L01 - 2324A - Introduction PDF

The Aviation Industry Lecture 1 – Introduction Introduction to Aviation Industry David Shum Learning outcomes Course Intended Learning Outcomes (CILOs): 1. Describe the overall structure of the aviation industry; 2. Explain the operational, economics, and managerial characteri...

The Aviation Industry Lecture 1 – Introduction Introduction to Aviation Industry David Shum Learning outcomes Course Intended Learning Outcomes (CILOs): 1. Describe the overall structure of the aviation industry; 2. Explain the operational, economics, and managerial characteristics of airlines, airports, and air freight; 3. Analyze latest developments and issues in the aviation industry and their impact on future trends in aviation. 2  Recommended Books: 1. Air Transportation : A Management Perspective 8th edition Author: John G. Wensveen 2. Flying Off Course : Airline economics and marketing Author: Professor Rigas Doganis 3 Course Overview 1. Introduction 2. International Aviation 3. The Airline Business 4. The Airport 5. Aircraft Manufacturers 6. Air Freight 7. Aviation and the Environment 8. Future Issues 4  Content 1. Aviation and Air Transportation 2. Certificated Air Carriers 3. General Aviation 4. The cyclical nature of the aviation industry 5. Overview of world passenger traffic 6. Important indicators 5 Aviation & Air Transportation Aviation & Air Transportation (ctd) The aviation (air transportation) industry includes all civil flying performed by certificated air carriers and general aviation. (Wensveen, 2007) Air Transport is the nation’s dominant intercity mode of transportation for those passengers & goods that must be transported quickly and efficiently. 7 Aviation & Air Transportation (ctd) Aircraft Industry: a sector of the aerospace industry, is primarily engaged in the (i) manufacturing of aircraft, (ii) aircraft engines and parts, (iii) aircraft propellers and parts, and (iv) auxiliary aircraft parts and equipment.  Aviation & Air Transportation (ctd) The aviation (air transportation) industry includes all civil flying performed by certificated air carriers and general aviation. (Wensveen, 2007) Civil Aviation: Representing all non-military aviation, both private and commercial. Military Aviation: Representing all national defense, supporting military operations. Aviation & Air Transportation (ctd) Certificated air carriers (or scheduled airlines) includes the all-purpose carriers (the so-called passenger/cargo carriers) and the all-cargo carriers. General aviation refers to all civil aviation except that which is carried out by the certificated air carriers, it includes business flying, instructional flying, personal flying, and commercial flying (i.e. agricultural spraying, aerial photography, etc.) All scheduled air transport is commercial, but general aviation can be either commercial / private. 10 Aviation & Air Transportation (ctd) Certificated Air Carriers VS General Aviation ??? Aviation & Air Transportation (ctd) Although scheduled air transport is the larger operation in terms of passenger numbers, General aviation is larger in the number of flights. Why? Number of Passenger – Number of Flight – Air Carriers > General Aviation General Aviation > Air Carriers  Content 1. Aviation and Air Transportation 2. Certificated Air Carriers 3. General Aviation 4. The cyclical nature of the aviation industry 5. Distribution of world passenger traffic 6. Important indicators 13 Certificated Air Carriers When the Civil Aeronautics Act was passed in 1938, only a handful of air carriers operated regular schedules over prescribed routes, and when they received government certification, they became known as certificated air carrier. Certificated Air Carriers is one of a class of air carriers holding certificates of public convenience and necessity issued by the Department of Transportation (DoT), authorizing the performance of scheduled air transportation over specific routes. It includes all passenger & cargo flights operating on regularly- scheduled routes, and a limited amount of non-scheduled operations. 14 Certificated Air Carriers (cnt) Air Carrier (Airline) - Commercial system of the air transportation, consisting of domestic and international certificated and charter carriers. Provide air transport services for passengers and/or freight, generally with a recognized operating certificate / license. 