Airline Industry Outlook 2023
Airline industry: overview
The airline industry directly or indirectly facilitates global trade, tourism, and economic growth. Thus, it is key to the advent of globalization taking place in many other industries.
In the last few decades, international airlines have aggressively expanded their reach to new markets globally through the establishment of alliances and partnerships. Most of the major airlines now command a global presence.
However, the airline industry is also one of the most cyclical as well as volatile industries that are extremely susceptible to political, economic, and social factors.
Also, the airline industry is characterized by extremely low-profit margins. Besides internal cost factors, airlines’ profitability is also highly correlated to economic growth, as it directly affects demand for air travel and trade. Thus, airlines have to constantly evolve and improve to survive and remain profitable amid such external fluctuations.
The global airline industry was adversely affected during the 2008/2009 recession and again by the COVID-19 pandemic. However, the airline industry is resilient and has always recovered through such circumstances, along with the improvement in the global economy.
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Global airline market
The global airline market is expected to recover and return to profitability in 2023. Airlines have proven to be resilient in the face of the challenges posed by the COVID-19 pandemic.
As per IATA, the airline industry losses reduced to -$9.7 billion in 2022, a significant improvement from the losses of $137.7 billion (-36.0% net margin) in 2020 and $42.1 billion (-8.3% net margin) in 2021.
In North America, the airline industry is expected to deliver an estimated profit of $8.8 billion in 2022, thanks to efficiency gains and improving yields. These improvements have helped airlines to mitigate the impact of rising labor and fuel costs, which were driven by a 40% increase in the world oil price in 2022.
Despite the economic challenges, there has been a strong pent-up demand for air travel, which has been fueled by low unemployment in most countries and expanded personal savings. This, combined with the lifting of travel restrictions in most markets, has led to a resurgence in demand and passenger numbers reaching 83% of pre-pandemic levels in 2022.
The industry’s optimism and commitment to reducing emissions are also evident in the expected net delivery of over 1,200 aircraft in 2022. This reflects a belief in the long-term sustainability of the industry and a desire to meet the growing demand for air travel.
In addition to the recovery in passenger travel, cargo volumes reached a record high of 68.4 million tonnes in 2022. This demonstrates the vital role that the airline industry plays in global trade and the resilience of the cargo sector in the face of the pandemic.
Overall, the global airline market is expected to continue its recovery in 2023, with profitability on the horizon as the industry adapts to the challenges posed by the COVID-19 pandemic.
North America
North America is currently the largest airline market in the world and also accounts for nearly half of the entire global airline industry’s total profits. The industry remains a vital contributor to the region’s economy and plays a crucial role in connecting people and businesses across the continent.
The airline industry in North America is dominated by a few major players, such as American Airlines, Delta Air Lines, and United Airlines, which operate a large number of domestic and international flights.
North America is also home to some of the busiest airports in the world, including Hartsfield-Jackson Atlanta International Airport, Los Angeles International Airport, and Chicago O’Hare International Airport. These airports serve as hubs for many major airlines and handle a large volume of passengers and cargo on a daily basis.
Largest airlines in North America
Largest airports in North America
- Atlanta Hartsfield-Jackson
- Los Angeles
- Chicago O’Hare
- Dallas Fort Worth
- New York JF Kennedy
Challenges
Despite its size and strength, the North American airline industry also faces a number of challenges, including rising fuel and labor costs, increased competition, and the impact of natural disasters and global economic downturns.
In comparison to airlines in other parts of the world, those in North America have generally adopted a strategy of low or no fuel hedging, which makes them more vulnerable to fluctuations in oil prices. As a result, North American airlines are often among the hardest hit when there is a global increase in oil prices.
Asia-Pacific
The airline industry in the Asia-Pacific region is a significant contributor to the region’s economy. It is home to some of the world’s largest and busiest airports, such as Singapore’s Changi Airport and Tokyo’s Narita Airport, and is served by a number of major international and domestic carriers.
The Asia-Pacific airline industry has experienced rapid growth in recent years, driven in part by the region’s expanding middle class and increasing tourism. According to IATA, the Asia-Pacific region is expected to account for a majority of the global demand for air travel within the next 20 years.
However, the industry has also faced challenges, including intense competition, rising fuel costs, and the impact of natural disasters and pandemics such as COVID-19. In response, many airlines in the region have focused on expanding their international routes and investing in newer, more fuel-efficient aircraft to reduce costs and increase efficiency.
Overall, the airline industry in the Asia-Pacific is a key driver of economic growth and connectivity in the region and is expected to continue to play a significant role in the future.
