Aviation Demand: Come Fly With Me, and Everyone Else

may be nervous. I was coming in from Guatemala into Newark in New Jersey, and it was in a rainstorm, lightning storm, and it was just bouncing all around, and I broke into a cold sweat. Just once, just once? Really? Yeah, how about you? Well, apparently once is all it takes. So I had some really bad turbulence once, which was one of those where the flight attendants took their seats and people's bums were coming out of their seats and

everybody was sitting there praying. The woman next to me kept tears in her eyes, asking to see her children again, and um. It ended up causing some pretty serious flight anxiety for me, and I ended up going to a class. I tried to book a hypnotherapist, but unfortunately I was unable to get in with the hypnotherapist. Because I was flying so often for work, I was unable to get our to get our schedules to match up, which actually I think it speaks a lot of volume over the

demand growth. Here we're still flying despite all this, still flying, so I was miserable on every flight, but I refused, deep down my stubbornness over road the level of anxiety I had about flying because I refused to let it limit my life. It's pretty common for people not to like flying in turbulence, but we do it anyway. And so when we say turbulence ahead for demand growth, it's actually the demand part of you and me and everybody we know wanting to fly. That's not the main issue.

It's all the other stuff that goes into ramping up this industry. So let's jump in today with David Doherty and hear what he has to say about airline demand going in the future. As a reminder, Bienny Have does not provide investment or strategy advice, and you can hear the fulldest claimer at the end of the show. Hi David,

thanks for joining us today. Thanks for having me. You might have noticed in the news that there have been a recent increase in what's being termed as flight shaming, where people are making other people feel guilty for taking flights because of their carbon footprint. And that might lead you to believe that maybe the overall amount of flight that's happening on commercial aircraft is decreasing. But David, you're an oil analyst here at be Enough and you have

a view that's a little bit contrary to that. So let us know what you think is actually going to be happening with airline demand going forward. Yeah, I mean, just by looking at the data, it tells a totally opposite story of that. And the interesting part is it's a great story for us if we're looking at something from our London office or in Europe. But for a lot of people flights new they want to go on holiday,

and are we going to deny them that? We expect them most of this also expect that man for flying is going to continue to grow. Where's this demand coming from? Mostly China and Asia Pacific, and that's from a small base, but that was pretty much where the growth is coming from. What's interesting has developed Europe also growing. As we changed the way Europe is structured, we expanded the EU ten years ago, right, So you can now travel to other

parts of Europe without visas or easier access. And the low cost carrier came around and they fly a lot and they're super cheap, and that opens up to a whole new market people who couldn't afford to fly before they can fly net What time horizon are we talking about? Choose housands onwards you see a spike up. The only place in the world really where you're kind of seeing flat demand or steady ish demand is the US, and

you don't really have the low cost carrier there. You do, and you kind of do, but you don't have your I mean I moved here, what's six seven years ago, and I didn't. We didn't have Ryanair or easy Jet or anything like that in the US when I was there. Oh, I think we do on the west coast Southwest? Okay, Yeah, the biggest domestic airline I guess is that Southwest. Yeah, there's a few. It's a different, got a long time, it's different. So the European stories a lot of connecting

the new East to what was western Europe. Right, So you've got this expanded wealth in Europe which didn't exist before. The US hasn't expanded its wealth to the same extent because you don't have brand new markets coming into one large market, right, So you're kind of moving the goalpost a little bit. In terms of fuel consumption as well, the system in the US gets quite efficient, so you've got fairly flat oil consumption jet oil consumption, whereas in

Europe Jeffield demand is growing and growing. It's slowing down now, but it's still growing a pack. It's going through the roof. You've got lots of new low cost carriers coming in. Traditional carriers traveling longer distances. You know, you can connect now in China if you're going to Singapore or to Australia. Previously that would never happen. So yeah, the whole system is changing and the demand profile as a result is changing. So flight schaming, whether or not exists, might not actually

be decreasing demand as much as we might think. It's a bit like when I want to eat some candy and I don't want my kids to see I'm going to go around the corner. Are kind of stand in the closet so they don't see me getting the candy. But the reality is everybody wants it. You're saying, this is growing in Asia. Is there not a lot of infrastructure that needs to be added in order to make that take place? And what does that look like for

