How differently would you structure your 5-10 year business development plan if you could predict the future? If you could estimate how much oil prices would drop and how future passengers would interact with the aviation industry?
Understanding the global climate (politically, socially and economically) and using basic economics to predict future aviation trends could enable this, says Dr. Adam Pilarski, Avitas’ senior vice president of Avitas, who spoke at the Aviation Suppliers Association conference in Scottsdale, Arizona on June 8.
“If you know the world economy, you will know world passenger traffic,” asserts Pilarski.
Utilizing predictive behavior and economics can help MRO companies grow their businesses based on anticipated events.
To exemplify how this can be done, Pilarski examined historical examples of predictable changes in the last 40 years.
For instance, in 1985, the U.S. boasted 372 million passengers, Japan had 51 million passengers and China only logged 7 million. By 2013, China grew to 353 million passengers (while the U.S. grew to 743 million and Japan to 106 million).
Pilarski outlined how some forecasters in the 1980s predicted not only China’s growth but also the rise in Asian aviation in general by examining GDP growth of the region coupled with cultural and geographical factors.
Asia had two geographic features that led to a boost in the aviation industry. First, there are many islands in the region that drive short-haul travel. Second, the sheer size of the region factored with the cultural ethnic ties (of families having relatives in different and distant areas) rendered train and other transportation vehicles difficult. All this led to a boom in the Asian aviation industry and was based off of information readily available in the 1980s. Companies that further examined these realities better prepared and positioned themselves to capitalize on this economic Asian boom.
In the 1980s, many predicted that Japan would be a powerhouse in the industry (a cultural anecdote that Pilarski shares is in Back to the Future II, a 1989 film, one of the characters has a Japanese boss). Although Japan’s technological and business prowess at the time seemed to be leading to an economic powerhouse, by examining the demographic changes that occurred in the 1960s and 1970s, Pilarski suggests that Japan’s role in aviation would be mitigated due to a lack of workforce.
Unpredictable acts, such as terrorism, can have an enormous impact on the aviation industry. When dealing with the “future-predicting” powers of economic evaluations, obviously one cannot take into account an event such as 9/11. However, what economist can do is predict the reactive implications of these major events.
Pilarski examined how three unpredictable events, Chernobyl, the invasion of Kuwait, and 9/11 (in 1986, 1991, 2001) caused similar correlations to the North Atlantic monthly RPM traffic, which saw severe declines and recoveries. While the next disruption is unknown, we can gather data from similar tragedies on how the industry will act.
So how does the aviation industry today plan for the future based on current political, economic, cultural and geographic realities? Pilarski suggests going back to economic logic and relying on three basic principles: 1) Use common sense, 2) Use basic economics, and 3) Don’t think yourself to death.
Apply this to oil prices. Pilarski says that if the price of oil drops, so will the cost of airline ticket prices. He claims that although the traditional thinking is that lower fuel costs equal higher profits, the reality is that fares will also drop and other costs will go up (such as airline worker’s salaries). He does not see $100/barrel oil for a long time unless there is an unpredictable event (but the likelihood of a catastrophic event is high due to military tension with Russia, deflation in Europe and regional adjustments).