While industry, passenger travel and freight, over the

While transporter travel technology of science fiction like Star Track is
still just a dream the aviation industry of today would have been considered a
similar dream in centuries past. “With aviation’s
growth and the shortening of travel times to almost any point on the globe, the
world has metaphorically become a much smaller place. Journeys which just a
generation ago would have taken weeks can now be achieved in a day or even
less.” (Airbus, 2017) This travel and the factors that
influence it are continually advancing and in order for firms in the aviation industry
to compete and thrive they must know what to expect in the future. One such
tool that adds in providing a looking glass into this future are market
forecast. As such Airbus and Boeing publish annual forecasts for the global
growth of air transportation and the market for commercial aircraft over the
next twenty years. This forecast known as the Global
Market Forecast by Airbus and Current Market Outlook by Boeing use calculations
of how the concept of supply and demand will affect the commercial aviation
industry, passenger travel and freight, over the next twenty years. This
forecast uses many aspects to predict what the aviation industry can expect, in
terms such as growth, markets, and regions, in the future. While these annual predications
are based in historical and empirical data they are still projections with a
margin of error.

The Theory of Supply and Demand Employed by
Airbus and Boeing

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“In economic theory, the law of
supply and demand is considered one of the fundamental principles
governing an economy. It is described as the state where as supply increases
the price will tend to drop or vice versa, and as demand increases the price
will tend to increase or vice versa.” (Adam, 2009)

The theory of
supply and demand in forecasts.

Many factors can influence air
travel growth in a market. Generally, these factors can be grouped into one of
three categories: economic activity, ease of travel,
and local market factors. Some factors that drive demand, such as GDP, are
easy to quantify. Other factors are more difficult to quantify but can have an
even greater effect on market performance. When such factors are present, other
information sources (e.g., expert opinion or analogies to other markets) must
be harnessed to create a meaningful forecast. (Boeing, 2017)

 

Whilst GDP remains an important
driver for air transport, it is clear that it is not the only factor that
drives air traffic growth. In its traffic forecast, Airbus uses as many as 15
different explanatory variables. From more than 100 traffic flows modelled in
the Airbus traffic forecast. (Airbus, 2017)

Airbus and
Boeing use current and historical fleet figures, along with life cycle
projection to include inputs such as maintenance history, fleet age, expected
replacements and conversions to build a projective supply forecast. According
to Airbus there are approximately 18,890 passenger aircraft today, where Boeing
list 19,130 passenger aircraft not including small regional aircraft, this is
expected to more than double by the year 2036 to 40,120 aircraft
according to airbus and 41,320 aircraft according to Boeing. (Mediavilla,
2017)
While the number of aircraft available and the resource to operate and maintain
these aircraft is the supply end of the equation the supply is driven by the
estimated needs of the supply or the demand.

Demand theory used to develop these
forecast on the other hand employees numerous influences, according to Boeing
these influences can be grouped into three broad areas: “economic activity,
ease of travel, and local market factors.” (Boeing, 2017) In it most basic
terms passenger travel demand is the requirement for passenger travel plus freight.
One of the most significant influences of demand both Airbus and Boeing rely
heavily on is Gross Domestic Product or GDP, a subcategory of economic
activity. Other economic influences include population and per-capita income
trends, labor-force composition, and international trade, economic, and
investment links. Factors such as more open-air services agreements between
countries, liberalized domestic market regulation, emerging technology,
business-model innovations, and airline network improvements are all examples
of the ease of travel increasing demand on air travel. Local market factors the
last broad category Boeing identifies, this category includes factors which are
not “related to macroeconomic trends or related directly to ease of travel.” (Boeing, 2017) These include things
such as emerging markets and regional specific changes that effect the quantity
of travel.

“Shifters” or independent variables
factors which influence demand for air travel.

Some of the local market factors that
are taken into account include the growth of the Middle class, which could be considered
a demand shifter. “A variable other than the price of a good or service which
influences the demand”  (Baye & Prince, 2017) for a good or
service is known as a demand shifter, in this case it is the local demand which
is driven by the change in type of traveler. As the middle class grows so does
the both the business traveler and the vacation traveler. This influences the
types of planes that are required to fill the demand in a region or area.  For example, in the middle east, the wide
body plane is projected to grow substantially, because of the amenities that
the wide body plane offers, which is appealing to the business traveler.  While in Europe and the United States the single
isle plane demand is projected to grow significantly, due to the new ultra-low-cost
carrier business plan. This relatively new concept has grown in the double
digits over the last few years and is expected to continue to grow.  This growth is in part due to local laws and
regulations have been changed which influence the demand for passenger and
cargo transportation. Other local market factors include alternate forms of public
transportation, for example, areas like Japan that have a fast and efficient
rail transit systems which local populations are accustomed to using. (Boeing, 2017)

Application of factors to Airbus and
Boeing Analysis

 Both Airbus and Boeing apply these factors,
that affect the demand of air travel and drive supply needs, to a quantitative
formula. Using historical and empirical data they derive what the forecast of
air travel demand and supply in turn will probably look like. This forecast is
then used by many in the aviation industry to prepare and invest for the coming
years. Since aircraft take time to build and significant resources are required
to purchase and maintain aircraft, it is imperative that the providers of air
travel, at all levels, have an accurate estimate of future demands. As Doganis
puts it “profitability depends on the interplay of key performance variables:
unit cost, unit revenue and load factor.”  (Doganis, 2010) As we can see from
the past profitability of United States based airlines, the firm’s ability to
apply the forecast and theory of supply and demand can have devastating effects
on their ability to turn a profit.

The most important factors categorized by
either supply or demand.

While there
are numerous factors that affect the demand and the supply of air travel most
if not all can be divided into either a supply factor or a demand factor. Air
travel demand drivers include: tourism, development,
gross domestic product per capita, working age population, private consumption,
labor force demographic, unemployment, disposable personal income, imports,
exports, total population, government consumption, industrial production index,
urban population, fixed investment, and even employment. Air travel supply
factors include: evolution of airline business model, liberalization of regulations,
crude oil prices, domestic investment and even nominal change in inventory.

So why invest in developing annual
forecasts.

According to Boeing it develops and
publishes its annual current market outlook to measure the effect of new and
significant trends and the effects of such trend on the development and future
of the aviation industry. Boeing states that these trends have a direct impact
on the aviation industry and the demand for aircraft in the future. This
forecast and analysis includes both passenger and cargo traffic demands and
derives a long-range projection of more than 180 airlines to include commercial
passenger service aircraft with more than 30 seats.  (Boeing, 2017) While the Airbus
forecast is similar in scope it limits its factors to commercial passenger
service aircraft with more than 100 seats and freighters with a capacity of greater
than ten tons. (Airbus, 2017)

 

Conclusion

In fact, profitability depends on
the interplay of three key performance variables: unit cost, unit revenue and
load factor. (Doganis, 2010)

While there are an infinite number of variables
which affect both supply and demand within the aviation industry and the air
transport category of the industry, the forecast provide a semi objective
analysis of a significant number of these variables. This attempt to provide
direction and profitability for not only their own firm but also their
constituents who purchase and lease their aircraft. What is significant is the
idea that with all of the research and study that goes into these forecasts yet
the airline industry as a whole seems to be one of huge risk with little chance
of reward, that is it requires a large investment and yet so many airlines
struggle each year to make any profit. This is because while there is a large
revenue the unit cost is astronomical and the load factors such as maintenance
seems to drain any foreseeable profit.