A Discussion of the Capacity Supply - Demand Balance within the Global Commercial Air Transport Industry Ricky Mack Senior Analyst, Director Helen Jiang Associate Technical Fellow Robert (Bob) M. Peterson Technical Fellow and Chief Analyst Aviation System Analysis Boeing Commercial Airplanes August 2013
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A Discussion of the Capacity Supply - Demand Balance within the Global Commercial Air Transport Industry Ricky Mack Senior Analyst, Director
Helen Jiang Associate Technical Fellow
Robert (Bob) M. Peterson Technical Fellow and Chief Analyst
Aviation System Analysis Boeing Commercial Airplanes
August 2013
A Discussion of the Capacity Supply - Demand Balance within the Global Commercial Air Transport Industry
The Boeing Company August 2013
Aviation System Analysis Aviation System Analysis is an independent team within Boeing Commercial Airplanes, tasked to bring influential, timely, objective and innovative thought leadership on important issues to the attention of leaders of The Boeing Company and to the industry.
1.1 Background and objective ................................................................................... 3 1.2 Perspective ......................................................................................................... 3 1.3 Status metrics ..................................................................................................... 4
2. The Commercial Aviation Product ......................................................................... 4 2.1 Definition of the commercial aviation product ...................................................... 4 2.2 Capacity planning complexity .............................................................................. 5 2.3 Measuring commercial aviation status ................................................................ 7
3. Primary Influencers and Indicators of Capacity Balance .................................... 8 3.1 Broad influence considerations ........................................................................... 8 3.2 Aircraft asset-related influences .......................................................................... 8 3.3 Defining nominal values for indicators ................................................................. 9 3.4 Key and ancillary indicators............................................................................... 10 3.5 Table of indicators ............................................................................................. 11
4. System Dynamics of Commercial Aviation Capacity ......................................... 13 4.1 Responding to system capacity requirements ................................................... 13 4.2 Timing is important ............................................................................................ 14
5. Defining System Overcapacity ............................................................................. 16 6. Assessment of Current Capacity Status ............................................................. 17 7. Conclusions........................................................................................................... 18 Appendix ....................................................................................................................... 19 1. Available Seat Kilometers (ASK) ......................................................................... 19 2. Load Factor (PLF %) ............................................................................................. 20 3. Aircraft Utilization ................................................................................................. 21 4. Commercial Aircraft Fleet .................................................................................... 22 5. Ancillary Indicators ............................................................................................... 24
5.1 Airline Yield ....................................................................................................... 24 5.2 Aircraft Order Backlog ....................................................................................... 25 5.3 Book-to-Build Ratio ........................................................................................... 25 5.4 Average Fleet Age ............................................................................................ 25 5.5 Sector Profitability ............................................................................................. 25
About the Authors ........................................................................................................ 26
which indicators move at different paces or in divergent directions, imply that, whereas
the system is in balance, it could be building potential for a change to another state.
Exhibit 1 (below) uses the above definition of the status of the industry and the indicator
matrix to assess the current state of the air transport industry. We find that all
indicators are currently within their nominal ranges; there is no evidence of a
persistent systemic overcapacity; and the industry capacity supply and demand
is in balance.
Exhibit 1 The current state of capacity supply and demand balance in the air transport system (yellow dot represents current state with respect to nominal balance range, gray area, and yellow arrow shows momentum of status)
1 We suggest a three-year time window as the industry has been and will always be in continuous correction – the
capacity supply constantly attempts to adapt to the ever-changing demand via a variety of means, from demand stimulation, revenue management, and network optimization, to fleet management. Three years is sufficient to observe correcting behavior with annual data; a shorter period could be considered with higher frequency data available.
Overcapacity
Under-capacity
Overcapacity
Under-capacity
Overcapacity
Under-capacity
Overcapacity
Under-capacity
~3%
SA 0
WB -0.1
1.2%
-1.2%~3%
~7%
~5%
2.6%
0.9%6.7%
SA -0.2
WB -0.3
ASK growth is in balance based on growth recorded
by ICAO, moving-average momentum moving from
previous overcapacity to current balance state
PLF is in balance with delta from trend, based on ICAO
Associated with ASK capacity and RPK demand is the passenger Load Factor (PLF)
which determines the portion of filled or demanded capacity. This component of key
indicators is usable in its raw form as a percentage value. Again the data for PLF are
compared to a nominal range. Because PLF has developed along a growing trend over
time, the nominal range must be defined around that trend. Further details of the
development of the nominal ranges and the measurement of individual indicators
metrics is covered in the Appendix.