Air cargo market
Also, the Asia-Pacific region is a powerhouse in terms of global trade, which in turn leads to a strong air cargo market in the region. The air cargo industry in the Asia-Pacific region is a vital component of the global logistics network, playing a key role in facilitating the movement of goods and materials within the region and to and from other parts of the world.
The region is home to some of the busiest airports in the world, and the demand for air cargo services is driven by a number of factors, including the rapid growth of e-commerce, the expansion of global supply chains, and the increasing complexity of international trade.
Challenges
However, considering the growth in demand for air travel, the region is not coping well in terms of infrastructure. Major airports in the region, including Bangkok, Manila, and Jakarta, are said to be in dire need of major upgrades.
Also, the major markets, including China, are struggling with air traffic management. As a result, the country is facing the serious problem of flight delays. Many of these delays are due to excessive demand whilst at limited capacity expansion, as a majority of the airspace is still under military control, while commercial services are restricted to limited access.
Also, the Asia-Pacific airlines lag behind North American carriers in terms of profitability. In 2021, the average profit per passenger of North American airlines was estimated to be $17.75, with an average profit margin of 9%, whereas it is estimated to be around $12.3 per passenger for Asia-Pacific airlines.
One of the reasons for lower profitability is also that most of the airlines in the region are still aggressively opting for capacity growth.
Also, low-cost airlines are growing rapidly in the region. Intense competition and hence competitive pricing are predominant in the region, which has also led to comparatively lower profit margins.
Largest airlines in Asia-Pacific
- China Southern Airlines
- China Eastern Airlines
- Air China
- Hainan Airlines
- Air Asia Group
Largest airports in Asia-Pacific
- Beijing Capital International Airport
- Dubai International Airport
- Tokyo Haneda Airport
- Hong Kong International Airport
- Shanghai Pudong International Airport
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Europe
The European airline industry is a major contributor to the region’s economy. Ryanair Group, easyJet, and Lufthansa Group are the three major airlines based on the number of passengers transported.
The fragmented airline market in Europe
The airline industry in Europe is highly fragmented, with 348 city pairs generating 25% of within-Europe passenger revenues compared to 167 in North America.
On the one hand, fragmentation can be seen as a strength because it allows for greater competition and choice for consumers. With many different airlines operating in the market, travelers have more options to choose from when it comes to routes, pricing, and services. This can lead to lower prices and better quality of service for consumers.
On the other hand, fragmentation has led to reduced economies of scale for European airlines. With several smaller regional carriers operating in the market, it can be difficult for them to achieve the same level of efficiency and cost-effectiveness as larger, more consolidated airlines. This can lead to higher operating costs and lower profits for these smaller carriers.
Additionally, fragmentation can also lead to increased complexity in terms of regulatory compliance and coordination, which can be challenging for airlines to navigate.
Challenges faced by the European airline industry
The European airline industry has faced numerous challenges in recent years, including rising fuel costs, increased competition from low-cost carriers, and the impact of global economic downturns.
In addition, the industry has been significantly impacted by the COVID-19 pandemic, which has led to widespread travel restrictions and a sharp decline in demand for air travel. As a result, many airlines have had to reduce their operations or temporarily suspend flights, leading to financial difficulties and job losses.
Despite these challenges, the airline industry in Europe remains a vital part of the region’s transportation infrastructure and is expected to recover as travel demand returns. In recent years, there has been a trend towards consolidation in the industry, with some airlines merging or forming partnerships in order to better compete in a challenging market.
In addition, many airlines are investing in new technologies, such as fuel-efficient aircraft and digital solutions, in an effort to reduce costs and improve the customer experience.
Also Read: What’s Wrong with European Airlines?
Largest airlines in Europe
- Lufthansa Group
- Ryanair
- International Airlines Group (IAG)
- Air France – KLM
- easyJet
Largest airports in Europe
- Heathrow Airport
- Charles de Gaulle Airport
- Royal Amsterdam Airport Schiphol
- Frankfurt Airport
- Istanbul Atatürk Airport
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Latin America
The airline industry in Latin America is a diverse and competitive market, with a mix of domestic and international carriers serving the region.
Overall, the airline industry in Latin America is highly competitive, with a mix of legacy carriers and low-cost carriers vying for market share. Many of the major airlines in the region have codeshare agreements with international carriers, which allows them to offer passengers a wider range of destinations and more convenient connections.
Recovery in the Brazilian and Mexican economies is expected to help the market performance to a great extent. Also, the middle-class population in Latin America is expanding, which will contribute to the growing demand for air travel.
