AVIATION INDUSTRY PROFILE

There were 633,317 active pilots certificated by FAA at the end of 2018. All pilot categories, with the exception of rotorcraft only and recreational only certificates, continued to increase. The FAA has currently suspended the student pilot forecast for the second year in a row. The number of student pilot certificates has been affected by two recent regulatory changes; first, the 2010 rule that increased the duration of validity for student pilot certificates for pilots under the age of 40 from 36 months to 60 months. The second one, which went into effect in April 2016 removed the expiration date on the new student pilot certificates. The number of student pilots increased from 72,280 in 2009 to 119,119 in 2010. By the end of 2016 they totaled 128,501 and with no 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 2009 2019 2029 2039 Calendar Year General Aviation Hours Flown (in thousands) Fixed Wing Piston Fixed Wing Turbine Rotorcraft LSA Experimental and Other 27 expiration of the new student certificates, jumped to 149,121 by the end of 2017 and 167,804 by the end of 2018. The 2016 rule change generates a cumulative increase in the certificate numbers and breaks the link between student pilot and advanced certificate levels of private pilot or higher. Because the change is new, there is not sufficient data yet to perform a reliable forecast for the student pilots.

Commercial and air transport pilot (ATP) certificates have been impacted by a legislative change as well. The Airline Safety and Federal Aviation Administration Extension Act of 2010 mandated that all part 121 (scheduled airline) flight crew members would hold an ATP certificate by August 2013. Airline pilots holding a commercial pilot certificate and mostly serving at Second in Command positions at the regional airlines could no longer operate with only a commercial pilot certificate after that date, and the FAA data initially showed a faster decline in commercial pilot numbers, accompanied by a higher rate of increase in ATP certificates. Commercial pilot numbers have been increasing for the last two years, as well as the ATP numbers.

The number of active general aviation pilots (excluding students and ATPs) is projected to decrease about 13,250 (down 0.2 percent yearly) between 2018 and 2039. The ATP category is forecast to increase by 25,755 (up 0.7 percent annually). The much smaller category of sport pilots are predicted to increase by 3.0 percent annually over the forecast period. On the other hand, both private and commercial pilot certificates are projected to decrease at an average annual rate of 0.6 and 0.1 percent, respectively until 2039.

In the near term, IHS Markit projects that world economic growth will ease slightly from its 2018 rate of 2 percent as economies return to their long-run trend growth rates. Growth is projected at 2.9 percent in 2019 and 2.8 percent in 2020. The U.S. economy is forecast to be supported by improved financial conditions but restrained by reduced government spending while European growth is pressured by weakness in manufacturing and widespread political uncertainty. Japan’s economic growth is projected to suffer from trade concerns and an increase in the consumption tax later in 2019.

In emerging markets, China’s growth rate continues to gradually decelerate through 6 percent, though supported by government stimulus, while other countries such as Brazil and Russia suffer from political uncertainties and relatively weak export demand. India is expected to post growth rates of about 7 percent as consumer spending slows and fiscal stimulus is reduced.

IHS Markit forecasts world real GDP to grow at 2.8 percent a year between 2019 and 2039. Emerging markets, at 4.1 percent a year, are forecast to grow above the global average but at lower rates than in the early 2000’s. Asia (excluding Japan), led by India and China, is projected to have the fastest growth followed by Africa and Middle East, Latin America, and Eastern Europe. Growth in the more mature economies (1.6 percent a year) will be lower than the global trend with the fastest rates in the U.S. followed by Europe. Growth in Japan is forecast to be very slow at 0.9 percent a year reflecting deep structural issues associated with a shrinking and aging population.

The average crude oil price in 2018 was up 28 percent from the year before to about $65 per barrel, continuing the increase seen in 2017. IHS Markit is projecting slight moderation in prices in 2019 and 2020 due to supply growth, particularly in the U.S., followed by gradual increases in subsequent years. The price of oil is projected to increase over the long run due to growing global demand and higher costs of extraction. IHS Markit forecasts U.S. refiner’s acquisition cost of crude to remain just shy of $100 per barrel by the end of the forecast horizon in 2039.