that market? I mean in terms of fuel supply or airports or anything else that you might need and have a massively growing industry. Yeah, there's a lot of pipes that need to be put together for this to work. Essentially, So the biggest growth centers in terms of countries that are expected to sort of lead the market in the future of China, the US, interesting, it and India. Now, India and China are really interesting when you think about it,

um they're underserved massively. So in the UK and the US we travel on average about two times per year each right. In Germany, which has a really good rail network, it's about once per year. But if you look at India and China, you're looking at zero point to zero point four trips per year per person, right, So it's tiny and it's massively undersaturated. What they don't have is the network we have in Europe and in the US of airports and connection points and ways to get off

the ground. Right, you need that runway. So for example, in India, it's got a ton of runways that are just laying idle. So the government of they have a regional connectivity scheme in order to get people flying in mobile so they're bringing back runways that were previously essentially derelict. Right They're also trying to build new runways, so the capacity they have at some of their biggest airports is expanding, and they're building new airports. So they want to double

the amount of airports in India. It's pretty ambitious. India hasn't got a great record of building these massive projects out on time. But nonetheless, even if that's five ten years delayed, doubling the airport numbers is pretty chunky. And right now it's somewhere around one. I think it's like in and around one in India, yeah, and in and around two hundred in China, and they want to increase there's to four five. So again doubling over fifteen year

time period. It now in China, say they want to do it, they do it. So it's a slightly different way they're gonna they're gonna build out that capacity. And actually in China already we're seeing brand new, big, mega runways and big mega airports being built, so we're building out all these airports. Talked to us about airplanes. Once you build all the airports, you actually need airplanes to fill them, So who's winning there. Yeah, it's an interesting

time for the airline sector. What we're seeing is a shift in the business model of airplane manufacturers. So we used to have really big airplanes and you put everybody on it, like the A three a D from Airbus right for big engines, a lot of people, which is actually quite efficient on a pair passenger mile basis, but

expensive and it's hard to fill them. The key for the airline industry is getting as many people into every aircraft so as possible, and the range is pretty chunky, right, So on average about two of all seats globally are filled, but that varies. So you've got some traditional airlines like Air China or BA or American airlines who are in

and around two. Others on the low end, like Emirates are in around seventy seven seventy eight percent, and then you've got like Europeans Rhiner, so they're really filling these and essentially what you're doing is meeting that demand with the same airplane. So it's much much more efficient. And airplanes are much more efficient than they were twenty years ago,

but they have about a twenty five year lifespan. But every new generation airplane is about more efficient in the previous right, So if we're building this out and you're filling them up, you can meet a lot of this new demand. And airplanes are happy, you know, airlines are happy. The environment's a little bit happier. I guess we're all

still traveling. But with that is more demand for oil. Right, So despite a more efficient airplane, I saw you put in forecasting in the note that forecasted roughly between forty increase in oil demand for aviation fuels at right. Yeah, that's correct. Yeah, it's a hard, hard industry to decarbonize. You know, shipping is hard to de carbonized. Trucks are

hard to dec urbanized. But this is next level. Not only is it hard to you know, switch to a bio fuel, but the aviation industry is incredibly safety conscious. But it's difficult to get a different grade fuel into the airplane and ensure that it's safe to take off.

So we are seeing some small things like biojet, which at the moment is very expensive and technologies from the likes of Airbus where they want to hybridize existing jet jet engines and essentially maybe run auxiliary power off an electric motor or aid the systems in some way with electric motors or batteries, so that makes it more efficient,

but ultimately it's a long way away. So we're looking at forty Airbus have targeted their hybrid planes to take off, so batteries, pure, pure batteries are you know, even further away than that. So yeah, it does mean that there's more oil in the world because there is no alternative, and oil and gas companies are responded by investing right.

