December 22 2015  |  Industry News

International travel is up, buoyed by recovering European economy

By Wendy Morley

Overall passenger travel is up year-on-year, though regional differences make the future difficult to predict

The International Air Transport Association (IATA) reports a year-on-year increase of 4.5% in October. Looking at recent months, this growth is supported by an increase within a recovering European economy; air travel across the North Atlantic is also increasing, up 6.9% year-on-year.

These positive numbers are weakened by sluggish international travel within the Far East, which have pulled back on a generally positive trend. This is caused in great part because of slower-than-expected growth in China and weak trade activity in the region. This remains a concern, and the region is expected to temper global growth. The Within Far East market was among the weakest performers in October, up just 0.9% year-on-year, consistent with economic weakness in some key Asian markets and sluggish trade to/from the region. In China, a slump in exports this year has weakened manufacturing activity, and placed downward pressure on business-related premium travel within the Far East as well as markets connected to the region.

Eurozone

While travel growth has been disturbingly slight in the Far East, the economy in the Eurozone has been steadily improving. This means the outlook for international passenger growth remains mixed. Despite the growth in the Within Europe and North Atlantic markets, weakness in other regions, like Asia, remains a concern and is likely to keep international passenger growth from accelerating beyond current trends.

Over the past few months, we have seen weakness on the Within Far East market, which suggests that recent adverse economic developments in parts of Asia have finally started to place downward pressure on air travel demand.

Markit surveys of purchasing managers have shown that the Q3 average of business activity growth is the highest seen since the Q2 2011, despite weakness in major economy, France. This positive trend has continued into Q4.

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.

Long haul

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.

Overall, growth in economy travel has been stronger than premium travel. Economy travel has been boosted by low fares (brought about by drastic decreases in oil prices) whereas business travel has been dampened because of weakness in business confidence.

North Atlantic

Premium class travel was up 3.9% in October year-on-year, an improvement on the 2.9% result in September. The acceleration in premium passenger growth was mostly driven by a pick-up on the North Atlantic market, which was up 6.9% 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.

The progress in the Eurozone economy has also helped premium travel growth within Europe, which was up 6.4% in October year-on-year. Economy class travel rose at a slightly slower 5.1% rate, but still above the 4.0% trend year-to-date growth rate. It is important to remember that this market includes segment traffic as part of longer-haul journeys as well, so part of the growth is reflecting stronger demand for travel that includes a segment within Europe.

Air travel on markets connected to the Middle East continue to show mixed results. International air travel growth on Europe-Middle East was up 5.4% in October. In contrast, Africa – Middle East and Middle East – Far East were relatively weaker, +0.8% and -1.2%, respectively. This is likely due to adverse economic and political developments in Asia and Africa rather than any major downturn in the Middle East. After a decline in the first half of 2015, Q3 data from purchasing managers (Markit) pointed to further gains in business conditions across the non-oil producing private sectors of the UAE and Saudi Arabia, and this should help sustain solid expansion in air passenger demand for local carriers.

 

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