Accelerating Aviation Economics: a visionary approach

Airports International correspondent Inderjit Singh reflects on the imperative resurgence of a robust economic order in the air transport industry.
Call it a financial crisis, a downturn, global recession, or a crash — we have been living through the worst economic collapse since the Great Depression.  Over the past few months a constant parade of bad economic news has come streaming in from Europe, Asia and the United States despite the panic-fueled crisis management by policymakers.  The global economy has become so incredibly unstable at this point that it is not going to take much to plunge the world into a horrific economic nightmare.  After three years of pain and very little economic gain, signs of a prolonged economic slowdown are everywhere.  Nobody knows for sure, but potential tipping points are all around us.  So which tipping point will trigger the next global economic downturn?
The shocking losses of the past few years have reshaped nearly every facet of our lives — how we live, work, buy, sell and even the way we think – or more precisely the way we ought to think – all affecting the trends in travel, tourism, and trade – the three prime drivers for sustainable growth of the aviation industry.
 
A Candid Analysis
To me, it appears that the global economic system today is even more vulnerable than it was back in 2008, as virtually none of the systemic problems that contributed to the collapse have been fixed as yet.  There is a sense that we have turned a corner, that the economy may be out of the woods – but that may not necessarily be the reality — what with the increasing belief among certain economists of an impending double-dip recession.  That’s when the economy slips back into a recession while still trying to recover from the last one.
Both the World Bank and the International Monetary Fund (IMF) have taken the position that it will not be business as usual when economies stop sinking and move towards recovery from the current economic malaise.  Much of the developed world including the UK, Japan, and the US facing heavy state debt burdens are a glimpse into the future for many of the global economy’s most important nations.  As politicians worldwide are leaning in favour of packages of austerity measures aimed at reducing the government’s yawning budget deficit, wrangling over the cuts in taxes, controlling its ballooning debt and continuing to support their respective economies with rescue funds and bailouts etc, we have to ask the question: Is there a silver lining on the horizon?  Yes, in my opinion.  I would not say that we are at the ‘point of no return’ – well not at least for now!
 
Aviation and Global Economy: the relationship
Air-transportation usage and global economic activity are interdependent.  Aviation drives economic activity at every level of global trade, tourism and commerce.  It moves millions of people and billions of dollars of goods all around the world.  It is a pillar of the modern economy and a key driver of both supply and demand at the global, regional, national and local market levels.
Efficient markets thrive on efficient exchange processes and airports are key components in facilitating those processes.  As part of the strategic economic development plan, aviation activity is instrumental in developing a region to its full potential.  Good transportation facilities, especially airports, are vital to job creation and economic growth.  The first thing that Fortune 500 companies and others consider when searching for a location for a new office or a production facility is the quality and affordability of air service in the vicinity.

Figure 2: Economic Growth and Air Transport Activity.

As a focal point of distribution and exchange, airports help to develop a larger role in national and international economic activity than its region would otherwise achieve.  A reliable air transportation infrastructure cuts costs, improves efficiency, enhances productivity and provides industries with better access to sources and markets.  In addition, a country with a well-developed aviation infrastructure is more attractive to investors and developers.  There is a strong correlation between the growth of a country’s economy and its air traffic.  Countries with developed economies exhibit  higher levels of air transport activity because the relatively higher disposable per capita income increases the propensity of people to spend on air travel.
Air service is central to any economic activity.  The global economy cannot grow without a safe and efficient civil aviation industry.  An increase in airline activity thus provides a useful indication that a nation’s economy is flourishing (Figure 2).
GDP growth has traditionally always been a significant driver in air traffic growth and it will continue to do so (Figure 2).  In 2010, the airlines of ICAO member countries carried some 2.5 billion passengers and 43 million tons of goods.  The sector, with a contribution of US$4.98
Figure 2: Passenger and GDP Trends Aggregated by Region – Correlation between GDP and Air Passengers.

trillion, accounts for approximately 8% of the world’s GDP and employs 32 million people directly and another several million indirectly in ancillary jobs.
It is not a mere coincidence that in 2010 the Beijing Capital International Airport Ltd. (BCIA) has risen to the second position among the list of world’s busiest airports, replacing Chicago O’Hare, which had retained that position for several years with Hartsfield Jackson Atlanta International on top.  China’s economy currently is at its best and is doing far better than most others.  Its demand for air travel is likely to continue to rise at an extraordinary rate each year in the foreseeable future.
 
Looking back and ahead
While aviation was emerging from a long list of crises – 9/11, Gulf wars, SARS and terrorist attacks – we could not imagine a more difficult situation than what we are now experiencing.  Oil surged from US$57 per barrel in 2006 to $147 by mid-2008 and any relief as it intermittently returned to more normal levels was consumed by the impact of the financial crisis.  In 2009 came the biggest shock in aviation history as 9% of the passenger business disappeared, cargo demand fell 24% and revenues dropped by US$82 billion.  The outlook for 2011 is more pessimistic.  With oil at an average price of US$84 a barrel, IATA has cut back its 2011 earnings forecast for the world’s airlines by 5.5% to US$8.6 billion from the US$9.1billion projected in December 2010.  Political unrest in the Middle East has once again sent oil over US$100 per barrel, significantly higher than the US$84 per barrel that was the assumption in December.  The profits have been revised to US$4 billion, less than half the US$8.6 billion expected for 2011 in the March 2011 forecast.  The air transport markets have suffered adverse demand shocks from the recent earthquake and tsunami in Japan, and the turmoil in a number of Middle East and North African countries.  There is also further impact on operational costs with a recent US$20 a barrel rise in oil prices.
 