Low-cost carriers in Latin America
There are several low-cost airlines operating in Latin America, including Viva Air, Volaris, Sky Airline, and JetSmart. These airlines offer flights to destinations within Latin America, as well as to some international destinations in North America.
Low-cost carriers have helped to increase access to air travel for many people in Latin America who may have previously been unable to afford to fly. They have also contributed to the growth of the tourism industry in the region by making it more affordable for people to visit.
Although low-cost carriers have seen tremendous success throughout the world, it surprisingly lags behind in this region. Four large full-service carrier groups currently dominate the Latin American airline market, accounting for more than 40% of the total capacity.
However, this lower penetration of LCCs in the region could, in turn, emerge out to be an untapped market opportunity for the region.
Along with the correction in market characteristics that have currently hindered the growth of LCCs, new LCCs could emerge and expand, bringing competition and passenger growth.
Challenges
However, poor infrastructure and regulatory challenges are prevalent in the region. According to World Bank, Latin America spends only about 3% of its annual GDP on infrastructure development.
To cope with the growing demand, the region needs to invest more, as well as improve its airports and air traffic control infrastructures.
Largest Airlines / Airline Group in Latin America
- LATAM
- Gol Transportes Aéreos
- Avianca Holdings
- Azul Brazilian Airlines
- Aerolíneas Argentinas
Largest Airports in Latin America
- Mexico City International Airport
- São Paulo–Guarulhos International Airport
- El Dorado International Airport
- Cancún International Airport
- Jorge Chávez International Airport
Middle East
The airline industry in the Middle East has undergone significant growth and expansion in recent years. The region is home to several major international airlines, including Emirates, Qatar Airways, and Etihad Airways, which are known for their luxurious amenities and long-haul flights. These airlines have played a key role in making the Middle East a major hub for air travel, connecting cities and regions around the world.
The Middle East is also home to a number of smaller regional airlines that serve domestic and regional routes within the region. Many of these airlines have benefited from the growth of tourism in the Middle East and the increasing demand for air travel within the region.
Despite the growth of the airline industry in the Middle East, it has faced a number of challenges in recent years, including the impact of the COVID-19 pandemic, competition from low-cost carriers, and political and economic instability in some parts of the region. However, the industry is expected to recover and continue to play a key role in the economic development of the region in the coming years.
Changing dynamics of ‘super connectors’
The three large airlines in the Middle East, namely Emirates Airlines, Etihad Airways, and Qatar Airways, are considered the super connectors in the region. These airlines achieved aggressive growth based on their business model of positioning their respective location in the Middle East as the center hub of the world to connect the East and the West.
This model succeeded to a great extent and positioned these three airlines as large super connectors. Along with their superior service and competitive pricing, these three airlines quadrupled the number of passengers they carried each year in the last decade.
However, the same geo-political factor that had helped the airlines achieve this aggressive growth is also a high-risk scenario for these airlines amid volatile regional tensions brewing in the region again.
Also, the rising ambitions of Turkish Airlines to establish itself as the new ‘super connector’ and shift in the ‘hub gravity’ to Istanbul is another major threat that could challenge the other three superconnectors’ dominance.
Turkish Airlines is another large airline from the region, and it already flies to more than 300 destinations in 121 countries, the largest among all the global airlines. With such aggressive growth ambitions, Turkish Airlines will try to attract long-haul travelers away from the existing Dubai, Abu-Dhabi, and Doha hubs.
So, expect more intense competition among the airlines in the region in the future. Despite posing an increased challenge to the existing super connectors, it’s overall a good sign for increasing demand and a healthy prospect for the airline industry in the region.
Thus, despite the geo-political challenges, the momentum of the Middle Eastern airline industry is expected to remain positive.
Largest airlines in the Middle East
- Etihad Airways
- Emirates Airlines
- Saudia
- Qatar Airways
Largest airports in the Middle East
- Dubai International Airport (Dubai, UAE)
- King Abdulaziz International Airport (Jeddah, Saudi Arabia)
- Hamad International Airport (Doha, Qatar)
- King Khalid International Airport (Riyadh, Saudi Arabia)
- Abu Dhabi International Airport (Abu Dhabi, UAE)
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Africa
While air traffic is growing, passenger load factors for African airlines are just over 70% which is over 10% points lower than the industry average.
Higher operational costs, restrictive aviation policies, and fragmented skies for intra-African connections make it very difficult for African airlines to make a profit at such a low utilization rate.
However, the African Union’s concerted effort to further liberalize and promote the growth of intra-Africa connectivity through the formation of SAATM is a development in a positive direction.
