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Tailwinds
2014 airline industry trends

Spotlight:
The connected airline

Welcome to our second edition of Tailwinds, a publication for the airline
industry. This edition provides an overview of the current state of the
industry on a global level. It includes a special report on the ‘connected
airline’ that discusses how new technologies are transforming the way
airlines do business.

Part one looks at key metrics in the global airline industry, such as growth
and operating income as well as expense patterns since 2004. The overall
picture is favorable. Revenues are at an all-time high, driven by passenger
traffic rather than cargo. Expense growth is up as a result of increases in
non-fuel items, such as labor and maintenance. The regional outlook shows
North American carriers in the most favorable position, followed by Asia-
Pacific carriers. All carriers face more aggressive competition in the coming
year: an expansion of the low-cost carrier (LCC) business model, the rapid
growth of airlines in the Middle East, and an increase in joint ventures to
allow more international flights.

Part two examines how airlines can thrive in an increasingly competitive
environment. Thanks to advances in technology and analytics, airlines
can now use the massive amounts of data on hand to become a ‘connected
airline.’ A connected airline gets the right information to the right places
at the right time, which helps to improve decision-making and resolve
operational problems in the short-term and reduce costs and increase
revenue in the long-term.

Table of contents

Part one: Current global industry trends 2

Part two: The connected airline 8

Contacts 13

Part one: Current global industry trends

Revenue and pricing Figure 1: Global commercial airline revenue ($ bil)

Global airline revenues are estimated 800 636 679 708 743
to have reached a new high in 2013 700
of $708 billion (Figure 1). Growth has 600 579 497 538 566 596
been driven by increased passenger
revenue as a result of more flights 500 67 62 60 60
and scheduled passengers. However, 400 445 72 79 82 87
cargo revenue declined for the 2011 2012 2013e 2014f
second consecutive year even as 300
freight tonnage increased. Passenger
and cargo pricing were both weaker, 200
and the passenger yield declined 100 66
despite a minor uptick in load
factors. Nevertheless, the industry 0 68
has been adding more passenger 2010
capacity in light of relatively robust
traffic growth numbers. Passenger Cargo Other

Cargo performance continued Note: (e) estimated and (f) forecast
to suffer from overcapacity. The Source: International Air Transport Association (IATA), International Civil Aviation Organization (ICAO)
problem has been exacerbated by the
addition of belly capacity as part of a Figure 2: Global airline passenger and cargo yield growth vs. CPI (%)
larger passenger fleet. This challenge
is likely to worsen in coming years 20% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013e 2014f
because of new deliveries of wide- 15%
body aircraft. Demand, on the 10%
other hand, is being negatively
affected by a continuing modal shift 5%
to alternative forms of transport, 0%
including marine, rail and ground. -5%
In addition, given that cargo is a -10%
non-core business for many airlines, -15%
it can suffer from a general lack of -20%
capacity and pricing discipline.
Passenger yield Cargo yield Consumer prices
As Figure 2 shows, both passenger
and cargo yields have grown at Sources: IATA, ICAO, International Monetary Fund
an average annual rate far below
consumer prices over the last ten
years, with 2.6 percent average
passenger yield growth and 1.2

2 Tailwinds: 2014 airline industry trends

percent average cargo yield growth Figure 3: Jet fuel crack spread ($/barrel), fuel consumption (bil/gal)
compared to four percent average
global consumer price growth. In 150 80
addition, airline yields tend to be 75
more volatile than global consumer 100 70
prices. Airline passenger and 65
cargo yields are also far below the 50 60
10-year average operating expense 55
growth rate of 8.3%. These yield 0 2009 50
data indicate that airline pricing
power is still quite modest relative 2010 2011 2012 2013
to other inflation comparisons.
Jet fuel crack spread Crude oil price, Brent
Low-cost carriers (LCCs) continued Jet fuel consumption
to gain global market share,
restraining the yields of the legacy Source: IATA
carriers. LCC’s share of global
capacity increased to over 25 Figure 4: Global revenue and operating expenses ($ bil)
percent in 2013.1
800 446 455 473 498
Profitability 700
600 176 210 211 210
Airlines saw some operating 500 2011 2012 2013e 2014f
expense relief in 2013 as a result 400
of lower fuel prices. Fuel expense 300 412 Fuel Revenue
was flat from 2012–2013 even as 200
capacity and consumption grew. A 100 139
reduction in jet fuel crack spread
in 2013 also contributed to lower 0
jet fuel costs. (Figure 3). The 2010
replacement of older aircraft with
newer, more fuel-efficient models Non-fuel
should help airlines to continue to
control fuel expense. But there has
been a significant and steady rise
in non-fuel expense since 2009
(Figure 4), indicating an increase in
labor and maintenance costs.

