01-Jun-2014 12:00 PM

Air travel rises with a country's wealth. Law of nature, or can government policy make a difference?

Analysis

CAPA's extensive country rankings database provides rich pickings for analysis of the relationship between the wealth of a country and the penetration of air travel in that country. Not surprisingly, our analysis confirms that the two are closely correlated. Countries with higher GDP per capita tend to have higher numbers of airline seats per capita.

Establishing a correlation does not indicate the direction of causality, which works in both directions. Economic wealth drives air travel, but air travel also helps to drive economic wealth. However, the correlation is not perfect and levels of penetration can be affected by geographical, political, fiscal and infrastructural factors. This leads to some countries having a significantly higher or lower number of airline seats per capita than might be expected simply from their level of GDP per capita.

Who are the out-performers, in terms of the penetration of air travel, and who are the under-performers? What are the characteristics of each group? How do the main regions of the world compare?

And what role can governments play? - in some cases, they can potentially make a significant difference.

Summary

The penetration of air travel is closely correlated with GDP per capita.
Economic wealth drives air travel, but air travel also helps to drive economic wealth.
Factors such as geography, politics, infrastructure, and fiscal policies can affect the level of air travel penetration in a country.
Island nations and city states tend to have higher levels of air travel penetration due to geographical advantages and government policies.
The BRIC countries (Brazil, Russia, India, and China) are under-penetrated by air travel, but have the potential for growth through reforms and infrastructure development.
Governments play a significant role in increasing air travel penetration through regulatory changes, market access, taxation policies, and infrastructure development.

The penetration of air travel is correlated with GDP per capita

CAPA's databases include data from OAG on seat capacity by country, together with population and GDP data from the International Monetary Fund. We can use this to calculate GDP per capita and airline seats per capita for the 177 countries for which all the necessary data is available. A scatter plot showing airline seats per capita (for the week of 9-Jun-2014) against GDP per capita is presented below.

The chart demonstrates a number of points. First, there is a vast discrepancy in the level of penetration of air travel (measured by airline seats per head of population) across the countries of the world. Setting aside countries for which we have insufficient data to perform our calculations, the least penetrated nation is the Democratic Republic of Congo, with just 377 weekly seats per million of population, and the highest is Qatar, with 618,362 seats per million people.

The most fundamental point highlighted by the chart below is that, in general, a higher level of GDP per head of population is associated with a higher level of penetration of air travel (the correlation is quite strong, as indicated by the R squared value of 0.7). That said, there is also a huge range of different levels of penetration even within a narrow band of GDP per capita, and so there are also other factors affecting the propensity to fly.

The density of the chart in the bottom left corner highlights that there are a large number of countries with below average levels of wealth and of air travel penetration. Only 34% of the countries on the chart have GDP per capita above the global mean, but these countries account for 70% of the total number of seats. Only 45% of the countries have more airline seats per capita than the global mean, but they account for 70% of total seats.

The disproportionate impact of the wealthier and higher penetrated countries drags up the global averages, but many of the world's nations are still playing catch-up when it comes to air travel.

Airline seats per capita (vertical axis) versus GDP per capita (horizontal axis) by country

Increasing wealth has a bigger impact on raising air travel in poorer countries

The trend line that gives the best fit to the data points in the above scatter plot is very slightly concave: it does not rise in a straight line, but it gently flattens as it moves to the right across the chart. This suggests that increasing wealth (measured by GDP per capita) has a bigger impact on raising the penetration of air travel in poorer countries than it does in richer countries.

The chart below shows the same data as the previous chart, but uses a logarithmic scale on the vertical axis (which shows seats per capita). This not only accentuates the flattening of the trend line as GDP per capita rises, but also stretches out the lower end of the scale for seats per capita making it easier to distinguish the separate data points in this crowded part of the chart. We have also added some labels to selected data points, indicating which country they represent.

Airline seats per capita (vertical axis, logarithmic scale) versus GDP per capita (horizontal axis) by country

Other factors also have an impact

Countries that are below the trend line on the above chart have the potential to increase their rates of air travel in two ways.

