Research and analysis on key industry issues prepared by IATA's partners and other industry experts.
May 2009
Excess capacity headwind increasing
by Chris Tarry, CTAIRA
Airlines continue to report significant losses in 2009 and assessing the outlook for the future is a challenging task. The “mood music” of management – in other words how they view the future – can be used this as one source of perspective but even if what we are beginning to see is the rate of decline slowing there is little to indicate that once the bottom is reached the upturn will not be some time away. The fundamental rules of economics still apply to the aviation industry and there are signs suggesting that the current downturn has a number of parallels with excess capacity challenges of the early 1990s. Complete report (pdf)
European policy perspectives from a former DGCA
by Peter Griffiths, IATA
Careful policy design in the key areas of environment, infrastructure investment and avoiding trade protectionism will be vital to the ongoing success of the aviation industry in Europe. Peter Griffiths, former Director General UK CAA has recently joined IATA as Regional Vice President for Europe and shares a policy-makers perspective on how these issues can be tackled. Complete report (pdf)
January 2009
‘Shrink to survive’ is not the only strategy
by Chris Tarry, CTAIRA
Against the background of falling demand and revenue the challenge is to take capacity and cost out of the market quicker than the speed at which traffic is falling – but is a “shrink to survive” strategy the only one that will work? The answer is no – as indeed for some airlines such an approach would represent shrinking to oblivion. Chris Tarry looks at airline survival strategies. Complete report (pdf)
A path to greater commercial freedoms for airlines
In contrast to other global industries, current national and international rules governing the international aviation business seriously limit airlines’ ability to tap international equity capital and achieve optimal structures, whether by cross border mergers, acquisitions or establishing themselves abroad. Discussion on this issue at the recent Agenda for Freedom Summit was seeded with an initial proposal suggesting that progress could be made towards bringing down barriers to more open competition and more liberal ownership structures through the unilateral waver of restrictive provisions in bilateral air service agreements. Complete report (pdf)
October 2008
Check hatches and harnesses
by Ivan Colhoun, consultant & former Qantas chief economist
Despite recent government assistance to moderate financial market turmoil, Ivan Colhoun outlines why the world economy and the aviation industry are in for very tough times over the next few years. Just as in preparation for a landing, the call is being sounded for industry hatches and harnesses to be securely fastened. Complete report (pdf)
Aircraft lessor prospects and lease valuation for airlines
by William Gibson, AirBusiness Academy
Over the medium term one of the primary stresses caused by the credit squeeze will be the capacity of operating lessors to finance deliveries. The operating leasing model involves the lessor accepting the risk of aircraft residual values, a risk which airlines pay for through higher funding costs implicit in the operating lease payments. This article by William Gibson considers different leasing valuation techniques which airlines can use to assess the risks and rewards of aircraft financing alternatives. Complete report (pdf)
Jul 2008
Industry crisis – Which route to salvation?
by Chris Tarry, CTAIRA
Although generalisations are dangerous it is perhaps possible to sum up the key issues facing airline managements as: the fuel price; cash conservation and generation and, for some, their ability to survive and the actions that they are going to take to ensure it. Chris Tarry looks at the opportunities for generating cash through improving revenues and the broader question of capacity adjustment. There are no easy answers and rather than painting a picture of what a fundamentally reshaped industry might look like, the challenges facing airline managements are identified and underlined. Complete report (pdf)
New business models to make airlines more strategic and agile
by Professor Nawal Taneja, Ohio State University
Noted futurists are envisioning a world of consumers, suppliers and societies that are radically different from the past. In this essay Professor Nawal Taneja considers that airlines, individually and collectively, face a number of game-changing forces. Senior airline executives need to examine new business models to adapt to the potentially radically different marketplace. In his view, the alternatives are bankruptcy, shrinkage of network, government bailouts or market presence that is irrelevant. Complete report (pdf)
April 2008
The competition effects of airline mergers and alliances