Source: IATA, ICAO

Tailwinds: 2014 airline industry trends 3

The growth in non-fuel expenses in the global fleet over the next Despite the growth of non-fuel
limited operating margins. Labor 20 years.2 Increased pilot training operating expenses, airlines are
and maintenance are typically the requirements, an aging workforce (with seeing generally better margins
largest non-fuel operating expenses mandatory retirements), and global since the economic downturn in
for airlines. It is unlikely that competition for pilots are contributing 2008–2009. While fuel prices are
airlines will see much relief from to this demand.3 In addition, until down year-over-year, the net profits
a labor cost perspective because the newer, more efficient aircraft are since 2010 can be mostly attributed
of the expected growth in the delivered, the fleet will require more to higher revenues, combined with
demand for pilots and maintenance maintenance, contributing to non-fuel the high operating leverage inherent
technicians. Boeing has forecasted expense inflation. in airline business models (Figure 5).
that 498,000 new commercial
airline pilots and 556,000 new
maintenance technicians will be
needed to operate new aircraft

Figure 5: Global operating and net margins (%)

5% 5.0% 2.2% 2.2% 3.3% 4.7%
1.3% 1.1% 1.8% 2.6%
4%
3.3% 2013e 2014f

3%

2%

1%

0% 2011 2012
2010
Operating margin
Net margin

Source: IATA, ICAO

4 Tailwinds: 2014 airline industry trends

Global results by region Figure 6: EBIT margin by region (%)

There was a wide range of margin 5 4.8% 4.1% 3.8% 3.1%
performance by region, with North 4 3.4% 3.3% 3.0%
America taking a significant lead in 3
the EBIT (earnings before interest 1.5%
and taxes) margin (Figure 6). In 2
addition, North American carriers 1.3%
now account for almost half of the
global industry net profit, up from 1 0.7%
about a quarter in 2010 (Figure
7). Carriers in this region have 0
benefitted from a wave of domestic
consolidation and capacity discipline. -1 Europe -0.5% -0.4%
Asia-Pacific carriers also earned North America Asia-Pacific Middle East Latin America Africa
relatively high EBIT margins, despite
contributing less to the overall global 2013e 2012
net profit. Many of the airlines in
the Asia-Pacific region have been Source: IATA
helped by the growth of the middle-
class and corresponding increases in
passenger traffic.

European EBIT margins improved Figure 7: Global net profits by region (%)

as the region attempted to move

past recession and sovereign debt

issues. Nevertheless, the economic

environment remained sluggish.

Also, European airlines have been 2010 22% 10% 58% 5% 5%
grappling with increased competition

from well-funded Middle East

carriers on intercontinental routes.

In fact, Middle East carriers have

placed a record number of orders for 2013 45% 13% 25% 5% 12%
new wide-body aircraft for the next

decade.4 To compete, the European

airlines may be facing additional 0% 20% 40% 60% 80% 100%
consolidation as seen in the US

