Global air passenger market analysis in July

Geneva, 28 Sept. - (ANA) - Industry-wide passenger traffic increased by 5.9% year-on-year in July (the first month of the summer peak). Market developments reflect a range of influences, with a subdued economic backdrop but lower fares. European carriers' international traffic trend has eased, but domestic India remains in a league of its own.
The seasonally-adjusted passenger load factor has remained in a narrow band at a historically.

Annual growth accelerated in July Annual growth in industry-wide revenue passenger kilometres (RPKs) accelerated to 5.9% year-on-year in July – its fastest pace in five months. Middle Eastern carriers regained their position at the top of the growth chart, followed by airlines in Asia Pacific.

Industry developments shaped by a range of drivers Recent developments in industry-wide traffic growth
reflect the net impact of a range of competing drivers. On the one hand, growth continues to face a number of
headwinds, including lingering impacts from high-profile terrorist attacks and political instability in parts of Europe,
as well as the ongoing fragile economic backdrop.

Typically, the impact of terror-related shock events is just temporary, but the repeated nature of recent events
suggests that the impact this time may be longer-lasting than we might otherwise expect. Meanwhile, although
global business confidence has edged up in recent months, the economic backdrop remains highly uncertain,
with policy at a crossroads (See Chart 2.) Heightened uncertainty following the ‘Brexit’ vote in the UK
exemplifies the downside risks in this regard.

On the other hand, air passenger demand is being supported by lower fares, which are a function of lower oil
prices continuing to feed through, as well as wider competitive pressures in the market. Further stimulus to
demand is likely to arrive during the rest of 2016.

The negative influences on demand growth have tended to dominate throughout much of 2016 so far, and industry-wide growth momentum has eased somewhat; correcting for the fact that February 2016 was a leap year, we estimate that industry-wide RPKs have grown by 5.5% year-on-year so far this year, compared to 6.3% in the same period of 2015. However, the bigger picture is that passenger traffic this year has still grown broadly in line with the average pace seen over the past decade or so.

Moreover, the modest tick-up in seasonally-adjusted traffic in July shows that demand was resilient coming into
the peak summer season. All told, passenger traffic is set for another year of solid growth.
Load factor remains close to historic high The peak travel months of July and August are when the highest passenger load factors are registered. The industry-wide load factor was 83.7% in July – just 0.1 percentage point lower than the record July high reached last year. In seasonally-adjusted terms, the load factor has slipped 1.3 percentage points from the all-time high reached in November 2015, and edged down by 0.1 percentage point in July. But the key point is that it has remained in a narrow band around 80% since February, as airlines have slowed capacity growth in line with the moderation in growth.

Europe and Africa international traffic has lost momentum

Annual growth in international RPKs rose to 7.1% in July, up from 5.0% in June. (See Chart 3.) International demand for European carriers – the largest region in terms of international RPKs – has been affected by recent tragic terrorist attacks and political instability in parts of the region. The impact is not yet wholly apparent in the annual growth rate, which increased to 4.1% in July.

But the upward trend in seasonally-adjusted traffic has eased markedly in recent months; traffic has grown at an
annualized rate of just 1.4% since March. It is a similar story for African international traffic too.
Year-on-year growth jumped to 7.4% in July, but this relates mainly to the strong upward trend in (seasonally
adjusted) traffic during the second half of 2015. Alongside challenging economic conditions in much of the continent, particularly in the biggest economies of Nigeria and South Africa, traffic has tracked sideways since the start of 2016.

…but the trend in other regions is robust International traffic flown by Asia Pacific airlines rose by 9.8% year-on-year in July, with signs that the upward trend in seasonally-adjusted traffic is reasserting itself.

Reports suggest that Asian passengers are being put off by terrorism in Europe: traffic on the Europe-Asia route
fell by 0.9% year-on-year in June (latest available), and it has been the weakest-performing major route so far in 2016. (See Chart 4.) It appears that Asian travelers may be substituting to destinations closer to home:
international traffic growth Within Asia accelerated to a four month-high of 8.1% year-on-year in June.

Annual growth in international RPKs flown by Middle Eastern airlines recovered to 13.1% year-on-year in July,
having dipped in June owing in part to the timing of Ramadan. There remains little sign of any slowdown in
the strong upward trend in traffic. However, passenger capacity growth has continued to outpace that of demand; in fact, load factors on the largest routes to and from the Middle East, those between Asia and Europe, fell by 2.8 and 3.3 percentage points respectively in the first half of 2016, taking both to record period-lows.

Having trended down since July 2015, North American carriers’ international traffic has also picked up in recent
months. Strikingly, seasonally-adjusted volumes have risen at an annualized rate of more than 8% since March,
helped by an improvement across the Pacific route. - (ANA) -

AB/ANA/ 28 September 2016 - - -