Historically, the aviation industry has been one of the most cyclical of all: when markets were buoyant, so too was the aviation industry. But the number of failed airlines is testament to an industry with massive capital expenditure and volatile cash flows. In 2018, with air travel becoming more of a commodity than a luxury, this is less true than ever.
Nowhere is this better exhibited in Europe than through figures for LCC (low cost carriers) on the continent, which stand at 37% of all commercial airline seats sold on the continent. The largest commercial airline is Ryanair, taking the lead from Lufthansa in 2017 and is expected to strengthen its grip on the leadership position beyond 2018.
In the next 20 years or so, internal flights in Europe alone are forecasted to grow by over 3% per annum, with revenue per passenger kilometer (RPK) expected to double in line with this growth. Flights from Europe to more exotic destinations are forecasted to grow even more; for example, by 4.5% per year to Asia and 4.3% to Latin America.
As in the years to 2018, competition for passengers will be one of the main drivers of this growth but historically low oil prices, increased demand for travel in emerging markets where incomes continue to rise, increased fuel efficiency in aircraft and even new routes will also contribute to the continued upswing in air travel.
All of this is good news for the traditional aircraft manufacturers for the European market - Boeing and Airbus, with both firms expecting to grow their output in Europe by around 3.5% every year to 2035. Both firms expect the majority of their production over this period to be in single-aisle aircraft (approximately 60,000 aircraft combined) reflected increasing growth in short-haul journeys.
The downside of the trend for short-haul journeys in Europe, if there is one, is that airports tend to be smaller and regional. As such, in 2015, only 5 of the world’s largest airports were located in Europe. While this may remain the case in the years ahead, increased traffic will at least generate more revenue in these hubs - with larger airports being far more profitable across the board than their smaller, regional counterparts.
When famed US investor Warren Buffett said that investors would have been better to shoot Orville Wright down than to invest in the aviation industry in 2007, he may have spoken too soon. The airline industry goes from strength to strength, and even Mr. Buffett has gotten involved subsequently having realized this.
This growth, in Europe and beyond, can only be good news for the rest of us. 2017 was the safest year on record for airlines at the same time that European airlines such as IAG, Lufthansa and Ryanair all recorded annual net profit of over $1.5 billion. In 2018, Orville Wright looks he was a much better investment than Mr. Buffett predicted a little over 10 years before.