Soaring capacity growth could force flight prices down – KPMG report

aircraft genericBy Rob Gill

Flight prices may begin to fall due to the “unprecedented” number of orders for new aircraft by the world’s carriers over the next few years.

Business consultancy KPMG has carried out research as part of its new Transport Tracker quarterly publication, which predicts that expanding airline capacity “may soon outstrip demand” and force prices down.

The record number of orders by both full-service airlines (5,168 aircraft on order) and low-cost carriers (3,582 aircraft on order) are set to add more seats to the global market and exceed Iata’s predicted annual passenger growth rate of 5.4% between 2013 and 2017.

James Stamp, KPMG’s global head of aviation, said: “Assuming that the orders are fulfilled – and this is a major if – the increase in capacity, even allowing for replacement of ageing fleet, would be significant.

“Falling operating costs and competition to fill capacity would result in further downward pressure on ticket prices, which would be good news for airline passengers.”

Stamp added that the impact on flight prices was unlikely to be felt in the next three years and the downward trend was likely to be “gradual” rather than a “step change”. But he was not able to give predictions on the likely scale of any drop in airfares.

“We will start seeing prices coming down in three to five years as the benefits of new aircraft start to reach critical mass in the industry,” he said. “In the meantime, the fundamentals don’t point to an increase in prices.”

He added a “big caveat” to these assumptions was that some aircraft on order may not be delivered due to some airlines being unable to finance their planned purchases.

Low-cost expansion

KPMG also highlights how low-cost carriers were expanding “more aggressively” than their legacy airline competitors, who were mainly buying new aircraft to replace ageing fleets.

“Low-cost carriers have got nearly as many aircraft on order (3,582) as they currently have in service (4,025),” added Stamp. “Growth in this market is going to continue, especially in Asia-Pacific, where we will see low-cost carriers creating more capacity.”

KPMG’s report said that while deliveries of new aircraft to legacy carriers would start to decline from next year, the low-cost sector was expected to continue growing at the same rate until 2021.

Stamp added that the airline industry would remain “highly competitive” with the trend for consolidation continuing, as well as more joint ventures such as the transatlantic tie-up between Virgin Atlantic and Delta, and “equity alliances” with carriers buying minority stakes in other airlines.

“As we turn out of recession in Europe and the US, we don’t think this will translate into higher prices because of the high levels of competition and ability of airlines to reduce their costs,” said Stamp.

KPMG’s research also noted that the shares of low-cost carriers had performed better than legacy airlines from April 2013 onwards.

Sourced by TTG Digital

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