by Mike Tretheway, InterVISTAS Consulting Inc
The analysis of the potential competition effects of an airline merger or alliance often focuses on the change in average fare prices. However, this approach is fundamentally flawed. It should be broadened to cover the impact on economic efficiency. The pricing structure of an airline is not uniform; instead different customers are charged different prices. As such, a merger that introduces higher value new services may increase the overall average fare, but at no cost to existing passengers. In addition, removing loss-making routes can also raise average fares, but increase overall efficiency and sustainability. Complete report (pdf)
US / EU open skies negotiations: the second stage begins
by Professor Brian F. Havel, De Paul University College of Law
The US / EU “Open Skies” Air Transport Agreement – that went into provisional effect on 30th March 2008 – is in reality more of a staging-post on the journey to a truly open transatlantic aviation marketplace. The issue of foreign investment and control of airlines remains at the heart of the second stage negotiations, but faces clear and present political opposition. If “Open Skies” is successful it could be enhanced and extended to other regions of the globe. For now, however, the negotiators must address the formidable challenges of the second stage. Complete report (pdf)
January 2008
Hang on tight
by Chris Tarry, CTAIRA
For European airlines, 2008 will pose significant challenges from a combination of an economic slowdown and significant increases in capacity as the no-frills airlines take delivery of more new aircraft. There is a certain inevitability about airlines responding to a weaker economic environment and surplus capacity by reducing fares. It will be a bumpy financial ride. The steps that could be taken in response are reasonably clear, but the outcomes remain unpredictable. Complete report (pdf)
Harnessing technology to meet new environmental challenges
by Dr Andrew Sentance, University of Warwick, UK
Technological improvements can play a major part in reducing the “carbon footprint” of the aviation industry. But the full benefits from investment in new technology are not always reflected in market prices. Government policy instruments can be used to address this “market failure”. There may not be a major technological breakthrough on the immediate horizon for the airline industry. But there are a wide range of areas in which support for research into and adoption of new technology can achieve significant carbon reductions. Complete report (pdf)
November 2007
Great Expectations: The importance of adapting to a changing environment
by Chris Tarry, CTAIRA
The influence of changed or changing expectations on airline behaviour should not be underestimated, especially in respect of risk. There are signs that the airline industry is now in the downswing stage of the cycle; at least in terms of demand growth and the availability of finance. However, in moving from one stage to the next, there will be a series of intermediate points where the market is out of balance. For airlines, a change in expectations is required to enable them to pass on or avoid risk in the new environment. Complete report (pdf)
Carbon offsetting and aviation
by Hugh Somerville, University of Surrey, UK
A growing global market is emerging in carbon offsetting designed to address the climate impact of aircraft emissions. Offsets are different to other market-based measures in that they are voluntary and in many cases can be implemented quickly. Their difficulties lie in uncertainty of the nature of the offer and in the variety of the offers that are available. Complete report (pdf)
July 2007
European Airlines: 10 reasons why we could be at the top of the cycle
by Chris Avery, JP Morgan
A benign demand environment has allowed some European airlines to improve their yields over the last two years. However, industry history suggests that a third year of better yields in 2007 is unlikely. This note highlights key reasons why the peak of the yield cycle may have been reached; increasing the importance of further productivity and efficiency gains to support profitability. Complete report (pdf)
Unions and wages in the US airline industry
by Barry Hirsch, Trinity University, San Antonio, Texas
US airlines have made significant progress in improving labour cost efficiency in recent years. However, there remains a “wage premium” for airline workers compared to similar skilled workers in other industries, particularly unionised workers. Attempts to limit pay increases as carriers regain financial health are necessary, but may not be achievable. A more hostile labour environment could arise, placing pressure on the overall health of US airline industry. Complete report (pdf)
April 2007
Airline M&A activity: A new “super-cycle” or “over-exuberance”?
