January 31, 2013

The Future of Aviation, Part I: A smooth ride or turbulence ahead?

From Finland’s perspective, a strong need for international contacts makes air traffic all the more important. This dynamic industry will face changes in the future that will affect the industry’s development.
From Finland’s perspective, a strong need for international contacts makes air traffic all the more important. This dynamic industry will face changes in the future that will affect the industry’s development.
Lehtikuva / Martti Kainulainen

Aviation is undergoing a rapid transformation. Its development will be affected by both long-term megatrends and changes and phenomena affecting the industry itself. What lies ahead for the industry? Will the ride be smooth or full of turbulence?

“It is difficult to conceive of breakthroughs and changes in the international operating environment of commercial aviation without an understanding of the industry’s history,” says Mette Vuola, a special adviser at Trafi, the Finnish Transport Safety Agency.

Many present-day challenges related to the market situation are rooted in the fact that air traffic was for a long time a closed operating environment and the markets were highly regulated financially. This laid the foundation for the business environment of major national airline companies, who were strategic pawns of their states; traffic rights were being traded between governments.

As a result of the gradual dismantling of financial regulation, the markets began to free up for the start of commercial air traffic beginning in the 1990s― especially in Europe. Following this revolution, so-called cheap airline companies began to arrive on the scene, putting traditional airlines in a position of having to reassess their heavy organisational structures and swollen cost bases.

A sensitive industry

Along with the relaxed regulations, Vuola says air traffic has also been shaken by external events and phenomena, such as the New York terrorist attacks, the war in Iraq, the SARS epidemic, the rising price of oil, the economic recessions of the 2000s, the volcanic-ash eruption in Iceland and the tsunami in Japan.

“Air traffic has proved time and time again how highly sensitive it is to economic fluctuations and worldwide phenomena in a globalised world. Even the global awakening to climate change has played a part, reflected in the form of more stringent regulations on environmental impacts,” Vuola says.

The current decade will be characterised by global competition, which will be intensified by the overcapacity problems that are inherent in air traffic for historical reasons. The high price of oil will continue to burden airlines with rising cost levels and will be partly responsible for their poor profitability.

Although making predictions about the future is difficult, Trafi’s research data reveals certain trends. It can be expected, for example, that air traffic will continue to grow and will become more commonplace, despite its poor environmental image. The price of oil will rattle air traffic in future, too, and the number of airline companies will decline.

Volumes to double

“It is safe to assume that the focus of airline traffic will switch to, for example, the Middle East, the current hub of activity for many major and up-and-coming airline companies. Growth in demand for air travel in Asia is also expected to affect future air traffic, spurred on by an emerging middle class and growth in prosperity,” says Vuola.

According to aircraft manufacturer Boeing, air traffic is expected to grow at an annual rate of around five per cent until 2030, which translates into a two-fold increase in volumes compared to the 2011 level. In more mature markets, such as Europe and North America, growth will remain moderate, whereas in Latin America and the Caribbean, market growth is expected to be strong.

Vuola points out that in terms of supply and demand for airline travel, Finland as a market area is small. Air traffic is, however, very important for Finnish business, since geographically speaking, the country is an island.

“Because of our location, Helsinki–Vantaa Airport can serve as a junction point for air traffic en route to Asia. For Finnish airline companies, that is a key advantage. It is also important for Finnish companies who target business in Asia,” Vuola says.

Text by: Sari Okko

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