First, as for all countries, the number of airline seats per head in these countries should increase as GDP per head grows. For those that are also below the global average for GDP per head, this potential is particularly strong.

Second, the countries below the trend line have the potential to increase air penetration to catch up with other countries of a similar wealth, but who already have higher rates of air travel.

This process of catch up might be achieved in a variety of ways, including regulatory change (including liberalisation of market access), infrastructure development and taxation policy. On the other hand, geographical and other structural factors may mean that this potential is greater for some countries than it is for others.

The BRIC emerging economies are under-penetrated by air travel

Note that all of the so-called BRIC countries (Brazil, Russia, India and China) sit below the trend line in the chart above (and they also have a level of airline seats per capita that is below the global mean).

Among the four, India would seem to have the greatest potential to improve the penetration of air travel, but needs reform and further development on issues such as fuel tax and infrastructure if this potential is to be realised.

For Brazil, the development of airport infrastructure may benefit from recent privatisations and the stimulus of the 2014 Football World Cup and the 2016 Olympics and the airline industry is continuing to develop distribution channels that are adapted to the Brazilian market. Infrastructure development has also been (and continues to be) an important theme in both Russia and China, where recent regulatory and legal changes should stimulate the growth of the LCC sector and give a further boost to air travel penetration.

The MINT grouping is more diverse

Moving on from the BRIC countries, the more recently identified group of MINT countries (Mexico, Indonesia, Nigeria and Turkey) are more diverse in terms of their aviation markets. Whereas all the BRIC countries are among the world's largest airline markets by total number of seats (only Russia is outside the top 10 and it ranks 13th), among the MINTs only Indonesia and Turkey are at a similar rank (they are 11th and 12th respectively; Mexico is 20th and Nigeria 56th).

Unlike the BRICs, which are all below trend line on our chart, the MINTs include two countries, Turkey and Indonesia, that sit above the line. These two already have more airline seats per head than might be expected purely from their levels of GDP per head.

In the case of Turkey, this reflects the success of its national carrier, Turkish Airlines, in attracting global connecting traffic through its Istanbul hub. Indonesia's position, only slightly above the trend line, probably reflects the geographical imperative of aviation as a means of transport in the archipelago and the success of the LCC sector in tapping into demand.

Mexico occupies a similar position on the chart to that of Brazil, while Nigeria's is not too far from India's.

Island nations and city states are the out-performers

Next, we reproduce the same chart, but this time we label the "out-performers" - those countries at the upper frontier of the scatter plot that also have a level of air seats per head that is above the global mean. These nations have the highest level of airline seats per head for their level of GDP per head. These out-performers fall into two categories: island nations and what might be termed "city states".

The islands, which include Maldives, Bahamas, Cyprus, Malta and Iceland, rely on air travel (and often inbound tourism) for their links with the rest of the world and this has given rise to a much more developed aviation market than would otherwise be expected in equivalently wealthy countries.

The "city states" include true city states Hong Kong and Singapore and also Gulf nations Bahrain, UAE and Qatar. In these countries, aviation markets have been stimulated by government policy in addition to demographic features such as large expatriate populations.

Airline seats per capita (vertical axis, logarithmic scale) versus GDP per capita (horizontal axis) by country: the out-performers

The under-performers

The "under-performers" highlighted in our next chart (see below) form the lower frontier of our scatter plot. They can also be divided into two sub-groups.

The first consists of countries that have above average levels of airline seats per capita, but that nevertheless have a lower level than might be expected from their GDP per capita (in other words, they are below the trend line on the chart).

This group includes some of the world's biggest aviation markets, such as the US, Germany, France and Japan. Comparison with other countries that are similarly wealthy suggests that they could be even bigger if they could move up closer to the trend line. On the other hand, the position of the line is perhaps artificially dragged upwards by the presence of the islands and city states of the out-performer group, where the penetration of air travel is boosted by the geographic and political features mentioned earlier.