during the past decade in an attempt North America Europe Asia-Pacific

to strengthen the industry. Europe Latin America Africa & Middle East

Source: IATA

Tailwinds: 2014 airline industry trends 5

has already seen the formation of Kelly has commented that they will buying new, fuel-efficient aircraft in
3 mega carriers (Lufthansa, IAG, have opportunities to expand their large numbers, often with financing
Air France-KLM) like the US, but international service. Canada’s help from US and European export
has much more smaller airlines left WestJet has recently announced credit agencies. They also benefit
than in the US. EBIT margins for a transatlantic route to Ireland.6 from government investment in
the Latin American airlines were The net effect of these moves is infrastructure and advantageous
up. However, according to IATA likely to be greater pressure on tax environments. In addition,
(International Airline Transport international yields. these carriers are blessed with an
Association),5 improvements to advantageous geographic location,
regional infrastructure have been While the LCC business model is which places them at the cross-roads
trailing traffic growth, which could less developed in Asia, there will of Asia and Europe.
affect the airlines. In an effort to deal be significant growth as carriers
with this issue, Brazil has offered target nearby emerging markets. For 3) Carriers are likely to remain
numerous airport concessions in example, Aviation Daily reports that more conservative in their
order to bring in more investment the Civil Aviation Administration of capacity planning relative to
ahead of the 2014 World Cup and China has urged domestic airlines previous cycles. In the years
2016 Olympic Games. to consider moving to a budget/LCC following past global recessions,
business model7 and China Airlines annual percentage capacity
Outlook for 2014 announced near the end of 2013 that growth peaked at double-
it would be setting up a joint venture digit levels. However, capacity
1) The low-cost carrier (LCC) with Singapore’s Tigerair in order to increases following the 2009
model will likely evolve in western target the Taiwan market.8 global recession were much more
markets, and the concept should measured. Consolidation in certain
gain more traction in Asia. Western 2) Middle East carriers will geographies as well as a focus on
LCCs are likely to continue their likely become even more yield improvement led to improved
push into international markets. of a competitive threat on capacity rationalization. The
Pending regulatory approval, international routes. Middle East challenge moving forward is that
Norwegian Air is planning to launch carriers are well-funded and their many new aircraft will be delivered
a new transatlantic service out costs tend to be lower. Fuel and labor over the next several years and
of Ireland, which will use 787s costs are generally cheaper in this
and pilots from Asia. In addition, region than in more developed parts
Southwest is assuming AirTran’s of the world. Gulf-based airlines are
international routes, and CEO

6 Tailwinds: 2013 airline industry trends

serve to modernize the existing fleet Figure 8: Global commercial aircraft orders, deliveries & retirements
(Figure 8). While some carriers may
try to grow market share by keeping 4000
some of their older equipment in 3500
service, high fuel costs will reinforce 3000
stated intentions to retire older 2500
equipment, leading most airlines to 2000
remain capacity disciplined. 1500
1000
4) Airlines will push for more
joint ventures (JVs) and antitrust 500
immunity agreements (ATIs) 0
to target international growth.
Some airlines in Asia are using the 2010 2011 2012 2013e 2014f
LCC model in JVs with other Asian Deliveries Retirements
airlines in an effort to capture more Orders
international traffic. More airlines
will pursue new JVs and ATIs Source: Airline Monitor
(subject to open skies agreements)9
to allow them to offer more
direct flights on transatlantic and
transpacific routes and enhance their
ability to compete.

Tailwinds: 2013 airline industry trends 7

Part two: The connected airline

Airlines have made great strides in the • Further integration between Further enabled by more recent
last decade by improving operating airlines and airport IT advances in networking and mobile
performance, controlling costs, infrastructure and operations devices, the connected airline is now
enhancing customer relationships, can yield as much as $2.5 not just a concept, but a reality. Pilots
and increasing profit margins. But billion and could further carry real-time flight and navigation
the rules of the game keep changing. increase the efficiency of airline information on tablets, crew members
New competitors, with inventive and on-airport operations.13 customize in-flight service using
often lower-cost business models, are passenger profiles on handheld
operating in established and emerging Many airlines now find themselves at a devices, and passengers rely on Wi-Fi
markets, challenging larger incumbents crossroads. They can continue to chip for productivity and enjoyment, not
on their own turf. Also, customers away at inefficiencies and realize small, just in airports but in-flight as well.14
have become more demanding and incremental improvements, or they
knowledgeable, as they can easily can apply advanced technologies and
compare prices and services across achieve step function advancements in
airlines and share positive and negative operational and financial performance.
experiences with vast networks of
people in seconds. Convergence of
technological advances
To compete successfully and maintain
profitability requires that airlines While technological advances in the
make the most of their opportunities industry have been developing for
to further streamline and improve some time, it is only recently that they
processes. A look at several key are converging in a “game changing”
indicators on an industry-wide way. Airlines can now collect massive
level highlights some of the existing quantities of data from sensors on
opportunities for reducing costs and the aircraft, analyze the data to turn
increasing revenues: them into actionable information, and
then disseminate that information
• Flight delays and cancellations in real-time to resources dispersed
cost US airlines an estimated $7.2 throughout the operation. This
billion annually.10 process can help airlines to improve
decision-making and resolve or even
• Mishandled bags, 26 million in avoid problems.
2012, cost airlines nearly
$3 billion.11

