NORTH

AMERICA

ENDURES

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AT A GLANCE

  • Despite of the highest level of maturity in the world, the North American market still delivers a meaningful growth rate;
  • Industry Profitability on a downward trend;
  • With the focus on optimization, the small narrowbody concept is a key element to provide connectivity and profitability to the mainlines.
 

A MATURE AND STILL GROWING MARKET

Although the North American aviation market is the most mature in the world, the region continues to support significant traffic growth, achieving growth of 5.0% in 2018 compared to the previous year. Such results can attributed to accentuated GDP growth in the region, which reached 2.9% in 2018. In the long term, the expectation is that the RPK will increase by 2.7% (CAGR).

PROFITABILITY ON A DOWNWARD TREND

After a few years of very high profitability levels, the worldwide airline industry is on a downward trend. In North America, since the peak presented in 2015, the margins are systematically falling.

One of the main detractors of profitability is the fuel price, which keeps rising as well as presenting high volatility. At this point the up to 150 seat segment can play a very important role, as the even more efficient new generation of aircraft enters the marketplace.

NORTH AMERICA
AIRLINE INDUSTRY PROFITABILITY

Source: IATA

THE SMALL NARROWBODY: A KEY ELEMENT FOR CONNECTIVITY AND PROFITABILITY

The airline industry will increasingly consider the importance of profits and returns as the best metric to measure efficiency. Small narrow-body jets, like the E195-E2 are optimized to deliver not only a competitive cost structure and higher profitability, but also provide the flexibility to serve different missions.

The key to sustainability for an airline is less about adapting its network to its capacity, and more about capacity to its network. Not every time slot justifies a larger aircraft.

Given the size and maturity of the North American market, demand does not, and will not, warrant a structural shift upwards toward large narrow-body aircraft across the board: one size simply does not fit all, and a streamlined fleet does not necessarily signify an optimized one.

At this point, the small narrowbodies are not just more fuel efficient than current alternatives, but also suggest gains in operational cost advantages as they can reach between 10-35% less pilot pay costs (comparing 120-seaters to 160-seaters), nicely tapping the existing capacity gap between large regional jets (76-seats) and mid-size narrowbodies (160-seats).

PILOT SHORTAGE GRADUALLY ADDRESSED

For the U.S. alone, which represents 30% of the worldwide pilot pool, the shortage is a result of three major forces:

  • Huge wave of pilots flying for major airlines reaching the retirement age (65 years);
  • Fewer students are enrolling in flight schools. According to the US FAA, the number of pilot certificates issued for students has fallen by an average of 2.7% annually over the last five decades in the USA;
  • The lengthy – and expensive – process of becoming a pilot. Even if a career as a pilot become financially accessible overnight, the effects would be only felt in 3 to 5 years.

In order to address these topics, airlines are developing alternatives to mitigate the pilot shortage issue. Some are working to attract new pilots at earlier ages, others are building their own pilot schools and some are providing loan alternatives for new students.

REGIONAL AVIATION AS THE CORE OF U.S. CONNECTIVITY

By deploying small aircraft, regional carriers fulfil two roles: offering high frequency flights with connectivity for business travelers, and to serve thin regional routes that cannot be sustained by larger aircraft.

Regional carriers are the only source of air service for more than half of all U.S. airports and are responsible for carrying more than 40% of all U.S. passengers. Such figures reinforce the strong relevance of the segment to United States’ connectivity.

COMBINATION OF FACTORS AROUND SCOPE RELAXATION

The combination of the lack of alternatives for the 50-seat segment, the drop in the level of profitability of the local airline industry and the arrival of new and more efficient aircraft in the 70 seat segment by 2021 (with the E175-E2) are factors that demand greater attention from stakeholders regarding the necessity of scope clause relaxation.

As the profits became more pressured by costs, a state-of-the-art and even more efficient aircraft will play a very important role to keep the U.S. market strongly profitable.

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