The more serious under-performers are those countries that have a below average number of airline seats per capita and also sit below the trend line on the scatter plot. These include land-locked African countries the Democratic Republic of Congo, Chad, Lesotho and Swaziland, as well as Turkmenistan, Slovakia and Slovenia.

Their under-performance may be a function of a number of different factors, such as the political backdrop, a lack of infrastructure, or being served indirectly by the airlines of neighbouring countries. On paper, at least, this group has the greatest potential to increase the penetration of air travel.

Airline seats per capita (vertical axis, logarithmic scale) versus GDP per capita (horizontal axis) by country: the under-performers

Regional differences: Middle East outperforms; North America underperforms

By aggregating the data for the countries of each major world region, we present a final scatter plot of airline seats per capita against GDP per capita by region (see below). This highlights a number of points.

First, Africa is substantially under-penetrated by air travel, with only just more than one fifth of the global average number of airline seats per head of population. This is broadly consistent with the continent's level of GDP per capita. African countries occupy the lowest 11 places in the world ranking of airline seats per capita.

Second, although Asia Pacific is the largest world region in terms of the total number of seats, it is still a small market relative to the size of its population, with only 56% of the global average number of airline seats per head. Asia Pacific is a very diverse region, with both developed and emerging markets. It includes Maldives (the country ranked number three in the world by seats per capita) and Bangladesh (ranked 171 on this measure).

Third, Latin America is not far from the world average on both GDP per capita and airline seats per capita, but is still a little behind on both measures. Its aviation markets have potential to benefit both from GDP growth and from the additional boost to penetration levels that could result from infrastructure development and regulatory reform.

Fourth, the Middle East as a region is outperforming strongly in terms of airline seats per capita compared with GDP per capita. It is only slightly wealthier than average (GDP per capita 7% above the global mean), but has 68% more seats per head than the world average. This reflects government policy and the success of the super connector airlines in the Gulf.

Fifth, Europe is a modest out-performer, with a higher level of air travel penetration than might be expected from its level of GDP per capita (particularly Western Europe). This reflects the liberalised internal market of the European Union (its aviation market and other markets, including that for labour), relatively well developed aviation infrastructure and the consequent development of the LCC sector.

Sixth, North America is underperforming in terms of airline seats per capita against GDP per capita, when compared with other regions. It has more than five times the global mean level of GDP per capita, but less than four times the global mean number of airline seats per capita. This probably reflects the diminishing power of GDP alone to stimulate penetration of air travel as aviation markets mature.

As we have seen earlier, there are island nations and city states with similar levels of wealth to that of North America, but where the number of airline seats per capita is much higher, but they benefit from additional geographical and policy stimuli.

Airline seats per capita (vertical axis) versus GDP per capita (horizontal axis) by region

Governments do have a large role to play

This report provides a glimpse of what can be gleaned from analysing CAPA's country ranking database. It confirms the correlation between the number of airline seats per head and GDP per head, both at the country level and at the regional level. Countries such as island nations have geographical advantages that boost aviation markets.

While nations cannot do much about their geographical location, their governments can play a large part in achieving higher levels of penetration of air travel, or in holding it back.

Air travel in countries such as the Gulf states of Qatar and the United Arab Emirates has been increased by government policy and the consequent strategic growth of their national airlines. This has led to the Middle East region's strong outperformance in terms of airline seats per capita compared with its GDP per capita.

Europe also achieves a higher level of air travel per head than might be expected from its level of GDP per head, in no small part due to its liberalised internal market.

By contrast, a number of countries underperform significantly compared with their GDP per head. In such cases, as in countries like India governments can often do much to improve the penetration of air travel through their stance on factors such as improved regulation, market access, taxation and infrastructure.

In very mature markets, such as North America, it seems that the very high levels of penetration of air travel are less susceptible to further stimulation from growth in GDP per head.

Perhaps the final frontier for governments in such cases is to open up their domestic markets to global competitors. This is something the incumbent airlines will mostly resist strongly, but equally it is important to recognise that regulators do have the power to unlock further growth through regulatory intervention.

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