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Aviation Industry

Major Industry Trends

This report covers the entire aviation industry, including the airline and aerospace sectors. It focuses on the civil sector of the aerospace business. The military sector is included in the separate industry report on defense.

The Economic Cycle

The civil aviation industry is a core element of today’s global society, with the industry currently transporting some 2.2 billion passengers each year and accounting for some US$425 billion of world GDP. The industry is highly sensitive to the economic cycle. In times of economic hardship, people simply fly less often than they do in the good times. In addition to being hostage to the economic cycle, the airline industry is struggling with two major factors—fuel costs, which seem to be on a perpetual path upward, and the need to “green up.” As The Economist has pointed out, the world’s airlines operate on the tightest of margins and the least ill wind can push even the most established players into administration or bankruptcy.

However, necessity is often the mother of invention, and the big jet engine manufacturers, which include Pratt & Whitney, Rolls-Royce, Snecma, and General Electric (GE), along with several innovative competitors, have all been looking to design more efficient, leaner engines that use less fuel per mile and which are generally quieter, putting them comfortably inside the industry’s latest noise-abatement measures.

The European Union has thrown its weight behind innovation in the sector in a bid to achieve real performance and environmental breakthroughs in jet engine technology. The EU’s Clean Sky project is a private–public partnership involving the European Commission and the European aviation industry. Industry players and consortia can propose projects for 50% funding under the Clean Sky development agenda, with the aim of developing and introducing into commercial use “clean technologies” for air transport. The aim is to promote groundbreaking innovations that would otherwise be too costly and risky in their early stages for companies to pursue as realistic commercial projects.


Connectivity is undoubtedly one of the biggest trends in the sector, with airlines racing to reequip their cabins to provide passengers with Internet capabilities and telephone connectivity while in flight. Another development that has already made great advances in the business aviation sector, where price is often not an overriding consideration, is opening up the cabin management system (CMS) to the new “bring your own device” world. Major equipment providers such as Honeywell are already giving customers the option of using their tablet PCs, iPads, and iPods to watch movies and to interact with the entertainment resources on board. With commercial airlines this trend will impact first-class cabins first and will probably be somewhat slow to filter down to premium- and economy-class cabins.

Interestingly, although supersonic flight came to an end in commercial airline operations with the demise of Concorde, the business aviation world has a couple of players that are going flat out to try to bring both supersonic and hypersonic jets to market. Aerion is partnering with NASA to overcome the design issues involved in producing a supersonic business jet that will be capable of cutting hours off a long-distance journey such as New York to Tokyo. Another company, HyperMach, now headquartered in the United Kingdom, is working on the first hypersonic business jet. HyperMach CEO Richard Lugg reckons that his revolutionary hybrid electric and jet fuel turbine engine will get his SonicStar aircraft with 24 passengers from London to New York in 55 minutes. These are exciting developments and show that the dream of supersonic and hypersonic flight has not died with Concorde.

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Market Analysis

The current state of the global commercial airline business continues to be difficult, but by December 2013 there were some more positive signs as the global economy improved slightly. One of the deep structural issues that the industry faces is that it is very difficult to take overcapacity out of the sector while so many national airlines are propped up in various ways by government subsidies. The outcome in other industries where there is overcapacity—often, a spate of mergers and takeovers, along with some high-profile failures—faces many kinds of systemic barriers in the airline sector. This arguably prevents the market from functioning the way competitive markets should function.

By way of example, two of the biggest mergers in recent years—those between Air France and KLM, and between British Airways and Iberia—were both accomplished through holding companies, with the result that both parties to the merger stayed largely independent of each other and could continue to be national in character. Part of the problem is that for an international airline to fly between two countries the airline requires the bilateral agreement of both governments. This either involves the country concerned acquiring a stake in the incoming airline or requiring reciprocity from that airline’s government for its own flag carrier. So far this problem has not found a solution, and the only way in which the airline industry can seem to be truly global to its millions of passengers is via alliances between airlines. These alliances allow baggage forwarding, through ticketing, and a multicountry network that give the alliance an international flavor even as all the participants retain their domestic links.