15 Certificated Air Carriers (cnt) Passenger & Freight Airlines are NOT ONLY concerned with carrying passengers. They also carry freight and mail. i.e. Integrators; Combination carriers; All-cargo carriers Competition exists in both international market and domestic market. International freight market is more profitable than domestic freight market 16 Discussion: 5 minutes Why international freight market is more profitable than domestic freight market? Certificated Air Carriers (cnt) Most airlines are combination carriers (freight + passengers) Integrators: DHL, FedEx, UPS, etc. which are exclusively concerned with the carriage of freight But their degree of freight involvement varies. Source: Doganis (2019), Flying off Course: airline economics and marketing, 5thedition, Routledge. 18  Content 1. Aviation and Air Transportation 2. Certificated Air Carriers 3. General Aviation 4. The cyclical nature of the aviation industry 5. Distribution of world passenger traffic 6. Important indicators 20 General Aviation 21 General Aviation (ctd) General Aviation refers to the operations of the “utility” aircraft produced by light-plane manufacturers. Different from large-airplane manufacturers. 22 General Aviation (ctd) 1. Largest segment of aviation based on number of aircrafts number of pilots, and number of airports and communities served. 2. For both private and commercial. However, the majority of hours flown by general aviation aircraft are for business and commercial purposes. 3. Because of its efficiency and productivity, general aviation has become an important business tool. General Aviation (ctd) 2011 National Plan of Integrated Airport Systems in US 24 The use of general aviation 1. Business Aviation – use of an aircraft not for compensation or hire by an individual and it includes: Business aircraft use – personally flown for the purpose of transportation required by a business. Corporate aircraft use – use of aircraft by a corporation for the purpose of transporting its employees and/or property. Why Business Aviation? Although airlines offer transportation to the largest cities and business centres, Business Aviation provides quick (time saving), flexible, safe, direct, and more secure and reliable transportation whenever and whatever business needs require them. 25 Discussion: 5 minutes Which company handles business aviation in HK? And What kind of services do they provide? The use of general aviation (ctd) 2.Personal Flying – Personal transportation, i.e. a personal plane like a personal car. Mainly use the aircraft partly for business and pleasure. 3.Instructional Flying – Aircraft for formal instruction, with instructor or student flying solo. 4.External load and medical – hoisting heavy loads and hauling logs from remote locations or carry people or donor organs for transplant. 27 The use of general aviation (ctd) 5. Commercial and Industrial Aviation Video: Example 1 Aerial application – fire-fighting operations, agricultural and insect control. Aerial observation – photography, survey, patrol, fish spotting, search and rescue, hunting, or highway traffic advisory. Aerial other – Advertising, weather modification, and wildlife conservation. 6. Other flying i.e. research and development, testing, demonstration, government purposes, red bull race 28 The use of general aviation (ctd) 29  Content 1. Aviation and Air Transportation 2. Certificated Air Carriers 3. General Aviation 4. The cyclical nature of the aviation industry 5. Overview of world passenger traffic 6. Important indicators 30 The cyclical nature A measure of profitability commonly used among airlines is the operation ratio (Operating expenses Vs Operating revenues). This is calculated annually for the world’s airlines by the International Civil Aviation Organisation (ICAO). 4 – 5 years of poor or bad performance are generally followed by an upturn, and 4 - 5years of improving results (=> a cycle of around10 years). The cyclical natural of the airline industry is clearly evident, which is in-line with the global economic cycle). 31  The cyclical nature (ctd) Evident 1: cycle 32  The cyclical nature (ctd) Evident 2: in-line with world GDP ICAO scheduled airline traffic growth vs world GDP growth Source: Morrel (2007) 33 The cyclical nature (ctd) Even in good years, profit margins are low in airline business, and the profit after interest and tax can be as low as 2% of revenues (global average). Some airlines such as Singapore Airlines, Lufthansa Group, or British Airways have frequently produced much better profit margins. Nevertheless, such low average profit margins are a poor result for a new and high-growth industry. In fact, the performance (value chain) of the airline market is the worst performing of any other sectors in the air transport chain ….. 