They want to produce petrochemicals and jet fuel. They are the two things that are pretty safe to grow over the next twenty years, and it saves them from worrying about a stranded acid. If you want to produce a bunch of gasoline, now you've got to worry if evs are going to take your market away. You're less worried if there's going to be an airplane and the sky

with a battery. Slightly different angle, but tell me a little bit more about the bio fuels part, because you can have some mix in there, and it is it is efficient, What are the economics of it? It's um, it's expensive, is the answer. And biofuels are not one thing. You've got totally different types of biofuels and different generations, and they are now being sort of painned as the

answer to everything. It's hard to do carbonized trucks and ships, like I said, but bio fuels are earmarked for that. They're also earmarked for fift of fuels that are on the roads in the US right that competes to There's only so much you can really generate. If you have like a natural source to make bio fuels, like say Brazil, it makes sense absolutely to turn that into of your

road fuel. Otherwise you're competing with every but use for all of this new biofuel which we've yet which you know, we haven't seen, and that's why the prices are high. The supply is not there, and it's also not it's not as well proven, I guess as jet jet fuel um, and there's less of it available, but airlines are turning to it. It's almost a I don't want to say a marketing campaign in certain ways, but it definitely does well for green credentials of airlines if they're running off

of biojet. So we saw it, for instance at Davos, or we've seen some of the corporate flights being fueled by biojet. That's great, but they've all flown in on private jets. Right, it's not quite the solution that you're kind of thinking. So we've all been at the airport or maybe an advance gotten the email saying that our flight has been canceled, and in some circumstances that flight

gets canceled because the flight isn't full. One would then assume that, at least to some degree, that airlines and CEO two emissions might be in some way a line because they want to be as efficient as possible because that's where their margins come from. And this is a pretty petitive space to make money. And is it not or is it a robust space? Margins are thin. We see airlines go bus quite regularly. I mean we're in Europe.

There's five six examples in the last decade decade and a half, right, So yeah, absolutely, it's in the interest of the airline not to have big exposure to oil prices essentially, and somewhere between of their margin is down to the oil price or the jet fuel price in the case of airlines, right, so they want to shift away from that. The answer so far has been more efficient airplanes or lighter airplanes, or ones that can operate

in a much more efficient way. So not flying through two other cities or through one other city instead flying directly. You use less fuel because you've only got to take off ones and you've only got a land once, and it's much more efficient. A jet is much more efficient and cruising altitude then when it's coming down and circling an airport waiting for a landing spot, or when it's delayed um and trying to get off the ground right

taking off with all that fuel on board. So yeah, there's a lot of ways they could save fuel, operate efficiently and have the most efficient engine and fill the airplane the highest load factor is the best way to do it. Does this have a net benefit for CEO two emissions? And then what's the flip side of that? If yeah, I mean if you look at the distance

versus fuel efficiency profile of some flights, it's horrendous. So if you fly Washington, d C. To New York, roughly ten of the fuel is burned before you even take off the ground. So just moving around the A C on your you know, getting your safety briefing, the lights have to run off of something. You're in a queue, your six in line to take off. That's crazy. And between that taking off and the landing fuel profile, a flight that short can have of its fuel just from

coming down, not the cruising part of the flight. So when you make these things much more efficient, particularly things like airplane operations at an airport, you can you can cut that number down pretty quickly, and things like digital sensors, digitalization can really help this. So we've seen a few early indicators that there's low hanging fruit to be had. Right, you can you can really make the whole system much more efficient and save cash. Right, you're saving cash, you're

also saving CEO two emissions. It seems that all roads lead to the airlines themselves in terms of the attention that maybe you know we're talking about now and the end consumer. But really the innovation has got to be somewhere else, Right, they don't manufacture the airplanes, and they don't make the fuels. Where is most of the innovation coming from? Aside from the biofuels and electric planes that you've already addressed. Where is the other innovation. Yeah, it

can come from all different angles. Air traffic controllers, for example, they can do a much better job if you delay a flight and tell them in advance. They can be delayed and fly slower at a height when it's much more efficient instead of circling around Heathrow Airport. We've all been there. You can also have airports that know better

how to direct their traffic. So we saw study in China say, if you can use AI to hit your talk because you take off time, so when you hit back from the airport and go towards the runway, you can save on your fuel bill. I mean fuel bill translates into fuel consumption translates into carbon. The airline's happy, carbon emissions are happy. The person is not delayed, right, you're not sitting on that airplane again. So there's a lot of things. It's going to come from all different angles,