Regional & International Issues

The number of aircraft in the U.S. commercial fleet is forecast to increase from 7,397 in 2018 to 8,806 in 2039, an average annual growth rate of 0.9 percent a year. Increased demand for air travel and growth in air cargo is expected to fuel increases in both the passenger and cargo fleets. Between 2018 and 2039 the number of jets in the U.S. mainline carrier fleet is forecast to grow from 4,241 to 5,197, a net average of 51 aircraft a year as carriers continue to remove older, less fuel efficient narrow body aircraft. The narrow body fleet (including Eseries aircraft at JetBlue and A220-series at Delta) is projected to grow 46 aircraft a year as carriers replace the 757 fleet and current technology 737 and A320 family aircraft with the next generation MAX and Neo families. The wide-body fleet grows by an average of 14 aircraft a year as carriers add 777-8/9, 787’s, A350’s to the fleet while retiring 767- 300 and 777-200 aircraft. In total the U.S. passenger carrier wide-body fleet increases by 3 percent over the forecast period.

The regional carrier fleet is forecast to decline from 2,298 aircraft in 2018 to 2,022 in 2039 as the fleet shrinks by 12.0 percent (276 aircraft) between 2018 and 2029. Carriers remove 50 seat regional jets and retire older small turboprop and piston aircraft, while adding 70-90 seat jets, especially the E-2 family after 2020. By 2031 only a handful of 50 seat regional jets remain in the fleet. By 2039, the number of jets in the regional carrier fleet totals 1,877, up from 1,795 in 2018. The turboprop/piston fleet is forecast to shrink by 71% from 503 in 2018 to 145 by 2039. These aircraft account for just 7.2 percent of the fleet in 2039, down from 21.9 percent in 2018. The cargo carrier large jet aircraft fleet is forecast to increase from 858 aircraft in 2018 to 1,587 aircraft in 2039 driven by the growth in freight RTMs. The narrow-body cargo jet fleet is projected to increase by 7 aircraft a year as 757’s and 737-800’s are converted from passenger use to cargo service. The wide body cargo fleet is forecast to increase 28 aircraft a year as new 747-800, 777-200, and new and converted 767-300 aircraft are added to the fleet, replacing older MD-11, A300/310, and 767-200 freighters.

Competitive Landscape

Over most of the past decade, the international market has been the growth segment for U.S. carriers when compared to the mature U.S. domestic market. In 2015 and 2016, growth in the domestic market surged, outpacing international markets. However, in 2017 enplanement growth in international markets exceeded that in domestic markets, only to be reversed again in 2018. Domestic enplanement growth is expected to outpace that of international markets for the next few years when longer term economic trends begin to reassert themselves. Average annual growth rates (FY 2019-2039) of the international market (comprised of mainline and regional carriers) for enplanements, RPMs and ASMs are all forecast at 3.0 percent.

Growth of major global economies has begun to slow from the above-trend rates of recent years. Several moderating factors are at work, including dampened credit growth, reduced global trade, political stresses, and tighter U.S. monetary policy. The European and Japanese economies are generally seeing slow but positive growth, in part due to weak trade with Asia. In turn, this has been driven by China’s continuing gradual slowdown which has been managed by the government and is unlikely to decline sharply. Overall, global conditions appear to be on a stable path but one with growth rates that are closer to long-term trends than the higher rates of the recent past. Combined with moderate oil prices, this presents a supportive environment for air travel demand.

The next two years will see some reduction in growth rates of international demand for the U.S. carriers with growth averaging around 1.5, 2.8, and 2.8 percent a year for enplanements, RPMs, and ASMs, respectively. Subsequently, demand picks up to average 3.0 percent throughout the forecast for each measure. Airlines will continue to match capacity growth with traffic growth and load factor is expected to stabilize around 81.5%. Load factors this high were last seen in 2014.

For U.S. carriers, Latin America remains the largest international destination despite the recent economic and political crises in Venezuela and Brazil. Enplanements in 2018 grew an estimated 3.9 percent while RPMs increased 4.0 percent. Growth is projected to ease considerably in 2019 and 2020 as U.S. carriers trim capacity expansion to help stabilize yields. Enplanements and RPMs are forecast to increase 1.1 and 1.6 percent, respectively, in 2019. Over the twenty-year period 2019-2039, Latin America enplanements are forecast to increase at an average rate of 3.5 percent a year while RPMs grow 3.8 percent a year.

The Pacific region is the smallest in terms of enplanements despite the economic growth and potential of air travel to China and India. In 2018, U.S. carriers saw enplanements decline 4.4 percent from their 2017 levels, mainly due to declining enplanements to and from Japan, the region’s largest market. Meanwhile, traffic (RPMs) increased by just 0.4 percent. Although the region is forecast to have the highest economic growth of any region over the next 20 years, led by China and India, U.S. carrier enplanements and RPMs for the Pacific region are forecast to grow a modest 2.2 and 2.4 percent a year, respectively. Traffic growth is relatively moderate in part because U.S. carriers continue to have a majority of their service in the region to Japan as opposed to faster growing markets.