The global airline industry has made a multibillion dollar loss in seven of the last 13 years. There is scarcely a major airline—apart from those of the Gulf States, which are all cash-rich and expanding their businesses—that is immune from potential bankruptcy. However, in its financial forecast in March 2013, the International Air Transport Association (IATA) was able to report some positive movement. Higher oil prices caused IATA to downgrade its industry outlook for 2014 by $1 billion, to an industry profit of $18.7 billion on revenues of $745 billion, but if achieved this would still represent a profit rather than a loss and would enable the industry to build on the profit achieved in 2013.

In its December 2013 airline industry forecast IATA said that airlines expect to see a 31% increase in passenger numbers between 2012 and 2017. By 2017 total passenger numbers are set to rise to 3.91 billion, an increase of 930 million passengers on the 2.98 billion passengers carried in 2012. This amounts to a compound annual growth for the next five years of 5.4%. This seems reasonable given that even in the somewhat depressed period from the 2008 global crash until 2012, passenger numbers grew at an average compound rate of 4.3%.

General Aviation—The Scale of the Business and VIP Jet Market

As the international industry body, the General Aviation Manufacturers Association (GAMA), points out in its latest compilation of statistics on the sector, the 2013 General Aviation Statistical Databook & 2014 Industry Outlook, the corporate and private jet sector is responsible for nearly two million jobs worldwide and generates billions of dollars in revenue. The sector is defined as encompassing all aviation other than military and commercial aircraft, and includes everything from two-seater trainers to intercontinental business jets like Embraer’s Lineage 1000 or the Gulfstream G650. There are more than 320,000 general aviation aircraft worldwide, and more than two-thirds of these are based in the United States, the world’s largest general aviation market by far.

General aviation contributes more than US$150 billion to the US economy annually and employs some 1.265 million people. General aviation aircraft fly some 35 million hours annually in the United States and carry around 166 million people. The country has nearly 4,000 paved general aviation airports open to business jets. By way of contrast, there are just 500 commercial airports. At a stroke this highlights one of the major reasons for the continued use of business jets by corporates and high net worth individuals. Even in the United States there are a large number of towns and city pairs that are not on commercial airline routes and would require road trips of more than an hour or two for travellers to get to their desired destination from a commercial airport. In the emerging economies of India and China business aviation has an even stronger case to make.

General aviation has always had to struggle against the public (and political) stereotypical view of private jets as toys for the super rich. As the National Business Aviation Association (NBAA) points out in its “No plane no gain” campaign for 2012 and 2013, legislation follows perception, so the sector has to wage a constant struggle to avoid the imposition of penal taxes, which would damage growth and jobs in the sector. One of the perennial ideas that are pushed by US politicians from time to time is a general aviation usage tax of US$100 per flight. If you consider that a corporate with an eight-seater jet will do at least 300 hours flying time each year—or around 30 trips with six to eight managers and executives flying to meetings with clients and suppliers—that amounts to 30 × 6 × 100, or a tax on the company of US$18,000. A multinational like Walmart—which works its corporate jets hard ferrying generally mid- and low-level managers, buyers, and supplier relationship representatives out to the regions—the tax on the business would be nontrivial.

The NBAA commissioned the research house NEXA Advisors to report on business jet usage by the S&P 500 companies. It found that between 2003 and 2009 users of business aircraft outnumbered those which did not make use of them by three to one and that users typically used business aircraft to drive increased revenues, profitability, and efficiency. Business aircraft users outperformed nonusers in several important financial measures over the period 2003 to 2007. On a market capitalization-weighted basis, annual growth in revenues was 116% higher for users, earnings growth was 434% higher, and average annual earnings before interest and tax (EBIT) growth was 83% higher. According to GAMA, over two-thirds of all the hours flown by general aviation are for business purposes, and this includes all the leisure hours flown by small propeller and turboprop two-seater and four-seater aircraft.

According to GAMA’s figures for the first nine months of 2013, business jet sales have seen no growth at all, with the number sold in the first nine months of 2013 being slightly down on the number for the first nine months of 2012 (421 jets sold, versus 430 in 2012). In the multiengine turboprop sector, by way of contrast, there has been strong growth, with the figures for 2013 showing a 42.4% increase.

Airbus and Boeing Growth Predictions for Sales of Commercial Aircraft

Despite the very thin profit margins experienced by commercial airlines worldwide, passenger numbers are continuing to climb. In its latest industry forecast for the period 2013–2032, Boeing notes that passenger numbers for 2011 rose 6% over the figure for 2010. The company expects world passenger traffic to grow at 5% annually for the next 20 years. Air cargo traffic actually shrank a bit in 2011, down 2.4% on the figure for 2010. However, Boeing argues that emerging market economies, with their hunger for goods and their intense focus on exports, will foster a continuing need for air cargo, which Boeing expects to grow at an average annual rate of 5.2% through to 2031.

