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Positive Outlook for Premium Air Travel

August 17, 2010 By: George Dooley

The number of passengers traveling on premium and economy seats continued to follow an upward trend in June, the International Air Transport Association (IATA) reports, and the pace of growth does now appear to be slowing down. The number of passengers traveling on premium seats was 16.6 percent higher in June than a year ago. Economy travel expanded by 9.5 percent during the same period. But, IATA cautioned, there is little sign of a widespread revival in leisure travel.

For the first half of 2010, premium travel volumes were up 11.9 percent over the previous year. After removing the distortion from the European airspace closure in April, IATA estimated that the number of passengers traveling on premium seats was expanding at a very strong annualized rate of 17 percent comparing the first half of 2010 against the second half of 2009.

This estimated annualized rate for premium passengers is almost twice higher, in percentage terms, than the annualized growth rate observed for economy seats – a sign that the travel market is continuing to be driven by business passengers, IATA.

IATA cautioned that there are signs that this very strong post-recession rebound in travel may be slowing. Even after adjusting for the European airspace closures the expansion during the first half of 2010 has been slower than the rebound in the second half of 2009.

"Such a slowdown is not unexpected, once pent-up travel decisions and the business inventory cycle have been completed," IATA said in a statement. "Adjusting for the airspace closures shows premium travel volumes slowing from an annualized pace of 11 percent during the second half of 2009, over 20 percent in the first quarter to just under 9 percent in the second quarter. Although slower growth, this is still double the average 4.5 percent growth rate in premium travel seen in the expansion years before the recession. A similar slowdown is visible in economy travel volumes, from 9 percent growth in the first quarter, to 6 percent second quarter growth (adjusted for the airspace closures). Economy travel is now expanding in line with the trend growth rate seen before the recession.

Although air travel has slowed from the pace of the first quarter the outlook remains positive, IATA says. Coincident indicators of business travel, such as world trade, are supporting the growth of premium travel. InterContinental Hotels reported good results in Q2, IATA said. Exports and imports remain strong in most regions but the outlook is also for a slowdown to more normal trend growth of around 6 percent.

IATA cautioned that forward-looking indicators such as business confidence and financial market activity have been slipping in recent months, but they remain at historically high levels. This indicator would also suggest that premium travel growth rates are likely to slow towards 6 percent.

"But there is little sign of a widespread revival in leisure travel," IATA said. "Consumer confidence eased in June, especially in Europe and in the U.S. where fears of renewed economic weakness are high. Unemployment and consumer debt are still major concerns and consumers, in Europe at least, appear to be taking a cautious view on their spending by delaying travel for holidays."

IATA believes that the upcycle in economy travel is being driven more by business rather than consumer conditions. The bulk of economy travelers are still traveling for leisure and to visit friends and family, but changes in this market segment are being driven by business travelers sitting at the back, rather than the front of the plane.



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