Additional key indicators include:
Aircraft Utilization which is an indicator necessary to understand how hard the fleet is
being worked. Comparison to the nominal range established by historical values and
industry levels can also provide insight into likelihood that the system can flex utilization
to balance capacity.
In addition, overall Commercial Aircraft Fleet net growth indicators include over time:
the number of expected new aircraft deliveries;
the number of viable modern technology aircraft (typically, in-production types)
that are not being utilized; that is, the parked fleet, and
the number of expected retirements of obsolete aircraft to be removed from use.
A matrix of the aforementioned measures will provide the most important indicators of
capacity status and, together, will provide data for near-term capacity availability and
growth.
3.5 Table of indicators
The table below completes the recommended matrix of relevant and generally available
indicators for consideration in making capacity balance assessments.
Reading the table:
The shaded portion represents those indicators considered ancillary; Ancillary indicators
may be regarded as such due to merit and/or general data availability issues.
The left-most column: Indicator, names the common raw form of the data behind the
indicator. Where applicable, the converted form of the data used for the given indicator
is named in square brackets.
The center column: Description is a brief explanation of the indicator in the form used.
The right-most column: Indicator Information provides a brief overview of why the indicator has value or merit in the assessment matrix and/or the use of the indicator. Unless otherwise stated, the indicator is referenced to the nominal range established for the indicator, as defined in the Appendix.
The rate of change in supply of network capacity ASK expressed as annual growth rate
Directly relates to capacity supply, near-term planned scheduled capacity is published in advance. Reasonable forecasts are possible. Recent changes in direction and magnitude point to potential for imbalance. Importantly, rises in ASK are closely associated with simultaneous RPK demand. Thus any abnormal ASK growth that could otherwise create a capacity imbalance is only relevant if it significantly decouples from RPK growth.
Passenger Load Factor
[PLF % = Revenue Seat Km/Available Seat Km]
A measure of the average proportion of filled network capacity (used capacity) expressed as a percentage
Directly relates to capacity use and indicates ability for capacity management tools to fill available capacity. Typically, data availability lags, but slowing or acceleration of the trend is indicative.
Aircraft Utilization
[Hours/day]
The active time of aircraft assets use per unit time. An average for in-service fleet, but could also include selected parked fleet expressed in flight hours per day
Observing relative shifts provides insight into the likely direction of capacity changes. Significant shifts may limit system ability to employ utilization flexibility to mitigate capacity change requirements.
Commercial Aircraft Fleet
[net fleet year-over-year growth rate = fleet net of base in-service + parked + deliveries - retirements ]
The combination of components summed and measured year-over-year as growth in Net Fleet = In-service (t0) + Parked (t0) + Deliveries (t1) – Retirements (t1) – Parked (t1); expressed in aircraft units. Note: retirements = scrapped, (t0)= previous or current, (t1)=expected or future
Each component has a meaningful relationship to overall capacity. Together, they directly relate to capacity supply. Near-term plans for each component can be reasonably forecasted. Current/recent changes in direction and magnitude point to potential imbalance. Moreover, the ratio of fleet growth to ASK growth is an indicator of relative balance.
Airline Yield
[rate of change in average yield year-over-year]
A measurement trend of airline ability to extract value for its services over time, year-over-year, (Passenger Revenue $/RPK per year)
Insightful to assess airlines’ management of the trade-off between average passenger fare paid and capacity utilization. Useful compared to historical norms over time. Data are difficult to obtain and clarity is poor on
revenue sources.2
2 Reported yield is an average and declines with longer stage lengths and discounted fares. Airline yield represents a
potentially rich and useful indicator. However, even in the United States, where data for yield is collected under mandate, there is a lack of transparency on the components of the data with respect to revenue sources and air fares, etc.
[rate of change in the number of years to clear aircraft backlog at known or forecast production rates]
The quantity and rate of change of backlog units
Relates to capacity demand and supply and can have implications for potential balance. Increasing rate of change, however, does not imply imbalance. Caution must be exercised, as backlogs can shift with production rates, new product introductions, delays, order deferrals, accelerations or cancellations.
Book-to-Build Ratio A measurement of the market appeal trend for new aircraft. A ratio >1 = expanding market; i.e., growth in new delivery capacity
Indicates potential capacity expansion or contraction trend. Rate of acceleration/deceleration in indicator provides insight on industry sentiment and likely future capacity implications.
Average Fleet Age
[rate of change in average age year-over-year]
A measurement of change in relative age expressed in years per year
When measured over time, gives a trend that can indicate likely direction of future capacity changes, but is a lagging indicator.
