations and technology and, most importantly, the adoption of best international practices to maximize the benefits of the sector,” he adds. “The biggest challenge airlines face in Mexico is the country’s aviation policies. Legislation mandating free checked bags, nonsequential coupon use and free ticket cancellations up to 24 hours before the flight prevent the airlines from maintaining competitive prices or even being able to service some routes.”
OUTSIDE INFLUENCES
Not all challenges are internal, however. The depreciation of the peso against the dollar damages the competitiveness of the Mexican aviation industry against other countries. These issues make it more difficult for airlines to reduce costs and to invest in technologies that help them compete against other transportation means and foreign airlines that operate under better regulatory conditions, explains Allard. Another challenge is the cost of jet fuel. According to IATA, Latin America pays the highest prices for jet fuel, Mexico chief among them. While the world average is US$1.408 per gallon, the region pays US$1.457. Yet, at AICM, airlines pay US$1.72 per gallon. Prices in the country have risen due to a slowdown in production at national oil giant PEMEX that has led to a spike in imports, according to El Financiero. Now, Mexico imports 45.6 percent of its jet fuel. For a Mexican airline, jet fuel represents an average of 29.1 percent of operational costs.
The accumulated challenges, however, are not enough to diminish the positives that are bolstering Mexico’s aviation sector. “Mexican airlines are entering a new era through joint cooperation models,. We are likely to see additional strategic alliances that will drive potential consolidations or mergers in the future,” says Allard.