One of the major challenges in the airline industry is forecasting demand. New aircraft typically require orders to be placed years ahead of delivery. Aircraft heavy maintenance schedules are set years out, which largely determines a retirement schedule. As a result, the ability to forecast capacity requirements years into the future is key to not only the airlines, but also the manufacturers, airports, lessors, and MRO facilities, among countless others.
A typical forecast may rely solely on scheduled new aircraft deliveries in a backlog and an averaged retirement schedule based on aircraft age. While that may be sufficient for some, truly understanding the fundamental capacity and demand requirement can create a key competitive advantage. A lot of time is being spent at VisualApproach.io determining which factors affect future capacity needs, then building artificial intelligence models to improve the fidelity of our industry forecasting.
The typical variables we all grew up with still work: GDP, price of oil, production rates, infrastructure, etc. Yet there are other factors that add to the picture we may not be considering. This week, we look at the air cargo market, and how that may be a predictor for passenger traffic.
Comparing YOY traffic changes since 2001, you can easily see similarities in the cargo and passenger markets. The financial crisis of 2008 clearly hit both industries at differing rates but with the same timing. However, it is the other 19 years of data that strikes us as interesting. There is a correlation between freight traffic growth and passenger traffic growth, with roughly a 9 – 12 month offset. It’s not always perfect, but this shows that air cargo traffic may be a strong indicator for passenger forecasts.
This all suggests a very strong 2018 for the passenger airlines.
We’ve heard how the signs of a slowdown were happening in 2001 before 9/11, and this shows clearly with the drop in cargo volumes while passenger numbers continued to rise. Post-9/11, the cargo market recovered quickly and strongly, a recovery eventually repeated by the passenger airlines. Meanwhile, leading into 2008, the cargo traffic was in a decline while passenger traffic was growing at almost 5%. Then the cargo traffic recovered first, followed by a passenger traffic recovery.
As we moved into the 2010 decade, cargo largely remained neutral or negative with the passenger market not making the moves of the same amplitude compared to the freight market. Yet, the direction of the moves were in line with a 9-12 month offset. We saw negative cargo growth in 2013, which resulted in a stabilized passenger growth for 2014. This was matched by cargo growth in 2014 which correlated to an increased passenger growth rate in 2015. Reduced cargo traffic during the same period again led to lower passenger growth rates in 2016… you get the idea.
Through 2017, we have seen cargo growth rates meet, or exceed those of passengers. In fact, the cargo market has not seen an increase in traffic to these levels since the recovery from the financial crisis. This suggests a very strong 2018 for the passenger airlines.
Of course there are outside factors that could play into the validity of using cargo traffic as a predictor of passenger traffic. The rise of Amazon Prime may be driving more traffic to air as they air fill capacity they now own rather than paying per package. The tariffs recently announced by multiple countries could pressure the link between cargo and passenger traffic. Oil prices continue their steady increase. Yet these factors (along with cargo traffic and many others) are all a part of the overall picture of future passenger traffic; each a different stroke in the art of forecasting.
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