Single African Air Transport Market (SAATM) initiative
On 28th January 2018, 23 African countries (now 28) signed for the SAATM initiative by African Union (AU). It’s a major step to open up the African skies and also unite the highly fragmented aviation skies in Africa.
Earlier, most of the African airline industry operated based on bilateral air service agreements between the respective two countries. While deregulation, liberalization, and policies such as ‘open skies’ became established in other regions of the world, which eventually led to an increase in traffic flow across the regions; meanwhile, in Africa, it remained constricted until now because of quite stringent bilateral agreements.
As a result, the continent’s aviation industry remained fragmented, inefficient, and costly and could not develop to its full potential, considering its vast population and demand for air travel in recent years.
However, the potential increase in intra-African air connectivity as part of this SAATM initiative will hopefully bring huge benefits to the entire aviation industry in Africa.
As per research conducted by IATA, it was found that if only 12 countries in Africa (Algeria, Tunisia, Egypt, Ethiopia, Kenya, Uganda, South Africa, Namibia, Angola, Nigeria, Ghana, and Senegal) adopted more liberalization and opened their skies to each other, it would add $1.3 billion to the GDP, add 155,000 new jobs and more importantly the airfares would drop by 35%, enabling an extra 5 million Africans to afford air travel.
Thus, this initiative by 28 African countries that “provides for full liberalization in terms of market access between African States, the free exercise of traffic rights, the elimination of restrictions on ownership and the full liberalization of frequencies, fares, and capacities” could bring stark changes to the single continent.
Largest airlines in Africa
- Ethiopian Airlines
- EgyptAir
- South African Airways
- Royal Air Maroc
- Kenya Airways
Largest airports in Africa
- O.R. Tambo International Airport (Johannesburg, South Africa)
- Cairo International Airport (Cairo, Egypt)
- Bole International Airport (Addis Ababa, Ethiopia)
- Cape Town International Airport (Cape Town, South Africa)
- Mohammed V International Airport (Casablanca, Morocco)
Airline industry trends
- Airlines are incorporating more technologies into their operations,
- Big data and analytics have found a great foothold in the airline industry as a way to measure internal performance as well as gain insight into external factors that could, in turn, affect the business,
- Airlines and airports are already using Artificial Intelligence (AI) in various forms. According to SITA, 85% of the airlines are planning to implement AI virtual agents and chatbots, whereas 66% of them plan to implement AI in predictive analytics as well.
- Biometrics and RFID for self-check-in, passport control, baggage tracking, and security is being more of a norm.
- It’s also good to see airlines seriously looking into hot new technologies such as ‘blockchain’ and even considering ways it could be incorporated to their benefit.
Market drivers
- Strengthening and recovery in the global economy,
- Growing demand for air travel and improved efficiency are expected to help airline profitability despite rising costs,
- Low-cost carriers are sprouting throughout the globe and have made air travel accessible to millions of new flyers,
- Burgeoning e-commerce has helped drive the growth in the air cargo market,
- Airlines have been expanding and launching new routes as the financial outlook and demand have been favorable.
Airline industry challenges
- Rising fuel costs and labor expenses have been a challenge and will remain so,
- Jet fuel prices are expected to constitute roughly more than 20% of the airline’s operational cost.
- Labor costs are expected to constitute roughly 30% of the airline’s operational cost. Labor/manpower now constitutes more than the fuel cost and has been increasing,
- Regional and global political uncertainties will also remain a challenge.
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Threat of substitutes
Alternative modes of transportation
Passenger transportation is, in general, dominated by railways or roadways (passenger vehicles such as cars, buses, bikes, etc.).
Air transportation is still the preferred or the only viable mode of transportation for long distances. However, the possibility of threats in the near future from high-speed railway networks or emerging transportation systems (such as hyperloop) should not be discarded altogether.
As high-speed and cheap alternatives for transportation improves, passengers could re-evaluate these alternatives over the issues with air travel, such as booking/checking-in/security hassles, relatively higher ticket price,s and negative environmental impact.
Bargaining power of suppliers
Aircraft manufacturers
The aviation industry generates billions of dollars worth of revenue, of which the majority is comprised of civil aircraft, engines, equipment, and parts.
For commercial aircraft engines, the major manufacturers include Pratt & Whitney (now part of UTC), Rolls-Royce, and General Electric (GE) in partnership with Safran (France).
For commercial aircraft, Boeing and Airbus have a complete duopoly in the larger aircraft segment, whereas Bombardier and Embraer have a good share of the market in the regional aircraft market segment.
There are a few other aircraft manufacturers from Russia, China, and Japan vying to gain their foothold in the commercial aircraft industry. However, it will take a few more years before these new entrants could even make their presence felt in the market. Challenging the incumbent’s dominance in the market seems quite far-fetched for now.