• Suboptimal fleet deployment
choices cost US airlines nearly
nearly $4.8 billion.12

8 Tailwinds: 2014 airline industry trends

The challenge—and the Figure 9: Legacy airline approach to stakeholders and
opportunity information management

As shown in Figure 9, traditional Aircraft data Tech ops Crew data Pax data Airport data
airline organizations operate in data
siloes, with each major stakeholder
independently managing data and
prioritizing investments for its own
ends. Figure 10 illustrates the concept
of the connected airline, where the
most relevant information is easily
available to all stakeholders, when
and wherever needed.

The dissemination of information Source: PwC analysis
is pivotal to building a connected
airline that can address many of Figure 10: Connected airline approach to stakeholders and
the issues facing the industry today. information management
The examples on the following page
highlight how getting the right Dispatch
information to the right places at the
right time can help airlines improve
results:

Traveler Tech Ops

Bags Aircraft

Crew Airport

Source: PwC Analysis

Tailwinds: 2014 airline industry trends 9

• Airlines can improve air-and land- Figure 11: Optimizing the turn cycle
side operational coordination,
leading to better slot planning and Air Traffic Ground Ramp Gate
increased airport asset efficiency, Control Control Operations Operations
by consolidating airport and airline
data across stakeholders and their Connecting bags
separate IT systems (Figure 11).
Maintenance alerts Catering usage
• Airlines can better predict and
prepare for maintenance events, Flight In-flight Arrival Ramp Gate
leading to improved aircraft Stage/ • Disembark
utilization and reduced turnaround Activity • Slot planning • Runway to • Cleaning • Crew change
time and maintenance costs, by Ramp
correlating aircraft operating data • Route plans gate taxi • Fueling Crew
(e.g., the instances of hard landings ETA
and turbulence) with component Taxiway/ Real-time • Baggage
reliability data. Ramp Gate PSS
unload
• By taking a holistic approach to DHS
IROPS (irregular operations) Congestion Availability (Homeland
management (incorporating crew, Sec)
network, fleet, and passenger Sample ATC mgmt Airport ramp Catering Delayed
data and inputs), airlines can Airline/ Dispatch/ control vendors passengers,
accelerate decision-making Airport/ weather Other airline Baggage crew
to minimize the disruption to Industry systems mgmt
customers and the operation. For System
a network carrier interested in
premium passenger satisfaction, Updated flt plan Delayed bags Updated, Security line
assigning a customer value to each Wind/Wx updates re-routing crew, bags queue time
passenger would allow the airline
to optimize re-accommodation Departure alignment Real-time passenger &
and re-scheduling and minimize bags boarding
disruptions to high-value
frequent flyers. For LCCs, the Flight In-flight Departure Ramp Gate
goal might be different. If an LCC Stage/ • Slot planning • Taxi runway • Baggage load • Passenger
wants to minimize cash outlays Activity • Route plans
for hotels and meals, it could to gate boarding
apply an algorithm that would • Flight close
minimize overnight disruptions
to passengers. •So urAcei: rPwliCnaenaslyscisan increase merchandising revenue, and
merchandising revenue and reduce shared with vendor management
the cost of supply chain fulfillment to more accurately predict and
by correlating passenger data procure needed parts, catering,
across multiple channels and better and other goods and services.
matching supply with demand.
Through loyalty programs, The value of pursuing the connected
in-flight sales, and social media, airline is derived from capturing these
airlines can learn much about their opportunities (and many others) by
passengers’ buying behavior. These leveraging and correlating existing
behaviors can then be analyzed data sources to better predict,
to help determine how best to manage, and react to changes in the
sell to passengers, increasing daily operation of the airline.