34 The cyclical nature (ctd) Industry mean ROIC Source: IATA, 2013 ROIC: return of investment capital 35 The cyclical nature (ctd) 36 The cyclical nature (ctd) Factors that influence the cycles 1. Economic growth Demand of air transport ➔ aircraft orders and delivers Incomes of household ➔ spending on leisure travel By rule of thumb: 1% increase of global economic growth ➔ 2.5 – 3% increase of global air traffic 2. Inflation Inflation influences economic growth as it usually results in escalating labour and fuel costs. When prices are stable, interest rates tend to be low ➔ encourages investment and business expansion. High interest rate will inhibit economic activity, which can put a damper on air traffic. 37 The cyclical nature (ctd) 3. Fleet Capacity The passenger load factor (an airline output indicator expressed in %, relating the number of passengers flown to available seats) is used to measure airline capacity utilisation. High load factor: Rising air traffic ➔ airlines under pressure to buy aircrafts. If the load factors are rising during a business cycle ➔ revenues are improving. 4. Replacement Aircraft Airlines replace their aging and less efficient aircrafts ➔ increase their transporting capacity. 38  Content 1. Aviation and Air Transportation 2. Certificated Air Carriers 3. General Aviation 4. The cyclical nature of the aviation industry 5. Overview of world passenger traffic 6. Important indicators 39 Overview of world passenger traffic Passenger traffics, as well as growth rates are vary in different regions. For the last 30 years, overall had traffic growth. The airlines in Asia-Pacific region have grown much more rapidly than the airlines in other parts of the world. This is true for both passenger traffic and cargo, as much of this growth has been generated by the traffic to, from and between the countries of East Asia and Australia. 40 Overview of world passenger traffic (ctd) Source: Boeing Current Market Outlook 2019-2042 41 Overview of world passenger traffic (ctd) IATA’s new report – 2021 Europe North America 25.4% 32% Middle East 7.2% Asia-Pacific Africa 27.1% Latin America 2.0% 6.5% Source: IATA’s traffic report 42 Overview of world passenger traffic (ctd) Source: Statista – Number of scheduled passengers boarded by the global airline industry from 2004-2022 43 Post-COVID-19 pandemic Source: ICAO, Effects of COVID-19 on Civil Aviation, 2020 Overview of world passenger traffic (ctd) Source: ATAG, 2014 45 Overview of world passenger traffic (ctd) Source: ATAG, 2014 46 Overview of world passenger traffic (ctd) Air transport is a high-growth industry and very few industries, if any, have enjoyed such growth rate for such a long period of time. World passenger traffic has doubled every 15 years previously. Forecast predict the average growth will maintain at around 5% per annum in the future.  Content 1. Aviation and Air Transportation 2. Certificated Air Carriers 3. General Aviation 4. The cyclical nature of the aviation industry 5. Overview of world passenger traffic 6. Important indicators 48  Important Indicators (supply & demand) ASK – ASK = total # of seats x total Supply of the airline; Available Seat Kilometre distance flown passenger capacity RPK – RPK = # of revenue Demand of passenger; actual Revenue Passenger passenger x total distance revenue passenger Kilometre flown transported ATK – ATK = total cargo weight Supply of the airline; cargo Available Ton Kilometre: available x total distance capacity flown RTK – RTK = # of revenue cargo in Demand of cargo; actual Revenue Ton Kilometre or ton x total distance flown cargo weight transported FTK 𝑅𝑃𝐾 𝐷𝑒𝑚𝑎𝑛𝑑 PAX Load Factor LF = It is in % 𝐴𝑆𝐾 𝑆𝑢𝑝𝑝𝑙𝑦 𝑅𝑇𝐾 𝐷𝑒𝑚𝑎𝑛𝑑 Freight Load Factor LF = It is in % 𝐴𝑇𝐾 𝑆𝑢𝑝𝑝𝑙𝑦 49 Important Indicators (supply & demand) Example: UOW Airlines operates one Boeing 737-800 aircraft with a cabin capacity of 200 passengers between Hong Kong (HKG) and Taipei (TPE). However, the revenue passengers from the route are 190 passengers per leg. The distance between the two airports is 830km, which means that: RPK per leg = demand x distance = 190 x 830 = 157,700 ASK per leg = supply x distance = 200 x 830 = 166,000 𝟏𝟓𝟕,𝟕𝟎𝟎 LF = 𝟏𝟔𝟔,𝟎𝟎𝟎 = 95% Then, based on the frequency of this route per day and per year, the daily and annual RPKs and ASKs can be calculated accordingly. 50 Discussion: 5 minutes Why do we need RPK, ASK?