Thus, the market dominance of these selective few OEMs will surely not diminish in the near term.
In this term, these few aerospace giants have relatively high bargaining power over the airlines.
However, the introduction of new airline business models focusing on cost savings and postponed aircraft orders, e.g., through buying options instead of fixed contracts, has forced the aircraft manufacturers to give up much of their remaining bargaining power by focusing on supporting these airline business models to secure their own survival.
The best example of this case is the Airbus A380 program which survived mainly because of the orders from its largest customer, Emirates. However, in February 2019, Airbus announced that it will end the A380 production by 2021 after Emirates dropped the order for 39 of the aircraft, as the program was no longer sustainable for continued production.
Airport infrastructure
The supplier role of the airports is affiliated with the aeronautical services which they provide for the airlines.
Primary airports still have more bargaining power than smaller airports as they have reached critical mass and are not as susceptible to contract demands.
Labor unions
The airline industry is highly labor-intensive, and salaries for employees such as pilots, cabin crew, customer service, and gate agents have historically been accounting for one of the largest shares of an airline’s expenses.
Furthermore, many employees in the airline industry are well organized in different types of labor unions, thus strengthening their bargaining power.
One of the best examples of a labor union’s bargaining power was seen during the merger deal between American Airlines and US Airways, which could be termed a Union-driven merger in some ways.
In this case, American Airlines’ labor unions negotiated alternate labor agreements in secret with US Airways forcing American Airlines’ merger with US Airways, in their terms, to some extent.
Jet fuel suppliers
The Kerosene-type jet fuel (including Jet A and Jet A-1) that’s most commonly used in gas-turbine-powered commercial aircraft is made from crude oil, and the prices of the two are highly correlated.
Airlines have little influence over the international market price for crude oil, which means that the jet-fuel suppliers are in a favorable bargaining position.
To have some extent of control, airlines could hedge the jet-fuel prices by using financial derivatives or develop and use bio-fuel.
Aerospace companies (Boeing and Airbus) and several airlines are already members of the Sustainable Aviation Fuel User Group (SAFUG), whose primary goal is to develop and help commercialize sustainable types of biofuels.
Also, the ongoing research and development towards electrification of aircraft will help airlines gradually shift towards hybrid and then hopefully all-electric flights (at least for short-haul flights) in the future. This will largely help airlines reduce their operational costs, as fuel constitutes one of the largest chunks of operational expenses for airlines.
Bargaining power of buyers
The bargaining power of buyers can be interpreted as the opposite of the bargaining power of suppliers. Instead of raising prices and lowering product or service quality, buyers want to capture more value by demanding higher quality at lower prices.
Buyers were considered to have low bargaining power in the airline industry. However, it’s somewhat different these days.
For example, the rise of technology and the internet has increased the bargaining power of the consumer as it has made it easy for a potential buyer of a flight ticket to search for, compare and buy the cheapest airfare currently available through many third-party meta-search flight comparison websites/apps.
This ease of flight search and price comparison, combined with the low switching costs for buyers in this market, has helped push down the price of air travel.
The airline industry distinguishes between two types of buyers; leisure and business travelers.
Leisure travelers
Leisure travelers are defined as anyone traveling by airplane in a way that is not related to business/work.
Each individual customer has little bargaining power and is unable to push the airlines to deliver a higher quality service at lower prices.
However, comparatively less integration of leisure travelers into loyalty programs and thus their extremely low switching cost provides this segment of travelers with a certain amount of bargaining power as well.
In sum, leisure travelers are price sensitive, face low switching costs, and consider air travel to be a standardized undifferentiated service.
Consequently, this intensifies competition and draws profits away from the traditional network carriers towards the low-cost airline and the customer themselves.
Moreover, the leisure travelers’ support of low-cost airlines proves that as long as minimum requirements for service are undertaken, price is the only variable that matters.
Arguably, this has changed the dynamics of the industry and put pressure on traditional Full-Service Carriers (FSCs) to cut costs in order to offer cheaper flights.
Business travelers
Business travelers are defined as customers traveling on behalf of a company or for work-related matters.
Many business people are frequent travelers and often account for significant revenue for an airline. This leaves them in a strong bargaining position which they will utilize in order to obtain several perks and discounts.
Furthermore, airlines consider business travelers valuable because they generate a stable flow of revenue and provide a high degree of certainty as they are often locked into long-term contracts or some sort of loyalty program.
Compared to leisure travelers, business travelers are less focused on ticket prices and place more emphasis on airline punctuality, high route frequency, and effortless ticket service handling.
