18-Jul-2011 9:19 AM

A decade of change for the global airline industry: A new and altered reality in the rankings

Analysis

A decade is a respectable amount of time in our era when not only change but also the pace of change appears ever faster. Constant improvements in technology have made cutting-edge devices of 2000 seem to be quaint relics ten years later. However, there are also other factors, such as macroeconomic forces, at work that can bring enormous change as well. While not unanticipated, China has surpassed many other nations and soon is expected to be the world's dominant economy. There have also been demographic shifts, political change and the emergence of new business models.

Summary

The aviation industry has experienced significant changes over the past decade, driven by technological advancements, macroeconomic forces, and emerging business models.
Legacy players in the industry have been slow to adapt, while new players from China, the Gulf, and other regions have rapidly risen in prominence.
The ranking of top airlines based on Revenue Passenger Kilometers (RPKs) has seen significant changes, with many old names dropping away and new players emerging.
The rise of low-cost carriers (LCCs) has attracted a growing number of travelers, with five new-generation airlines making it to the top 25 list.
Mergers in the US market have resulted in fewer RPKs for the merged airlines, while European carriers like Air France/KLM and Lufthansa have seen growth.
Passenger numbers have also witnessed significant changes, with several carriers exchanging positions and LCCs gaining prominence. The Chinese carriers, Gulf airlines, and Turkish Airlines have shown substantial growth in passenger numbers.

Aviation on the cutting edge

Aviation is a technology heavy sector. Reservations computers introduced in the 1960s were actually the first big step towards the e-commerce society that we live in today. New airplanes about to enter service promise lower costs and improved operating economics using new materials and techniques.

But it is also a relatively conservative industry, with many of its legacy players slow to change either their mindset or their practices. Southwest Airlines has since spawned LCC clones and variations that now thrive in every geography. And not only China, but also other nations in Asia and South America have emerged as rich sources of customers that are taking to the air in ever-increasing numbers.

Shuffled lists of world leading airlines

All of this means that the top industry players are in flux, with old names dropping away as new ones emerge and rapidly move up the ranking scales. We will look at two measures of "big" and try to analyze what has happened and what is likely to occur in the near future.

First, there is no definitive measure of "biggest". The airline with the biggest fleet may not carry the most passengers nor does it follow that it will produce the most Available Seat Kilometres (ASKs).

Levels of profitability, perhaps the most important component for sustainability, often do not correlate with passenger numbers or network size. For the purpose of this examination, we will look at RPKs. While ASKs say something about size, it is ultimately the number of paying passengers that will affect the bottom line.

And, of course, passenger totals are always interesting, though, as has been repeatedly shown, full aircraft and lots of customers often still results in red ink.

First, Revenue Passenger Kilometres

The RPK comparison is a quick lesson in industry change. Eight-one third-of the 2000 chart residents have been replaced in 2010, six by merger, bankruptcy (or both) and two that have just seen their fortunes change.

The sole 2000 representative of a new business model, Southwest, is, in 2010, one of 3 such airlines. The other new players all are from either China or the Gulf, plus Turkish. The speed with which these newcomers have moved into the top group is, in some cases, rather breathtaking.

RPKs: A decade of Change

2000		2010
Rank	RPKs (mil)	Rank	RPKs (mil)
United	204,235	Delta	310,956
American	187,600	United (with CO)	297,129
Delta	173,486	Air France/KLM	204,737
Northwest#	127,317	American	201,944
British Airways	118,890	Emirates	146,134
Continental#	103,235	Lufthansa	129,668
Air France	91,801	Southwest	125,778
Japan Airlines	88,999	China Southern	111,327
Lufthansa	88,606	British Airways	107,723
US Airways	75,728	Cathay Pacific	96,588
Singapore	70,795	US Airways	94,938
Southwest	67,924	China Eastern	93,054
Qantas	67,486	Air China	86,212
All Nippon	62,592	Singapore	84,801
KLM#	60,327	Air Canada	77,458
Air Canada	57,374	Qantas	74,071
Cathay Pacific	47,153	Ryanair	72,147
TWA#	43,791	Korean Air	60,528
Thai	42,395	Japan Airlines	59,740
Alitalia*	41,433	ANA	58,414
Korean Air	50,532	easyJet	56,128
Iberia	40,049	Thai	55,676
Malaysia Airlines*	37,939	Qatar Airways	52,738
Swissair#	34,246	TAM	51,446
America West#	30,753	Iberia	51,242