After slowing in 2015 and 2016, the Atlantic region saw a strong increase in enplanements of 4.9 percent as well as an increase in RPMs of 5.4 percent in 2018. However, the European economies are beginning to cool and with them enplanement and RPM growth will slow in coming years. Over the twenty-year period from 2019 to 2039, enplanements in the Atlantic region (including the Middle East and Africa) are forecast to grow at an average annual rate of 2.3 percent a year while RPMs grow 2.6 percent a Change Fiscal Year U.S. Commercial Air Carriers International Market ASMs RPMs Enplanements 20 year. While Western Europe is a mature area with moderate economic growth, the economically smaller Middle East and Africa areas are expanding rapidly with GDP growth rates more than twice that of Europe. As a result, a larger share of the forecast aviation demand in the Atlantic region is linked to those two areas, particularly in the second half of the forecast period. Total passengers (including Foreign Flag carriers) between the United States and the rest of the world increased an estimated 5.3 percent in 2018 (244.2 million) as all regions posted gains led by a 7.1 percent increase in the Atlantic region.

FAA projects total international passenger growth of 3.9 percent in 2019 as global economic growth eases with the highest growth expected in the Pacific region. Moderate global economic growth averaging 2.8 percent a year over the next 20 years (2019- 2039) is the foundation for the forecast growth of international passengers of 3.4 percent a year, as levels double from 244 million to 491 million.

The Latin American region is the largest international market and is projected to grow at the fastest rate (3.5 percent a year) of any region over the forecast period. Within the region, Mexico and Dominican Republic are the two largest markets and are expected to post average annual growth rates of 3.3 percent and 4.3 percent, respectively.
Powered by economic growth and rising incomes in China, India and South Korea, total passengers in the Pacific region are forecast to more than double to 90 million by 2039. From 2019 to 2039, passengers between the United States and the Pacific region are forecast to grow 3.6 percent a year.

Both the Atlantic and Canada regions are more mature markets and are projected to have somewhat slower growth than the Latin or Pacific regions. The Atlantic region is forecast to grow at an average rate of 3.0 percent a year as an increasing share of the passengers in this region come from the Middle East and Africa markets. Though sizable and comparable to Mexico in passenger traffic, the Canadian transborder market is considerably smaller than the Atlantic region. With solid North American economic growth, Canada transborder passengers are forecast to grow at an annual average of 3.3 percent a year over the next 20 years.

Air cargo traffic contains both domestic and international freight/express and mail. The demand for air cargo is a derived demand resulting from economic activity. Cargo moves in the bellies of passenger aircraft and in dedicated all-cargo aircraft on both scheduled and nonscheduled service. Cargo carriers face price competition from alternative shipping modes such as trucks, container ships, and rail cars.
U.S. air carriers flew 42.8 billion revenue ton miles (RTMs) in 2018, up 9.1 percent from 2017 with domestic cargo RTMs increasing 7.7 percent to 15.8 billion while international RTMs rose 10.0 percent to 27.0 billion. Air cargo RTMs flown by all-cargo carriers comprised 78.7 percent of total RTMs in 2018, with passenger carriers flying the remainder. Total RTMs flown by the all-cargo carriers increased 9.5 percent in 2018 while total RTMs flown by passenger carriers grew by 6.7 percent. U.S. carrier international air cargo traffic spans four regions consisting of Atlantic, Latin, Pacific, and ‘Other International.’

Historically, air cargo activity tracks with GDP. Other factors that affect air cargo growth are fuel price volatility, movement of real yields, and globalization. The forecasts of Revenue Ton Miles (RTMs) rely on several assumptions specific to the cargo industry. First, security restrictions on air cargo transportation will remain in place. Second, most of the shift from air to ground transportation has occurred. Finally, longterm cargo activity depends heavily on economic growth.

The forecasts of RTMs derive from models that link cargo activity to GDP. Forecasts of domestic cargo RTMs use real U.S. GDP as the primary driver of activity. Projections of international cargo RTMs depend on growth in world and regional GDP, adjusted for inflation. FAA forecasts the distribution of RTMs 22 between passenger and all-cargo carriers based on an analysis of historic trends in shares, changes in industry structure, and market assumptions. After increasing by 9.1 percent in 2018, total RTMs are expected to grow 5.8 percent in 2019. Because of steady U.S. and world economic growth, FAA projects total RTMs to increase at an average annual rate of 3.3 percent for the balance of the forecast period (from 2019 to 2039).