by Chris Tarry, CTAIRA
The last six months have seen an almost unprecedented focus on merger and acquisition activity in the airline industry. Despite the excitement, it is necessary to question where the value may arise from M&A activity. Size alone has never been a sufficient condition for improved performance. We may be close to the top of the market – a period generally associated with high prices paid for acquisitions. While “fortune favours the brave”, investors must also remember the adage that “those who act in haste repent at leisure”. Complete report (pdf)
Light-handed regulation of airports: The Australian experience
by Peter Forsyth, Monash University
Australia has been experimenting with light-handed regulation of its major airports since 2002. However, there remains ambiguity as to what the system seeks to achieve and its effectiveness. From a broad efficiency perspective it has performed reasonably well, though not without its problems. In terms of minimising the abuse of market power the system has been less successful. Complete report (pdf)
March 2007
Travel & Tourism Competitiveness Index
The World Economic Forum has launched the first-ever Travel and Tourism Index covering 124 countries around the world. Website
January 2007
Corporate travel outlook 2007
by UBS Global Equity Research
The results of the latest UBS corporate travel manager survey show that the bullish outlook amongst travel managers continues. The vast majority do not expect a change in their firm’s travel policies in 2007—a positive indicator since travel policies are typically targeted for cuts early in a softening economy. It appears that the U.S. airlines are behind international competitors with regard to the perception of their international service, which would help to explain the product investments (e.g. lie flat seats) being made by the U.S. carriers. jetBlue’s recent entry into the corporate travel market is likely to have a small overall impact and large network carriers remain the favoured investments for 2007. Complete report (pdf)
Parochialism in international aviation: the paradox of airline ownership and control
by Dan Edwards, UK Civil Aviation Authority
The airline industry, in common with other major business sectors, is currently seeing a lot of speculation and proposals for mergers and acquisition activity. However, in contrast to other sectors such as steel or telecoms, the proposed airline deals are of a national rather than global character. This is not a coincidence, but linked to the tight ownership and control rules within the industry that restrict foreign investment in ‘national’ airlines. This article discusses recent work undertaken by the UK CAA looking at the possibilities for and the benefits of liberalising ownership and control rules. It argues that liberalisation of ownership and control is essential to the healthy development of a truly global airline industry. Care needs to be taken in navigating the transition to a liberalised world, but a clear pathway does exist for beneficial reform to the current rules, while still ensuring that the highest safety and security standards are maintained. Complete report (pdf)
September 2006
Investment incentives and airport regulation
by David Starkie, Economics-Plus Ltd
This article examines the proposition that price-cap regulation creates an incentive to under-invest at privatised airports. Using empirical evidence from price-capped airports in the UK and Ireland, it is concluded that, on balance, the regulated airport companies have inclined towards over-investment rather than under-investment. Complete report (pdf)
Does the S-Curve still exist?
by Urs Binggeli and Lucio Pompeo, McKinsey & Company
The “S-Curve effect” is the phenomenon by which airlines that have a high share of frequencies on a route can attain disproportionately high market shares. With the S-Curve in mind, network managers have historically looked to build a dominant frequency position on certain routes to capture a high share of traffic and revenues. But with significant changes in the airline industry structure in recent years, does the S-Curve still exist? Complete report (pdf)
June 2006
The Economic Impacts of Air Service Liberalisation
This study confirms that liberalising air travel directly benefits economies by increasing GDP, employment, travel and tourism, and exports. Increasing air travel also leads to significant gains in the quality and quantity of direct service to various communities worldwide. Complete report (pdf)
Managing the Airline Economic Cycle
by Chris Tarry, CTAIRA
Though it may not feel like it, the airline economic cycle may already be “as good as it gets” and past its peak. The demand environment is still relatively benign but fuel costs are set to stay high and capacity will increase as record new orders start to be delivered. In essence, for most of the industry it is now a question of “riding the cycle” rather than finding a new source of structural growth. Airlines will be running very hard to do not much more than stand still in financial terms. The even greater challenge is to sustain a profitable performance as economic turbulence kicks in. Complete report (pdf)
Slot concentration at network hubs
by David Starkie, Economics-Plus Ltd
A high concentration of take-off and landing slots in one airline at major hub airports can represent an economically efficient outcome. Concern has previously been raised that the concentration of slots is anti-competitive, leading to calls for slot re-distribution or for new or used slots to be allocated to new entrants only. However, this ignores the efficiency gains available from concentration that would be lost from a lower slot concentration. As such, competition may be better served coming from parallel or substitute routes rather than regulatory intervention at network hubs. Complete report (pdf)