Some were not even around until mid-century and some of the others have moved from obscurity to being omnipresent at airports across the world.

The emerging world order is clearly demonstrated when the carriers that made the list are compared by region. As we know, Asia Pacific will soon be the dominant aviation region and the Chinese carriers are amongst the fastest rising stars.

Top RPK carriers by region

	2000	2010
North America	10	6
Europe	7	6
Asia/Pacific	8	10
Gulf	0	2
South America	0	1

With its 90 A380s, Emirates will likely soon top the ASK charts.

US mergers bring fewer RPKs

The decline in numbers in North America is representative partly of the consolidation that has taken place-there are fewer big carriers. But the US carriers have been particularly focused on keeping the supply and demand of seats in a better balance, with resulting higher load factors and improved economics.

Combined RPK 2000 vs. 2011

AA/TW	-13.0%
US/HP	-11.0%
UA/CO	-3.5%
DL/NW	3%
LH/SR	5.5%
AF/KL	35.0%

The combined RPK table that compares combined (merged) 2000 RPKs to the new 2010 figures makes it clear that the US mergers have overall resulted in far fewer RPKs. Only Delta/Northwest has a positive number, and a very small one at that.

In contrast, the numbers for Air France/KLM are up over a third. Lufthansa/Swissair is not exactly the same as the companies continue to operate and report as separate entities. However, Lufthansa's expansion over the decade is impressive; 5% more in 2010 for LH alone than that produced by the two rivals in 2000.

Next, passenger totals

While airlines will advertise their dominance using a variety of figures, most of the rest of the world looks at passengers carried as the primary indication of "bigness". And there are equally as many surprises by this measure as were seen in the RPK numbers.

Passenger Numbers: A decade of Growth

2000		2010
Rank	Pax (000)	Rank	Pax (000)
Delta	105,723	Delta	162,615
American	86,280	Southwest	106,307
United	84,251	United (with CO)	99,452
Southwest	63,678	American	86,204
US Airways	60,636	China Southern	76,544
Northwest#	58,722	Ryanair	72,100
All Nippon	49,887	Air France/KLM	71,320
Continental#	46,896	China Eastern	64,878
Lufthansa	41,300	Lufthansa	58,916
Air France	39,204	US Airways	51,853
British Airways	38,261	easyJet	48,800
Japan Airlines	33,857	Air China	46,241
Alitalia*	26,697	ANA	45,743
TWA#	26,392	Japan Airlines	34,795
Iberia*	24,543	TAM	34,553
Japan Air System#	20,836	Air Berlin	33,593
America West#	19,954	Gol	32,122
Thai	18,038	Emirates	31,422
Air Canada	17,655	Turkish	29,099
China Southern	16,800	Cathay Pacific	26,796
Malaysia Airlines*	16,561	AirTran	24,721
KLM#	16,234	JetBlue	24,254
Singapore	14,874	SkyWest	24,218
Swissair#	14,238	British Airways	24,088
Alaska*	13,525	Air Canada	23,615

In the case of passenger numbers, 11 out of 25 have exchanged positions and the degree of change in the industry is even more evdent by just which carriers are now garnering the traffic.

LCCs attract travellers

In 2010, there are five new generation airlines in the top 25 - one fifth - plus the sort-of LCC spot occupied by Air Berlin. Skywest, doing a great deal of flying for the US majors as a commuter carrier, has also made the cut.