Taking these two facts into account, Boeing is forecasting a long-term demand for some 34,000 new airplanes to 2030, with a total value of US$4.5 trillion. “These new airplanes will replace older, less efficient airplanes, benefiting airlines and passengers, and stimulating growth in emerging markets and innovation in airline business models,” it says. The bulk of new orders, some 23,240 airplanes, will be single-aisle regional jets, reflecting growth in emerging markets like China and India. The larger, twin-aisle segment of the market, which currently accounts for about 19% of today’s fleet, will increase to 23% by 2031, Boeing says. These planes tend to be the intercontinental jets, so their arrival will foster the continuing globalization of trade and travel.

Airbus sees new-build demand for 2031 rising to 28,200 passenger and freight aircraft, somewhat lower than Boeing’s figures (link is: Traffic growth between advanced and emerging air transport markets will run at an average annual rate of 5.1%, it says. This is ahead of the average global growth figure of 4.7% and not far off the 6.6% growth expected for flights between emerging markets. Airbus also believes that around 42% of all the aircraft with more than 100-seat capacity will be delivered to carriers in the European Union and North America.

Technological Developments

Aircraft makers are focused on reducing fuel consumption, and operating costs in general, in the battle to win orders from airlines. Fuel costs, which can account for 50% of an airline’s operating costs, can make or break an airline. Boeing says that its 787 Dreamliner cuts fuel use by 20%, thanks to new engines and the use of lightweight, composite materials. Meanwhile, Airbus says that the A380 is the first long-haul aircraft to consume less than three liters of fuel per passenger over 100 km, a rate comparable to an economical family car. It claims that the A380’s efficiency and advanced technology result in 15–20% lower seat-mile costs than those of competitor aircraft. Fuel-efficient engines and the use of advanced composite materials have played a vital role in reducing the A380’s operating costs. The airframe is made up of some 25% composite material by weight, while the Airbus A350 XWB, which entered production in 2010, utilizes around 50% composite material.

Boeing and Airbus are also engaged in developing alternative fuels. The engine-makers Pratt & Whitney, Rolls-Royce, and General Electric are all involved, and the momentum is being maintained, even though oil prices have fallen considerably from their mid-2008 peaks. IATA has a goal of 10% alternative fuels by 2017, while in the United States the Federal Aviation Administration is encouraging the use of new fuels. Several flights have already taken place using biofuels. In April 2010, for example, a Boeing F/A-18 “Green Hornet” carried out a biofuel-powered flight and became the first US Navy fighter to be powered by a biofuel blend. The Navy noted that the General Electric F414 engine performed as expected during the 45-minute flight, stating that the “the aircraft did not know the difference between the bio-blend and its traditional fuel source.”

The EU Clean Sky Project

The European Union has thrown its weight behind innovation in the sector in a bid to achieve real performance and environmental breakthroughs in jet engine technology. The EU’s Clean Sky project is a private–public partnership involving the European Commission and the European aviation industry. Industry players and consortia can propose projects for 50% funding under the Clean Sky development agenda, with the aim of developing and introducing into commercial use “clean technologies” for air transport. The aim is to promote groundbreaking innovations that would otherwise be too costly and risky in their early stages for companies to pursue as realistic commercial projects.

One example of a project going forward under Clean Sky is the flagship Open Rotor project. Space precludes an account of this project, but it is both visually startling, since the rotors are on the outside of the jet engine’s nacelle (the metal covering around the engine), and offers more power for less fuel.


Over the last decade the three leading providers of avionics (cockpit instrument controls), Honeywell, Rockwell Collins, and Garmin, have moved the industry from having a number of separate “boxes” each providing a single function in the cockpit, to a fully integrated, digital flight deck with software-driven LCD displays. This has not only made it vastly simpler and cheaper to upgrade specific instrument features, but has facilitated the integration of a whole range of safety features, such as accurate terrain maps, airport approach and takeoff systems, and “heads-up” displays. The next stage in the development of avionics, which is already well under way, is the integration of real-time visual data from cameras and sensors on the aircraft, with digital terrain “views,” providing ever greater visibility and safety.

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Further reading on the Aviation industry


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