Airline Industry Trends

Global airline industry

2016 was a successful year for the global aviation industry, with passenger turnover increasing by 5.9% y-o-y, according to IATA. Scheduled passenger traffic grew by 5.7% to 3.8 billion passengers. Worldwide, the passenger load factor was pre-estimated at 80.2%, down 0.2 percentage points (p.p.) y-o-y.

In 2016, the Middle East delivered the highest growth rates with the passenger turnover up 10.8% y-o-y. Asia Pacific ranked second in terms of growth, with passenger turnover growing by 8.9%.

Passenger turnover in Europe grew by 3.8%. The European market was mainly driven by growing international traffic. This trend was the result of a 3.8% increase in capacity, a reduction in yields due to the expansion of the low-cost segment, and falling fuel prices.

The North American market saw a 3.2% increase in passenger turnover, driven by the steady economic growth in the USA and an upward trend in domestic flights.

IATA reported a fall of 2.4% y-o-y in industry-wide revenue to USD 701 billion. Traditionally, passenger flights account for the bulk of the industry’s revenue, their share standing at 71.9%. The decline in revenue was due to falling fuel prices, which enabled carriers to reduce yields without affecting margins.

IATA pre-estimated the 2016 industry’s net income at USD 35.6 billion, a ten-year high.

^{Note. Immaterial deviations in numbers in the charts and tables subtotals of the Annual Report are due to rounding.}

Russian airline industry¹

In 2016, the total size of the Russian market, including foreign carriers, shrank by 4.1% y-o-y to 102.8 million passengers (PAX). In particular, Russian airlines carried a total of 88.6 million passengers, down 3.8% y-o-y. Russian air carriers’ passenger turnover was down by 5.0% to 215.6 billion passenger-kilometres (RPK). At the same time, the capacity reduced by 6.6% to 265.8 billion available seat-kilometres (ASK), driving an increase of 1.4 p.p. in the passenger load factor for Russian airlines to 81.1%.

In the reporting period, the market continued to be affected by reduced consumer purchasing power due to the weakening national currency, restrictions on flights to Turkey, Egypt, and Ukraine introduced in late 2015, and the resulting weaker sales in the outbound travel market. These factors were behind the decline in the leisure segment serviced primarily by charter airlines. According to Transport Clearing House (TCH), in 2016, charter passenger traffic fell by 27.0% y-o-y, including a 39.8% reduction in international charter flights. As a result, the total passenger traffic on international flights (including foreign carriers) decreased by 15.1% y-o-y to 46.4 million passengers in 2016.

The domestic segment maintained its strong operating performance: the total number of passengers increased by 7.3% y-o-y to 56.4 million passengers due to the development of domestic tourism driven, among other factors, by shifts in outbound tourism flows. The average passenger load factor for domestic flights was 79.5%, up 2.9 p.p. y-o-y.

^{1 In this section of the Annual report Russian market is discussed in line with statistics disclosed by market regulators (only for Russian airlines), analytical adjustments based on TCH data (for foreign carriers) and company’s estimates (for international transit). Operating results of the Russian market if not stated otherwise or implied by the context are generated by all flights originating or terminating in Russia and serviced by Russian and Foreign carriers. Given that Russian carriers present statistics to the regulator with international transit passengers carried on respective flights accounted for in their operating results, market numbers for “Russian carriers excluding foreign carriers” include also international transit passengers (non-Russian O&D). For the same reason non- Russian O&D is included in the “Russian market including foreign carriers”. For analytical purposes international transit is presented separately in respective part of the section.}

Throughout 2016, the passenger traffic in the Russian market was shrinking; however, in Q4, this decline was halted and passenger traffic grew by 10.6% y-o-y. A change in the trend was due to a low comparison base effect, the reduced impact of negative factors affecting the airline industry (including stabilised exchange rates) and adjusted industry yields, all of which (including the foreign exchange rate effect) led to lower rouble-denominated prices for passengers.

Aeroflot Group acts as a key contributor to the growth in the Russian air transportation market ensuring transport accessibility and mobility of the population. Aeroflot Group’s gain in passenger traffic excluded, the market demonstrated a 12.5% decline y-o-y.

^{1 Y-o-y change.}

The Russian airline industry is highly consolidated with five largest players accounting for 70.4% of the total passenger traffic. Aeroflot Group’s leadership in the market remains undisputed. In 2016, Aeroflot Group had 42.3% of the total Russian market by passenger traffic (including foreign carriers) as compared to 36.7% in 2015. Aeroflot Group’s market share grew throughout the reporting period, with the biggest gains posted in Q1 and Q2.

Aeroflot Group’s market share growth was ensured by its effective business model and strategy, which helped the Group build resilience to external economic and market factors. The Group’s share growth is also associated with the redistribution of Transaero’s market share among key players (Transaero ceased its operations in October 2015) and the shrinking presence of foreign carriers in the Russian market. Enhanced international transit operations, primarily between Europe and Asia, also contributed to the increased market share of Aeroflot Group among airlines that service the Russian market. Excluding international transit traffic, Aeroflot Group’s “net” market share was 40.0% in 2016. The “net” market figures provide for a more accurate representation of the Group’s Russian market share, since passengers flying between Europe and Asia and making connections in Moscow by definition are not originating or terminating their trips in Russian cities.

Aeroflot Group’s closest competitors are S7 Group (12.8%), UTair Group (6.8%), and Ural Airlines (6.3%). Foreign carriers’ share in the Russian was 13.9%.

Aeroflot Group’s market share evolution by passenger traffic in the “net” market¹

^{1 “Net” market means the passenger traffic including foreign carriers but excluding connecting passengers on international flights, which are not relevant for the Russian O&Ds.}

Air cargo market

According to IATA, in 2016, the global air cargo market volume was estimated at 53.9 million tonnes (up 3.2% y-o-y). Global cargo turnover increased by 3.4%. The industry’s cargo revenue fell by 9.4% to USD 47.8 billion. The decrease in aviation fuel prices enabled a reduction in yields without affecting margins.

In 2016, the Russian air cargo market (including foreign carriers) fell by 7.4% y-o-y to 1.0 million tonnes. International cargo traffic reduced by 11.1% to 779.4 thousand tonnes, which is about 74.2% of the total cargo traffic in the Russian market. Domestic cargo traffic was up 5.3% to 271.6 thousand tonnes.

As at year-end, Volga-Dnepr Group remained the undisputed market leader by cargo traffic in Russia (50.8%). Aeroflot Group came second with 19.4%. Top 5 players account for 78.7% of the total cargo traffic.