Top passenger carriers by region

	2000	2010
North America	11	9
Europe	7	7*
Asia/Pacific	7	6
Gulf	0	1
South America	0	2

In terms of geographic distribution, there are also major variations, with Asia Pacific actually losing a spot but with China Southern, for example, showing a 456% increase.

Same US outcome

And mergers have had the same effect on the US carriers in terms of passengers as shown by the corresponding chart; with passenger numbers all down for the US merged airlines.

Some of that mainline decline has now been taken up by carriers like SkyWest, that are providing ever more seats for the legacy majors.

Passengers 2000 vs. 2010

US/HP	-36%
AA/TW	-24.5%
UA/CO	-24.2%
DL/NW	-1%
LH/SR	6%
AF/KL	29%

Again AF/KL has benefited by its new arrangement and Lufthansa's growth is reflected in a passenger count higher than the combined LH/SR totals of a decade ago.

Some notable declines

Others have not fared so well, with BA showing a passenger decline of almost 37%. Japan has also taken a significant hit over the decade, with the 3 carriers present in 2000 carrying a combined total of over 104 million passengers. In 2010, that combined total for ANA and JAL had declined by an aggregated 23%. And that was before the earthquake and tsunami.

Finally, the merger of AirTran and Southwest will keep the new group firmly in second place but will not be enough to overtake Delta in the near term, though others may.

A bit of crystal ball gazing

There are some trends that are relatively easy to predict. The US carriers, very reluctant to add domestic capacity, will likely have passenger numbers that are either flat or increase minimally. That means that they will not so much fall as be overtaken by those rising faster.

This group includes the Chinese carriers, airlines in the Gulf and South America as well as Turkish. Elsewhere in Europe, both AF/KL and Lufthansa appear to be on slow but steady growth curves and further consolidation is certainly possible.

The weak may weaken further

The future of BA is less clear. Two of the rising stars in the LCC subgroup are based in the UK and operate out of more airports while BA, with its primary base at (not expanding) Heathrow, has little capability to grow other than by using larger aircraft. The slot picture is bleak with no relief in sight and the APD, if not repealed, will encourage travel over other gateways.

The future is also unclear for the Japanese carriers with JAL just trying to stay above water, though ANA is on the cusp of a growth spurt. Increased interest in China could benefit the Japanese airlines which have a large connecting network to Chinese cities. But others have developed the same capability-especially the Korean airlines-and the ascendancy of Chinese carriers could cut the need for indirect routings to more Chinese cities.

India and Africa potential but…

The huge Indian market has been unable to move the Indian carriers up the list, but has been a definite factor in the rise of the Gulf airlines, which operate defacto long haul hubs to and from the subcontinent. While India surely has the potential for huge passenger numbers, a complex operating and regulatory environment has so far hampered the indigenous carriers.

Also yet to appear on either list is AirAsia, perhaps because of its multiple ownerships. But the group continues to expand and will bring additional challenges for the legacy carriers in Southeast Asia which do well with profitability and RPKs but have smaller passenger counts.

Finally, Africa, with a large population but in fragmented and generally poor nation states, will not soon appear on any of the top lists. However, passengers to/from the continent will continue to bring improved loads to those external airlines that build serviceable and reliable networks-again giving some advantage to the Gulf carriers and Turkish.

Outlook: Predictably unpredictable

The general patterns of growth over the next decade are clearly visible but that potential is subject to multiple factors beyond the control of the airlines. The SARS episode shows how quickly a viable operation can be hobbled, and that was essentially only a threat rather than a reality.

Global politics, natural events and disasters, fuel spikes; all of these have the potential to quickly unravel the trends and patterns. Airlines remain far more vulnerable to external forces than say, the continued increase in cell-phone use.

But absent such shocks, the global industry will continue to evolve in a vaguely predictable fashion. With shocks, all bets are off.