Stakeholder/Sector Profit
[rate of change in profit year–over-year]
The rate of change in profitability across a given commercial aviation sector
Can indicate sector ability to invest in capacity additions. Requires knowledge of influences affecting profitability and/or return on invested capital. Care is necessary to ensure meaningful trends extracted are influenced by commercial aviation activities only -- can be misleading.
4. System Dynamics of Commercial Aviation Capacity
4.1 Responding to system capacity requirements
Capacity requirements are planned against a background of imperfect information about
the future (see section 2.2). Each stakeholder in the commercial aviation industry
makes decisions with a given lead-time, defined by the capability of the stakeholder
and/or its suppliers, partners or customers to respond to a request or necessity to
change capacity. As a whole, the industry has been on a global growth trend throughout
the ‘jet age’ and there is little indication that growth is abating in the aggregate.
Continued aggregate growth in demand for air travel requires an ongoing need to adjust
capacity supply to meet demand. Generally, plans are focused on capacity additions
and are strategic and/or preemptive, whereas capacity reductions are more often
reactive. Additions can be more measured and, at a system-wide level, are relatively
gradual, due in part to the inherent lead times. Capacity withdrawal can be a rapid
response, especially if it is a reaction to an unexpected event. Similarly, following a
Using the recommended indicators of the global air transport industry and the analysis
of historical data, we have defined the boundary conditions of nominal capacity balance
(presented in the Appendix) as summarized below and shown in Exhibit 5.
ASK growth rate has averaged 5.2% per year historically with a nominal range of year-over-year variations about plus or minus 2% per year;
Passenger load factor has globally increased from mid-50% in the 1970s to today’s nearly 80%, approximating 0.9% improvement per year and a nominal range of year-over-year variations of plus or minus 1.2% per year;
Utilization of single-aisle passenger airplanes, measured in average flight hours per day, has increased by four minutes each year over the past three decades, with a nominal range of variations of plus or minus 0.2 flight hours per day. Utilization of wide-body passenger airplanes has improved at a pace of five additional minutes each year, with a nominal range of variations of plus or minus 0.3 flight hours per day;
Net fleet growth rate of all western-built commercial jets has averaged 4% per year since 1980, with a nominal range of plus or minus 1% around the mean.
Exhibit 5 The current state of capacity supply and demand balance in the air transport
system (yellow dot represents current state with respect to nominal balance range, gray
area, and yellow arrow shows momentum of status)
Overcapacity
Under-capacity
Overcapacity
Under-capacity
Overcapacity
Under-capacity
Overcapacity
Under-capacity
~3%
SA 0
WB -0.1
1.2%
-1.2%~3%
~7%
~5%
2.6%
0.9%6.7%
SA -0.2
WB -0.3
ASK growth is in balance based on growth recorded
by ICAO, moving-average momentum moving from
previous overcapacity to current balance state
PLF is in balance with delta from trend, based on ICAO
This appendix presents the data used to assess each of the indicators recommended
within this paper in terms of the boundaries for nominal balance. In this appendix, the
data concentrates on global-level passenger indicators. However, the principles and
methodologies employed can be generally applied across various regional markets
using data appropriate to the market(s) in question. The charts in the exhibits indicate
the nominal balance range by a shaded area and the label “balance” in green text, the
labels “overcapacity” and “under-capacity”, both in red text, are also indicated. This
labeling is intended to show the status at the current or then-current period; it is not
intended as predicative of future state. The interpretation of the balance charts is best
achieved by noting how the moving average lines compare to the shaded zones
representing the range of nominal balance.
1. Available Seat Kilometers (ASK)
ASK capacity growth, illustrated in Exhibit 6, shows the absolute levels for ASK and RPK and the ASK growth trend. Importantly, rises in ASK are closely associated with simultaneous RPK demand growth, thus any abnormal capacity growth that would otherwise lead to potential overcapacity is only relevant if it significantly decouples from demand growth.
Exhibit 6 Annual ASK growth trend and global ASK and RPK industry-wide since 1970
ASK growth has averaged 5.2% per year. Exhibit 7 shows the year-over-year annual
growth in ASK. The gray band represents a range between the 25th and 75th percentile
that defines the recommended nominal range for ASK growth, as this accounts for 50%
of the variation in the range of the historical growth. The band extends from
approximately 3.2% to 7.2%. The period over which growth is outside of the nominal
range is another consideration for which one should account in making assessments. A
three-year moving average, illustrated by the red-line, is a useful way to cross check the
ASK indicator status and potential future direction.