Growing economic confidence expected to drive demand for air travel

Wednesday, March 20, 2013

Growing economic confidence expected to drive demand for air travel

Overall economic conditions are considered to be one of the most reliable barometers of how the commercial aviation sector is expected to perform. If fewer businesses are investing in new personnel, expanding their operations or forging partnerships with other companies, they are also less likely to make use of air travel. However, as conditions in the North American financial markets begin to show signs of gradual recovery, some experts believe this will stimulate demand for air travel. The International Air Transport Association's (IATA) most recent financial forecast predicts stronger revenue growth in the commercial aviation sector due to heightened confidence in the overall economy.

Interesting anomalies
The IATA recently published its annual financial forecast, which projects that modest gains in profits at many major carriers in the U.S. during the coming months. Specifically, the report predicts a global increase in air travel passenger demand of almost 5.5 percent, with marginal gains of 0.4 percent expected in passenger yields. One of the most interesting factors revealed by the report is the continuing demand for air travel, despite negligible gains in the overall economic situation.

"Industry profits are taking a small step in the right direction," said Tony Tyler, director general of the IATA. "Against a backdrop of improved optimism for global economic prospects passenger demand has been strong and cargo markets are starting to grow again. The economic optimism is also pushing fuel prices higher. We are seeing a $12 billion improvement in revenue, and a $9 billion to 10 billion increase in costs - most of which is related to fuel."

Despite promising indicators that the global commercial aviation sector could see strong returns, the industry is facing several potential problems that could easily derail projected growth during the rest of the year. Growing anger over the proposed bank bailout in Cyprus reveals that the financial crisis in the eurozone is far from over, and that the already volatile situation could easily become more severe in the coming weeks. Should European financial experts fail to agree on a compromise, the marginal gains reported across the continent could be further set back, which is likely to have a serious impact on economic recovery in North America.

Mixed signals
Although the IATA predicts more robust growth in the commercial aviation sector for the remainder of the year, initial indications suggest that this optimism may be misplaced. According to Business Travel News, travel agencies in the U.S. processed 5.6 percent fewer transactions than they did in the same period last year. However, this may not indicate declining demand for air travel, but could instead reflect changes to the ways in which executives and travel management professionals purchase seats on business-class flights.

Data from Airline Reporting Corporation suggests that total air sales dropped by more than 4 percent in February, the third such decline in a four-month period. Despite this drop, sales of airline tickets through travel agencies remained strong at an estimated $15 billion, an increase of 0.2 percent over last year's figures.

While increasing profit margins will no doubt be welcomed by major carriers across the U.S., frequent business travelers may not be so pleased. The prospect of rising airfares and reduced services could force travel management professionals to seek out alternatives to corporate suites at chain hotels, such as serviced apartments and corporate housing. These options could become increasingly viable to organizations that do not want to compromise on quality but have to reduce business travel expenditure. No matter what twists and turns the nation's economy takes during the next few months, corporate apartments will always represent exceptional return on investment in a time when every penny counts.