Geopolitical developments hamper air traffic growth in June

By Charlotte Turner |

Growth in the number of international air passengers slowed in June to 2.4% – due largely to weakness in key emerging economies suffering from negative geopolitical developments – with first half growth of 3.7%, compared to the same period last year with travel on premium seats slowing more noticeably than economy.

 

Travel on premium seats slowed a little more than growth in economy travel, with a June year-on-year growth rate of 1.8% compared to 2.5%. However, these year-on-year figures were distorted by the comparison with ‘volatile figures’ last June, says IATA.

 

The major areas of weakness in international air travel are concentrated on markets connected to a number of key emerging economies.

 

The Far East market saw an exceptionally weak month in June, down 4.2% on total traffic compared to last year. Nonetheless, the whole of the first half has been weak for such a potentially dynamic region, with an average of -0.1% year-on-year.

 

The South America total market has also been weak, falling 3.8% during the first half of this year. Both of these regions, containing three BRIC economies, are expected to see substantial growth in the medium term, but are struggling today.

 

BUSINESS CONFIDENCE ON THE RISE

In recent months business confidence (as measured by the PMI Index in the second chart below) has started to rise once more. If this improvement continues, which is the consensus view now, then IATA would expect international air travel growth to accelerate during the second half of this year.

 

However, the first half of 2014 shows that premium travel expanded on average at a slightly faster rate than economy travel, at 3.9% compared to 3.7%. The share of premium revenues has risen further to just under 29% in June – a rise of a bit less than 1% during the past year, as premium yields have held up more than yields on economy seats.

 

This has partly been due to the mix of routes, with the strongest premium travel growth occurring on the longer-haul markets where the share of premium revenues is greatest. This has helped the financial performance of the longer-haul network airlines, compared to shorter-haul, mainly leisure, travel-focused airlines in some, though not all, regions.

 

 

RUSSIA ‘VIRTUALLY IN RECESSION’

The problem at the moment is the relative weakness of some key emerging economies. In Latin America, the Brazilian economy has been weak and is getting weaker, according to the recent business confidence data. The economic crises in Argentina and Venezuela are also not helping.

 

Russia is virtually in recession and travel is additionally being damaged by the geopolitical situation. In the Far East the Indian economy has been weak but, with a new government, is starting to strengthen. The Chinese economy has been managed onto a slower growth path, as the government seeks to move away from the earlier investment-led growth, but recent business confidence data suggests economic activity is starting to strengthen.

 

African markets are also noticeably weak, despite relatively good economic growth in many Sub-Saharan economies. The Ebola outbreak has yet to impact the data on African markets and, at this stage, there is no indication whether it will. However, travel has been discouraged by political unrest in parts of North Africa.

 

The still important Europe-Africa market remains weak because of these reasons and continued economic weakness in continental Europe. The exception for Africa has been the Africa-Middle East market, which is being sustained by flows of workers and business travel stimulated by new South-South trade lanes.

 

The stronger markets, of significant size, have been long haul. North and Mid-Pacific total markets were up over 7% in the first half of this year and the North Atlantic expanded by over 4%. Europe-Far East was up over 5%.

 

These are all markets where the share of premium revenues is over 38% – and is almost 50% across the Atlantic, where there is significant business travel and where leisure travellers are prepared to pay for premium seats due to the longer flight times. On shorter haul markets like Within Europe premium revenues have a share of less than 10%. The mix effect has been an important support to passenger yields for longer-haul network airlines.

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