A Visionary Approach
On being asked by a blind man as to what could be worse than losing one’s eyesight, the all-time great Indian philosopher and spiritual master Swami Vivekananda said —losing one’s vision.
Aviation today is all about vision.
Vision 2050 launched by the former IATA Chief Executive Mr Giovanni Bisignani, is one such initiative that has paved the way for structural reorganisation in certain crucial activities of the industry.  It was accepted in other sectors and, in turn, led to the overall long-term survival and profitability of the aviation sector, which is seen to be making progressive improvements in the environmental, safety, and global air traffic management domains.
Mr Tony Tyler, the Director General and CEO of IATA, in his acceptance speech for the position, while highlighting the all-encompassing role of aviation in relation to global economic outlook said that: “Aviation is the most exciting business to work in.  Every plane that takes off opens up new possibilities for business and trade, fulfils peoples’ dreams of exploration and discovery, and brings people together.  And I really believe that by doing so aviation makes our world a better place.  Aviation has changed our planet into a community.”
In context of the link between aviation and general economic development, the Secretary General of ICAO, Mr Raymond Benjamin, in his address to the French Chamber of Commerce, Montreal, while outlining the critical stakes and challenges of international civil aviation, emphasised that “the financial health of the air transport industry is essential to our dynamic global economy and any slowdown or break in air transport services can be devastating”.
Rebuilding a sluggish economy takes infrastructure that can keep pace with growth – and go beyond.  The principle of demand and supply suggests that we can add value to any industry where demand outstrips supply – aviation (in the long term) predominantly being one of them.  What is required is a vision – one that is not only practical but more importantly, achievable.
 
Initiatives and Strategy
The cornerstones of the future aviation vision are environmental and financial sustainability with infrastructure and technology structured to meet the needs of the anticipated 16 billion passengers and 400 million tons of cargo that would have to be safely transported in 2050.
What should then be the course to be followed for the growth in the aviation industry and what impact will each of these drivers have on its rate of economic growth?  A related question is: does history have anything to teach us or are there are newer forces at work?
I would say an innovative global outlook, leveraging the strength of each component synergistically, combined with lessons learned from past incidents will be the way forward to an economically sustainable aviation of the future.
The recent incidents have reinforced my view that even relatively short-term major disruptions will upset global commercial aviation equations.  The present economic scenario, however dismal, has presented to us a timely ‘gift wrapped’ opportunity to seriously get back to basics and revisit the prevailing global aviation policies and practices to suitably fine-tune and improve on them – keeping disciplined focus on business results and to turn potential into tangible performance.
Any viable economic recovery plan is going to involve fundamental changes in institutional frameworks, realignment of policies regarding government and private participation in the developmental processes and a geographical shift in the global economic center of gravity.
To illustrate this, the recent Icelandic volcano ash clouds that spread over the continent led to the closure of most of Europe’s airspace affecting a very high proportion of flights and consequently the economies of several airlines and airports worldwide.  IATA has estimated that the global airline industry alone lost US$203 million a day during the interruption period, inconvenience caused to the travelling public and huge losses to the trade and commerce notwithstanding.  The incident in its aftermath was termed by critics as a systematic failure in handling the situation by the governing aviation regulatory authorities and also a case of gross over-reaction by some airline and airport operators.  It is, however, another matter where – even though operating procedures have been streamlined by the authorities for the future – damage has already been done.
In view of the frequency and quick succession of past events that may or may not be in control within the aviation domain; it is my strong conviction that the long-term vision should have in it a built-in shorter-term-horizon of, let’s say, ten years for review and course-correction, in view of the very nature of the aviation industry where change is the only constant.
 
The Closure
Among all the initiatives currently in the pipeline to accelerate aviation economics, Air Traffic System (ATS) Transformation Program appears to me the most cost effective proposition.  It would additionally enhance the quality of aviation operations. Globally, several programmes are in various stages of design and development.  The FAA and Eurocontrol are in the process of modernizing ATS through the NextGen and SESAR programmes respectively.
The projected cost of these global transformations through 2026 is reckoned to be $897 billion.  The estimated regional break-down is; US NextGen programme, $281 billion, the EU’s SESAR $266 billion, and over the rest of the world, $350 billion.
It is estimated that when implemented, the annual savings will entail 3 billion gallons of fuel, the elimination of 29 million metric tons of carbon emissions and delays reduced by 4 million hours.  These savings amount to US$135 billion globally in the first year of full system deployment in 2026.  These significant fuel savings, lower carbon emissions, time saved and economic benefit should result from the transition to advanced satellite based positioning, navigation and timing technologies as well as new ATC procedures.  This transition should help in overcoming most weather induced and ATC based delays, allowing for direct flight paths and closely spaced aircraft operations.  Estimated savings accrued by different beneficiaries on accelerated implementation of various ATC, ATS and modernisation initiatives globally are: airlines 31%, overall economy 30%, passengers 34%, and ANSP /Airports/ATC organizations 5% of the total benefits.
It should hence be the earnest effort of the ICAO, IATA, ACI and CANSO and others to lobby and convince the respective governments to commit the necessary resources to implement the 21st century ATS with, if required, private sector support, akin to the commercial human spaceflight programme.
THE AUTHOR will be pleased to interact with readers via inderjit.singh@aviationanalyst.net and/or debate on the issue in an aviation security forum.