IATA Premium Traffic Monitor - December 2015

December 2015

KEY POINTS

• Broad weakness in key demand drivers resulted in a soft end to 2015 for industry-wide premium-class travel volumes.
• The lack of strong momentum on the demand side means that growth is likely to remain only modest in the near term.
• Nonetheless, premium’s share of revenues is holding up on key routes, providing a buffer for airline financial performance.

PREMIUM TRAFFIC OVERVIEW

Premium traffic volumes grew by an estimated 3.7% in 2015 as a whole. However, much of the growth was seen early in 2015, and the upward trend in the premium market eased over the latter months of the year. (See Chart 1.) Indeed, seasonally adjusted premium volumes increased by just 0.2% between July and November 2015, and traffic in December was just 1.7% higher than in the same month in 2014.

The easing in the upward trend of premium traffic over the second half of last year relates to broad-based weakness in the drivers of premium travel demand, including the ongoing uneven pattern of global economic growth and the emergence of key economic risks. Comparatively strong economic performance in advanced economies has supported premium traffic on the North Atlantic, but slowing growth, and even recession, in a number of large emerging markets such as China and Brazil, has weighted on premium traffic growth in many markets.

The second headwind for premium traffic has been the ongoing sluggishness of world trade growth (recall that trade growth tends to correlate with business-related premium travel demand). Admittedly, world trade volumes bounced back strongly in the second half of 2015 from the firm downward trend seen earlier in the year. Moreover, given the extent of the declines seen in the H1 2015, annual trade growth is likely to pick up sharply over the coming months too (we expect
to see annual trade growth in the region of 5-6% during Q2 2016). But the key point is that the upward trend in world trade volumes was actually rather modest in the second half of the year - around 2% on an annualized basis.

Finally, challenging conditions in some of the key industry sectors for premium travel - notably the banking sector, as well as the mining and energy sectors - presents a broader headwind for premium traffic growth. Certainly, tough times in these sectors over recent years - as proxied by the relative underperformance of these sectors’ equities versus the totalmarket - corresponds with premium’s declining share of total traffic over the same period. (See Chart 2.)

All told, the lack of strong momentum in the key premium-class demand drivers, particularly world trade, means that premium-class traffic is likely to continue to grow at just a modest rate in the near term.

PREMIUM MARKETS

Premium-class traffic growth lagged behind that of its economy counterpart on most origin-destination markets towards the end of 2015. (See Chart 3.) This is of course not surprising given that economy travel is more price sensitive than business-related traffic, and economy traffic has responded as lower fuel prices translated into lower airfares during 2015.

Premium traffic on the North Atlantic - the largest market in terms of revenue - is estimated to have grown by a healthy 4.5% in 2015 as a whole, supported by solid economic growth in the US and a modest cyclical upturn in Europe too.

By contrast, the weakness of premium-demand drivers in emerging Asia means that premium volume growth underperformed significantly on some of the region’s key passenger markets. Trade volumes to and from emerging Asia contracted on a month-on-month basis for five consecutive periods during the second half of 2015, and economic growth slowed in key regional economies (notably China). The underperformance of premium travel was most stark on the (origindestination) within Asia market and also to and from Europe. The one exception was on the Transpacific, where exposure to the stronger US economy looks to have helped to support demand and premium volumes.

Nonetheless, while premium passenger growth lagged behind economy volumes growth on most routes at the end of last year, premium fares in general held up better. As a result, premium’s share of revenues on some routes actually increased compared to November 2014. (See Charts 3 and 4.) This was particularly the case on the Transpacific and Europe-Asia markets, which together account for just over one-quarter of industry-wide premium-class revenues.

In the current environment where lower fuel prices and competition in the industry are placing downwards pressure on economy yields, the high-yielding premium-segment offers an important buffer for overall airline financial performance.

One notable exception is the North-South America market, where premium demand fell sharply alongside acute economic pressures in the key Latin American countries - notably Brazil. Premium fares have fallen relative to those in economy to stimulate demand but this has reduced premium’s share of revenues on the market. Business confidence indicators in Brazil have bounced back from a six-year low in recent months, but they continue to point to contracting economic activity.

Please note that this is the last month that we will be producing a stand-alone Premium Traffic Monitor. Given the importance of premium-class traffic to airline financial performance, from this point forward developments in premium-class traffic will be covered as part of IATA Economics’ monthly Airlines Financial Monitor.