and policy has to play a role. It's a little bit more dull, but they're trying to do what the shipping industry has done in terms of the I m O. It's just not quite having the same execution I guess is a fair way to say it without being too critical. It's a really weak policy we're seeing in course you're coming out who governs it, and it's the United Nations essentially the I c A. Oh, it's a it's a body of the U n Can you explain what Coursia

is to us? Yeah, So essentially, the goal of course here is that by growth and emissions to will be net zero pretty much. And to do that there's a few different mechanisms. So you can either offset your carbon emission. If you offset your carbon emission, you got to buy a credit. Essentially they haven't yet defined what that credit is. You can use a Corsio eligible fuel, which is like a biofuel or and this is the big or a jet fuel at his temper sound cleaner than a benchmark

jet fuel that they've currently recommended. So if you're a clean oil refinery and you get your oil in a less carbon intensive way, let's say Saudi Arabian oil which is not super carbon intensive, that can be registered as of course the eligible fuel and you can use it. So there's a lot of potential there for oil jet fuel to be used, and some biofuels and then this sort of carbon officer that we don't know the price of yet, so there's a lot of moving parts. It's

really limited though, because it's only international flights. It's optional pretty much before the end of this decade, and some countries have just said no, we're not taking part, crucially India, which again third biggest market in terms of growth that's expected. Russia have said no, Philippines have said no. You're getting quickly into pretty chunky terms. Less than half of all

the fuel consumed today would be covered under CORSEA. Is this something where countries will provide the stick to you know, to this to this market, or is something where companies will pick up the slack and decide to take this on themselves. I know we've heard of Jet Blue having a goal for net zero. By it's both sides, I think, right for airlines they don't want to pay the bill um for countries they have to be seen to moving

towards this Paris agreement. So we've seen UM Europe for example, float the idea of including the airline industry in the EU E t S system, so that would be quite interesting to see how it works. But also watching that or the Chinese, so they have earmarked aviation to fall under the emissions trading scheme out there as well. So these will essentially have a much bigger impact on the emissions profile, particularly EU E t S because they say you need to lower emissions, not net zero and keep

a flat you need to every year lower it. And then in the U S they're looking at applying levies or equivalent programs. It's sort of TBD to regulate it there. Now, if China, Europe and the U S acted even on their own, to estic flights, you're talking much much bigger numbers and it becomes a thing as opposed to international flights if you want to take part in our scheme. So what do you see is the one thing having

the biggest impact in the next decade. There's a few secret weapons out there that could really take away from jet field demand or travel demand in the next ten years.

High speed rail, I think is the big one. So China built out this gigantic project infrastructure project over the last ten years and they're continuing to do so um and that could have a big impact, particularly on domestic flights, because you can you can change the taxes and that you can encourage people to travel there, and we've seen

that to a certain extent just recently in Germany. But we saw a study from the I a while ago saying that between nine and two thousand the Eurostar took about fifty of the passengermand out of that flight path. So if that happens, you're talking about real numbers. But TBD, if that actually makes an impact, I think it will. I think that's the most important thing in the short term. That plus policy, because technology is just a little bit

too far away right now. It's too bad. I'm just looking forward to the hyperloop and the suborbital rockets text elon right. Cool. So this was the first in a series right on aviation from benf what's next in this line of research? Yeah, it is the first in a series for us, and it's an exciting new new area for us to research. The next few things that we're going to take a look at our biojet fuel specifically because it's kind of the solution for everything at the moment.

We want to question is it actually the solution and what cost is It's just you know, what kind of solution, what cost? And then we're going to look at the EU e t S scheme for aviation, what does it mean? And then that lets us see is that mechanism one that might work elsewhere? And that would be quite interesting, I think, because again we're seeing the Chinese looking at including aviation and their carbon market and if they do that,

you're talking big numbers. Again. China can do things overnight that we can't quite do in Europe the same speed. David, thank you for joining us. Yeah, thanks for having me. Guys. Bloomberg an e F is a service provided by Bloomberg Finance LP and its affiliates. This recording does not constitute, nor it should it be construed as investment advice, investment recommendations, or a recommendation as to an investment or other strategy.

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