Following a 7.7 percent increase in 2018, domestic cargo RTMs are projected to grow 4.5 percent in 2019 as the U.S. economic recovery slows. Between 2019 and 2039, domestic cargo RTMs are forecast to increase at an average annual rate of 1.6 percent. In 2018, all-cargo carriers carried 90.0 percent of domestic cargo RTMs. The all-cargo share is forecast to grow modestly to 91.4 percent by 2039 based on increases in capacity for allcargo carriers. International cargo RTMs rose 10.0 percent in 2018 after posting a 9.7 percent increase in 2017. Faster economic growth in the U.S. helped to fuel a pickup in worldwide trade. Growth in international RTMs remain strong in 2019 at 6.6 percent as global trade growth continues to be robust.

For the forecast period (2019-2039) international cargo RTMs are forecast to increase an average of 4.0 percent a year based on projected growth in world GDP with the Other International region having the fastest growth (5.1 percent), followed by the Pacific (4.3 percent), Atlantic (3.1 percent), and Latin America regions (0.8 percent), respectively. The share of international cargo RTMs flown by all-cargo carriers is forecast to increase from 72.1 percent in 2018 to 78.4 percent by 2039.

Sales & Marketing

Uncertainty exists in all industries, but especially in the commercial air travel industry. As volatility in the global environment has increased, the importance of scenarios for planning purposes has increased. In order to help stakeholders better prepare for the future, the FAA provides alternative scenarios to our baseline forecasts of airline traffic and capacity. To create the baseline domestic forecast, economic assumptions from IHS Markit’s 10- year and 30-year U.S. Macro Baselines were used. To develop the alternative scenarios, assumptions from IHS Markit’s 10-year optimistic and pessimistic forecasts from their February 2019 Baseline U.S. Economic Outlook were combined with the optimistic and pessimistic forecasts from their Fall 2018 30- year U.S. Macro forecast. Inputs from these alternative scenarios were used to create a “high” and “low” traffic, capacity, and yield forecast. International passengers and traffic are primarily driven by country specific Gross Domestic Product (GDP) forecasts provided by IHS Markit. Thus, the alternative scenarios use inputs based on ratios derived from IHS Markit’s Major Trading Partner and Other Important Trading Partners optimistic and pessimistic forecasts in order to create a high and low case.

The FAA’s domestic baseline forecast assumes that economic growth remains close to trend over the next few years as both consumer and business spending provide support. Recent tax cuts result in some nearterm stimulus but in the medium term, headwinds result from slower federal government spending. Oil prices remain moderate by historic standards and there are no external shocks.

The FAA’s high case forecast uses IHS Markit’s optimistic forecast. The optimistic forecast sees stronger overall growth driven mainly by an increase in productivity in a low inflation environment. This results in stronger real wage growth and an improved employment outlook, leading to increased consumer spending. Confidence is high and the stock market sees strong gains while the unemployment rate remains slightly lower than in the baseline scenario. Stronger imports accompany the increased domestic demand but exports rise faster with improving foreign economic conditions. In this scenario, real personal consumption expenditure (PCE) per capita growth averages 0.5 percentage points faster per year than the baseline forecast and unemployment averages 0.3 points lower on a fiscal year basis than the baseline.

Conversely, FAA’s low case forecast uses IHS Markit’s pessimistic scenario. In this forecast, a broad loss in confidence and growing aversion to risk leads to drops in a wide range of investment and consumer spending categories to end the expansion in the U.S. The economy suffers a three-quarter recession in 2020 and GDP growth averages 0.2 percentage points lower than in the baseline over the first ten years of the forecast.

Rising housing prices have left the real-estate market vulnerable, and a slowdown turns into a decline, as real-estate prices correct and confidence plunges. Then, a growing sense of unease marked by declines in 19 Real personal consumption expenditure per capita and unemployment are used as input variables to the FAA’s base, high and low forecasts of enplanements. consumer confidence and an inverted yield curve stresses financial markets, resulting in sharp declines in asset values and broad-based declines in business fixed investment. Negative wealth effects and employment declines lead households to sharply curtail their spending early in 2020. By the end of 2020, housing and consumer spending start to turn back up, but recover only tepidly, while business fixed investment turns up more strongly and leads the recovery. Oil prices rise faster than the baseline throughout the forecast.

