11 March 2013

The Airline Industry: Challenges, Economics and Innovation

Energy is at the center of human life and the harnessing of electricity is probably of the same magnitude as the harnessing of fire: there would be no modern life without electricity.
Since the 19th century’s industrial revolution, fossil fuels together with innovation have been the main drivers of development. Much has been said about climate change, and other side effects on health or how much energy prices can weight on the purchasing power of citizens and hamper economic development.

The airline industry is a point in case where kerosene represents 30+% of all costs, making it hardly profitable. A lot of efforts are made to move as much as possible towards electricity (for example for taxing) by engine suppliers (Safran, GE, Rolls Royce, Mitsubishi Heavy Industries to name the largest players).

1. The airline industry: a few metrics

Air Cargo transported over USD5.3 trillion worth of goods in 2010 or 35% of world trade in value. The air freight industry has grown 3 times quicker than the international trade and 4 times the world GDP for the past 30 years.

Passenger’s traffic has doubled during the past 15 years and will again double in the next 15 years to transport 9 billion customers.

The world airline industry generated USD 637 billion revenues in 2012 and is forecasted to grow 5% a year to 2050.

Boeing and Airbus are projecting the delivery of 28,000-34,000 new airplanes by 2031.

Engines represent c. 20% of the cost of an airplane.

Fuel consumption amounts to 30+% of the operating costs for a total consideration of USD209 billion in 2012.

676 million tons of CO2 emitted in 2011, equivalent to 1.5 billion barrels of oil.

2. Airline industry’s challenges

Environmental concerns project a negative image to the public and induce new and costly regulation (EU).

The return on invested capital is awful compared to the weighted average cost of capital (3.5% investor value loss in 2011): the industry as a whole is a serial destroyer of shareholder’s value.

Fuel cost is persistently high (kerosene x 4 over 10 years).

The industry is not profitable (cumulated P&L between 2003 and 2011 is zero) with net post-tax profit margins forecasted in the very low single digit in 2012 and 2013.

The world economy remains weak and may impair international trade, a key driver of airlines’ growth.

The industry is moving as much as possible towards the use of electricity in airplanes.

3. Innovation
Per minute, most of the fuel is consumed during taxiing (1%) and takeoff to cruise altitude (14%) for a 747 Boeing 8 hours flight time. The ratio is obviously worse for short hauls (majority of flights).

As for any industry, electricity has eventually always replaced fossil fuel for transportation, technology and economics permitting. Electricity is much cheaper than kerosene, the magnitude varying depending on countries. A rough calculation results in a USD 35 billon economy a year to airlines if it were to use electricity instead of kerosene as an energy source, making the industry from one of the economically worst possible to a profitable one on a consistent basis.

For example, SAFRAN, the French engineering company, recently designed an electric system to avoid using kerosene during taxiing.

Research in dramatically improving energy density of batteries is also advancing with Lithium-Air batteries theoretically being able to reach an energy density close to kerosene (we are 5-10 years away). Further down research is also focusing on totally new architecture for quantum batteries.

I came across a video from a TEDx conference held in Geneva in November 2011 about 100% electric turbojets, called Turboarcjet. I found this presentation from a young physicist fascinating even if it is a long way down the road, but I would love to fly with an all electric airplane.



TEDx conference: Empowering the Limitless Mind –“Thinking Outside the Box: Turboarjects”


IATA: Financial forecast and statistical data


Slideshare: Introduction to the Global Air Cargo Market


Jon Petersen: Air Freight Industry – White Paper


SAFRAN: Electric Green Taxiing System