10 Tailwinds: 2013 airline industry trends

Moving forward One yardstick to use in choosing the project manager must bridge the
early projects is how quickly they can gaps between the functional and
Many airlines are reluctant to provide value and create momentum. technology silos, helping to ensure
establish their own connected airline To ensure the business case is realized that information flows seamlessly
program. Some fear the process and benefits are captured, the initial throughout the organization.
will be costly and time-consuming, test cases selected must be based on
crowding out other critical initiatives. actual airline operating data and The end result
Others perceive the skills gap to be measurable through ROI and other
too large, with insufficient in-house benchmarked financial metrics. The connected airline provides
capabilities like data analytics, information where and when it’s
system integration, business process An example of a good test case needed to optimize airline operations
redesign, and change management. might be to increase pre-day-of- and the customer experience. It
Still others are waiting for OEMs departure ancillary sales through allows relevant stakeholders to make
to develop a commercial, off-the- improved customer targeting and better decisions by giving them the
shelf solution that can easily the introduction of new products, information they need to do so. It can
be implemented. services, and pricing models. lead to better aircraft utilization and
Another test case might be to dependability, reducing turnaround
However, airlines need not wait until improve asset utilization through times and maintenance costs. It can
all stars are aligned. They can start the implementation of a needs-based minimize transfer times for flyers
building a connected airline with maintenance program that reduces and shorten the time it takes to
small scale projects that not only aircraft downtime. reach destinations. It enables more
mitigate risks, but help demonstrate effective collaboration among the
the utility of the concept. Early At the start of a project, an airline different organizational functions,
wins can often be generated using must select a suitable champion. making workers more productive
existing data and returns then This champion, who will serve as and efficient. In a time of rapidly
reinvested in further development or the project manager, has to pull expanding competition, the connected
other initiatives. together a cross-functional team, airline can help build and maintain
spanning multiple business owners competitive advantage.
and diverse corporate function
owners. With a cross-functional team,

Tailwinds: 2013 airline industry trends 11

Endnotes
1 http://centreforaviation.com/reports/files/29/CAPA%20Yearbook%202013%20-%20Global.pdf
2 http://www.boeing.com/boeing/commercial/cmo/pilot_technician_outlook.page
3 In regard to the increase in pilot training requirements, we do note that the safety performance of the industry is strong: 2013 had the fewest passenger
fatalities since 1996, see http://www.airsafenews.com/2014/01/airsafecom-airline-safety-review-for.html
4 http://www.nytimes.com/2013/11/29/business/international/a-growth-spurt-for-middle-eastern-carriers-led-by-emirates.html?pagewanted=all&_r=0
5 http://www.iata.org/pressroom/pr/Pages/2013-12-12-01.aspx
6 “Irish Eyes Could Smile on WestJet,” Aviation Daily, November 18, 2013
7 “Challenges Loom in 2014 for Asia-Pacific Airlines,” Aviation Daily, December 31, 2013
8 “China Airlines, Tigerair to launch Taiwanese LLC,” Flightglobal, December 16, 2013
9 For example, see: “Delta Shifts Focus From Japan as Trans-Pacific Hub; Move Underscores Growing Importance of China, Elsewhere in Asia,” Wall Street
Journal, February 10, 2014 and “Delta and Virgin Atlantic Launch Joint Venture,” Flight International, December 31, 2013
10 Airlines for America, "Annual and Per-Minute Cost of Delays to U.S. Airlines," published May, 2013.
11 SITA 2013 baggage report.
12 Strategy& 2013 Fleet Deployment Index Study
13 Strategy& analysis
14 PwC Experience Radar 2013: Lessons Learned from the Airline Industry, October 2013.

12 Tailwinds: 2013 airline industry trends

www.pwc.com/us/airlines

Contacts

To have a deeper conversation about the subjects discussed in this report, please
contact the following PwC airline/transportation specialists:

Jonathan Kletzel Bryan Terry
US Transportation & Logistics Leader US Transportation & Logistics Director, Advisory
+1 (312) 298 6869 +1 (678) 419 1540
[email protected] [email protected]

Dirk deWaart Michael J. Portnoy, CFA
US Transportation & Logistics Advisory Principal Senior Manager, Research & Analytics
+1 (213) 830-8374 +1 (813) 348 7805
[email protected] [email protected]

Richard Wysong For general inquiries, contact:
US Transportation & Logistics Director, Advisory
+1 (415) 498 5353 Diana Garsia
[email protected] US Transportation & Logistics Marketing Senior Manager
+1 (973) 236 7264
Alexander T. Stillman [email protected]
US Transportation & Logistics Director, Advisory
+1 (202) 487 8086
[email protected]

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