Real PCE per capita in this scenario grows 0.4 percentage points slower per year than in the baseline; and unemployment, on average, is 0.6 points higher on an annual basis than in the baseline.
The price of energy is one of the drivers in the growth of consumer prices over the forecast period. In the optimistic case, slow growth of energy prices and import prices counteracts faster growth of other consumer goods prices causing the optimistic CPI to rise similarly to the baseline. In the pessimistic case, energy prices, wages and import prices all rise more rapidly compared to the baseline.

In the baseline forecast, system enplanements are forecast to grow at an average annual rate of 1.8 percent a year over the forecast horizon of 2019-2039 (with domestic and international passengers increasing at rates of 1.6 and 3.0 percent, respectively). In the optimistic case, enplanements grow at a quicker pace, averaging 2.5 percent per year (up 2.4 percent domestically and 3.4 percent internationally). This scenario is marked by a more favorable business environment and lower fuel prices which make the price of flying more affordable to business and leisure travelers. By the end of the forecast period in 2039, system passengers in the optimistic case are 15.4 percent above the baseline, totaling 1.5 billion, 201 million greater than in the baseline.
The pessimistic case is characterized by a period of weakened consumer confidence combined with a contraction in real estate and financial asset markets, leading to higher interest rates, and curtailed investment and consumer spending. In this scenario, enplanements grow an average of 1.3 percent per year (domestic up 1.1 percent and international up 2.6 percent). In the pessimistic case, system passengers in 2039 are 9.9 percent below the baseline case, totaling 1.2 billion, or 130 million fewer than in the baseline.

In the baseline forecast, system RPMs grow at an average annual rate of 2.2 percent a year over the forecast horizon (2019-2039), with domestic RPMs increasing 1.9 percent annually and international RPMs growing 3.0 percent annually. In the optimistic case, the faster growing economy coupled with lower energy prices drives RPMs higher than the baseline, with growth averaging 2.8 percent per year (domestic and international RPMs up 2.6 and 3.4 percent, respectively). In the pessimistic case, the combination of a slower growing economy and higher energy prices result in RPM growth averaging 1.7 percent annually with domestic markets growing 1.4 percent a year while international traffic grows 2.6 percent annually.

In the base case, system capacity is forecast to increase an average of 2.1 percent annually over the forecast horizon with growth averaging 1.8 percent annually in domestic markets and 3.0 percent a year in international markets. In the optimistic case, capacity grows at a faster clip than in the baseline forecast, averaging 2.8 percent annually system-wide (2.5 and 3.4 percent for domestic and international markets, respectively). Carriers increase capacity compared to the baseline forecast to accommodate increased travel demand brought about by a more favorable economic environment. In the pessimistic case, demand for air travel is lower than in the baseline, thus system capacity grows at a slower pace of 1.7 percent annually (domestic growth of 1.3 percent annually and international up 2.6 percent annually).

System load factors over the 20-year forecast period are relatively similar for all three forecast scenarios. System load factor rises from 83.9 percent in 2019 to 85.0 (optimistic), 84.8 (pessimistic), and 84.9 (baseline) percent in 2039, respectively. In all three scenarios it is assumed that carriers will keep load factors on the high side by actively managing capacity (seats) to more precisely meet demand (passengers). The domestic load factor increases over the forecast horizon from 84.9 percent to 86.6 percent in all three scenarios, optimistic, pessimistic and baseline. The international load factor is forecast to hold steady near 81.5 throughout the period in the pessimistic scenario and rise slightly to 81.6 percent in the baseline and optimistic scenarios. This reflects in part the relative growth in demand and capacity in the three (Atlantic, Latin, and Pacific) international regions under each scenario.

In the baseline forecast, nominal system yield increases 1.6 percent annually, going from 13.69 cents in 2019 to 18.94 cents in 2039. In domestic markets, yield in the baseline forecast rises from 13.67 cents in 2019 to 18.96 cents in 2039. International yield rises from 13.73 cents in 2019 to 18.89 cents in 2039. System yield rises in the optimistic case at the same rate as in the baseline, up 1.4 percent annually to 18.20 cents by 2039. Domestic yield increases to 18.08 cents while international yield increases to 18.48 cents. The modest growth in yield in both cases is due to advancements in technology, gains in productivity, and relatively favorable fuel prices.

In the pessimistic case, nominal yields rise more rapidly than in the baseline, growing an average of 2.4 percent annually, reaching 21.92 cents by 2039 (22.05 cents domestically and 21.66 cents internationally). This scenario reflects higher general domestic inflation and higher energy prices than in the baseline, forcing carriers to increase fares in order to cover the higher costs of fuel, labor, and capital.