While transporter travel technology of science fiction like Star Track isstill just a dream the aviation industry of today would have been considered asimilar dream in centuries past. “With aviation’sgrowth and the shortening of travel times to almost any point on the globe, theworld has metaphorically become a much smaller place. Journeys which just ageneration ago would have taken weeks can now be achieved in a day or evenless.” (Airbus, 2017) This travel and the factors thatinfluence it are continually advancing and in order for firms in the aviation industryto compete and thrive they must know what to expect in the future.
One suchtool that adds in providing a looking glass into this future are marketforecast. As such Airbus and Boeing publish annual forecasts for the globalgrowth of air transportation and the market for commercial aircraft over thenext twenty years. This forecast known as the GlobalMarket Forecast by Airbus and Current Market Outlook by Boeing use calculationsof how the concept of supply and demand will affect the commercial aviationindustry, passenger travel and freight, over the next twenty years. Thisforecast uses many aspects to predict what the aviation industry can expect, interms such as growth, markets, and regions, in the future. While these annual predicationsare based in historical and empirical data they are still projections with amargin of error.The Theory of Supply and Demand Employed byAirbus and Boeing”In economic theory, the law ofsupply and demand is considered one of the fundamental principlesgoverning an economy. It is described as the state where as supply increasesthe price will tend to drop or vice versa, and as demand increases the pricewill tend to increase or vice versa.” (Adam, 2009)The theory ofsupply and demand in forecasts.
Many factors can influence airtravel growth in a market. Generally, these factors can be grouped into one ofthree categories: economic activity, ease of travel,and local market factors. Some factors that drive demand, such as GDP, areeasy to quantify. Other factors are more difficult to quantify but can have aneven greater effect on market performance. When such factors are present, otherinformation sources (e.
g., expert opinion or analogies to other markets) mustbe harnessed to create a meaningful forecast. (Boeing, 2017) Whilst GDP remains an importantdriver for air transport, it is clear that it is not the only factor thatdrives air traffic growth. In its traffic forecast, Airbus uses as many as 15different explanatory variables. From more than 100 traffic flows modelled inthe Airbus traffic forecast.
(Airbus, 2017) Airbus andBoeing use current and historical fleet figures, along with life cycleprojection to include inputs such as maintenance history, fleet age, expectedreplacements and conversions to build a projective supply forecast. Accordingto Airbus there are approximately 18,890 passenger aircraft today, where Boeinglist 19,130 passenger aircraft not including small regional aircraft, this isexpected to more than double by the year 2036 to 40,120 aircraftaccording to airbus and 41,320 aircraft according to Boeing. (Mediavilla, 2017)While the number of aircraft available and the resource to operate and maintainthese aircraft is the supply end of the equation the supply is driven by theestimated needs of the supply or the demand. Demand theory used to develop theseforecast on the other hand employees numerous influences, according to Boeingthese influences can be grouped into three broad areas: “economic activity,ease of travel, and local market factors.
” (Boeing, 2017) In it most basicterms passenger travel demand is the requirement for passenger travel plus freight.One of the most significant influences of demand both Airbus and Boeing relyheavily on is Gross Domestic Product or GDP, a subcategory of economicactivity. Other economic influences include population and per-capita incometrends, labor-force composition, and international trade, economic, andinvestment links.
Factors such as more open-air services agreements betweencountries, liberalized domestic market regulation, emerging technology,business-model innovations, and airline network improvements are all examplesof the ease of travel increasing demand on air travel. Local market factors thelast broad category Boeing identifies, this category includes factors which arenot “related to macroeconomic trends or related directly to ease of travel.” (Boeing, 2017) These include thingssuch as emerging markets and regional specific changes that effect the quantityof travel. “Shifters” or independent variablesfactors which influence demand for air travel.Some of the local market factors thatare taken into account include the growth of the Middle class, which could be considereda demand shifter. “A variable other than the price of a good or service whichinfluences the demand” (Baye & Prince, 2017) for a good orservice is known as a demand shifter, in this case it is the local demand whichis driven by the change in type of traveler.
As the middle class grows so doesthe both the business traveler and the vacation traveler. This influences thetypes of planes that are required to fill the demand in a region or area. For example, in the middle east, the widebody plane is projected to grow substantially, because of the amenities thatthe wide body plane offers, which is appealing to the business traveler. While in Europe and the United States the singleisle plane demand is projected to grow significantly, due to the new ultra-low-costcarrier business plan. This relatively new concept has grown in the doubledigits over the last few years and is expected to continue to grow.
This growth is in part due to local laws andregulations have been changed which influence the demand for passenger andcargo transportation. Other local market factors include alternate forms of publictransportation, for example, areas like Japan that have a fast and efficientrail transit systems which local populations are accustomed to using. (Boeing, 2017)Application of factors to Airbus andBoeing Analysis Both Airbus and Boeing apply these factors,that affect the demand of air travel and drive supply needs, to a quantitativeformula.
Using historical and empirical data they derive what the forecast ofair travel demand and supply in turn will probably look like. This forecast isthen used by many in the aviation industry to prepare and invest for the comingyears. Since aircraft take time to build and significant resources are requiredto purchase and maintain aircraft, it is imperative that the providers of airtravel, at all levels, have an accurate estimate of future demands. As Doganisputs it “profitability depends on the interplay of key performance variables:unit cost, unit revenue and load factor.” (Doganis, 2010) As we can see fromthe past profitability of United States based airlines, the firm’s ability toapply the forecast and theory of supply and demand can have devastating effectson their ability to turn a profit. The most important factors categorized byeither supply or demand.
While thereare numerous factors that affect the demand and the supply of air travel mostif not all can be divided into either a supply factor or a demand factor. Airtravel demand drivers include: tourism, development,gross domestic product per capita, working age population, private consumption,labor force demographic, unemployment, disposable personal income, imports,exports, total population, government consumption, industrial production index,urban population, fixed investment, and even employment. Air travel supplyfactors include: evolution of airline business model, liberalization of regulations,crude oil prices, domestic investment and even nominal change in inventory. So why invest in developing annualforecasts.According to Boeing it develops andpublishes its annual current market outlook to measure the effect of new andsignificant trends and the effects of such trend on the development and futureof the aviation industry. Boeing states that these trends have a direct impacton the aviation industry and the demand for aircraft in the future. Thisforecast and analysis includes both passenger and cargo traffic demands andderives a long-range projection of more than 180 airlines to include commercialpassenger service aircraft with more than 30 seats.
(Boeing, 2017) While the Airbusforecast is similar in scope it limits its factors to commercial passengerservice aircraft with more than 100 seats and freighters with a capacity of greaterthan ten tons. (Airbus, 2017) ConclusionIn fact, profitability depends onthe interplay of three key performance variables: unit cost, unit revenue andload factor. (Doganis, 2010)While there are an infinite number of variableswhich affect both supply and demand within the aviation industry and the airtransport category of the industry, the forecast provide a semi objectiveanalysis of a significant number of these variables. This attempt to providedirection and profitability for not only their own firm but also theirconstituents who purchase and lease their aircraft. What is significant is theidea that with all of the research and study that goes into these forecasts yetthe airline industry as a whole seems to be one of huge risk with little chanceof reward, that is it requires a large investment and yet so many airlinesstruggle each year to make any profit.
This is because while there is a largerevenue the unit cost is astronomical and the load factors such as maintenanceseems to drain any foreseeable profit.