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WHAT DRIVES THE SIZE OF PREMIUM AIR TRAVEL MARKETS?
WHY PREMIUM AIR TRAVEL IS AN IMPORTANT TRAVEL MARKET SEGMENT
The premium (first and business class) travel segment is an important market, particularly for hotels and network airlines, but also for others in the travel and tourism value chain. For example, international air passengers travelling on premium seats represent 8% of traffic but 26% of passenger revenue 1 . Premium travel by air is closely related to business activities, such as international trade of good and services and Foreign Direct Investment (FDI), because an important way in which people build and maintain business relationship is through face-to-face meetings (Ref. 1). Previous survey showed (Ref. 2) that around 70% of passengers on premium seats are travelling to do business. Consequently, the size and potential of premium travel markets between country pairs will reflect the size and potential for flows of international trade, investment, finance and other business activities. This chapter reports on research that quantified the relative impact of the most important business travel drivers determining the size of premium travel markets between country pairs. In the first part of the chapter, we will identify and then quantify, through an econometric model, the various factors related to the number of premium passengers; the second part focuses on how much does these particular drivers explain differences between country-pairs. In the last part, we will explore how changes in aspects of a country’s attractiveness to business travellers – measured by different pillars of the World Economic Forum’s Travel & Tourism Competitiveness Index (TTCI) - could boost business and premium travel to a country.
WHAT IS DRIVING THE NUMBER OF PASSENGERS SEATING IN PREMIUM CLASS?
Number of international Passengers Travelling on Premium Seats Total Arrivals by Countries Source: IATA PaxIs Thousands
1,800 1,600 1,400 1,200 1,000 800 600 400 200 United Kingdom United States Japan Canada China Hong Kong United Arab Emirates Singapore Australia Italy Germany India France Switzerland South Korea Saudi Arabia Thailand Brazil Spain South Africa Indonesia Malaysia Mexico Egypt New Zealand Argentina Venezuela Kuwait Bahrain Austria Philippines Russian Federation Oman Portugal Turkey Greece Belgium Pakistan Qatar Israel Jordan Colombia Peru Finland Vietnam Sweden Hungary Panama Denmark Cyprus
Number of Premium Passengers
Top 50 countries in 2009
From IATA Origin-Destination database which shows the number of passengers traveling by seat class and associated revenue.
IATA Economic Briefing March 2011 Figure 1 shows the number of passengers travelling on premium seats for the top 50 countries. except United Arab Emirates.000. in terms of GDP. is not the only factor that drives premium passengers.000 Logarithmic scale Number of Premium Passengers Figure 2 Travel cost will rise with distance in both time and money terms. These outliers can be classified as: o o Those (at the top left of the chart) showing a relative small number of premium passengers but large economies at both origin and destination (such as United States .000 Product of GDP at Origin and Destination (bln) Japan . . despite Japan being a bigger economy than Canada in terms of GDP. In particular.UK Hong Kong-China UAE . In 2009.Russia) Those (bottom of the chart) showing relatively high number of premium travellers but small economies (such as United Arab Emirates-Bahrain) This figure shows several examples where economic size. 100.000 100 100 Canada . Those examples show that there are other factors that need to be taken into account when explaining differences in the number of premium passengers.US US-Russia 10.India Saudi Arabia . Figure 2 confirms that there is a positive relationship between the number of premium passengers travelling between a country pair and the size of the economies at either end of the flow.000 1. the relationship between travel and distance is one of them.000 100. Consequently trade and business travel will.000 1.000 10.Kuwait 1. This figure suggests that there are some interesting country-pairs outliers to the estimated relationship with economic size shown. at both origin and destination.000. all other things being equal.Bahrain Lebanon . are largest economies. the number of travellers between Canada and the United States is about twice higher than the number of business passengers between Japan and United States. in terms of premium passengers.UAE Saudi Arabia .000 10. Another example is the market between Hong Kong and China which is about half of the size of the Canada to United States market in terms of business passenger numbers.US Japan-South Korea Australia .000.Egypt UAE . followed by United States and Japan. For example.000. Looking at country-pairs of similar size. the United Kingdom was the country with the greatest number of premium travellers. but represents only 3% of the USCanadian economies.000 1.000 100. There is a wide range of experiences across countries but the chart shows that the top 10 countries. diminish with distance as shown by Figure 3. such as Germany-United Kingdom and Canada-Japan.
as the distance on the first market is shorter. Those factors will also influence the development of business activities such as trade in goods or services and FDI relative to the size of the economy.United States Japan . One interesting indicator from an investor point of view is the regulatory framework of a country. It also captures the extent to which the policy environment is favourable to the development of the T&T industry. However.000 United Kingdom . business travellers and holidaymakers have different perspectives when planning to invest or visit countries. Indeed. One clear outlier to the estimated relationship with distance is the premium travel market between Australia and the United Kingdom which is about 3 times larger than Singapore . Another relevant factor for investors is how easy and fast business deals could be made with a country.Indonesia South Korea .United Kingdom Canada . the TTCI score. among other factors.Saudi Arabia Australia . health and hygiene. related to the historical relationship with the UK.000 6. which suggests that travel to Australia is. Distance on both markets is similar. to assess the quality of the information communication and technologies (ICT) infrastructure.g. therefore we will analyse the relationship only between pillars directly associated with business activities and premium travel.Canada 10. the extent to which online tools are used for business transactions. which is composed by fourteen pillars.China Singapore . tourism infrastructure. some of them that might be less fundamental for international business travellers (e.China Pakistan .000 Singapore .000 12. natural and cultural resources).United States Distance (kms) China .000 8.United Kingdom Singapore . prioritization of the travel and tourism.Hong Kong Canada . This pillar includes some essential factors such as how well property rights are protected and the cost of setting up a business.New Zealand Mexico . Given the increasing importance of the online environment and electronic transaction.000 4.United Kingdom 40 60 80 100 120 140 Thousands Number of Premium Passengers Figure 3 Besides economic size and distance between countries. the TTCI allows a closer analysis of the other factors associated with the size of the premium travel market. . consequently travel cost is similar. it is important from an investor point of view.Japan United States .India UAE . capture a wide range of factors and policies.000 14. This is a catalyst factor for investors and therefore an important aspect to look at when analysing premium travel market.United States Australia .Brazil United Kingdom . This is captured by a specific pillar.000 2.Japan Germany .IATA Economic Briefing March 2011 the number of passengers travelling between Germany and United Kingdom is higher than the route Canada–Japan. which measures among other factors.Australia 16.United States with 80 thousands travelers. 18.000 20 United Kingdom . which is captured through the first pillar.
all other pillars. airfare ticket taxes. this would lead to an increase in a number of business passengers by 6%. . Looking at the fourth largest market. the model suggests that if GDP rises by 10%. All other things being equal. ICT infrastructure and price competitiveness would lead to an increase of 4. economic size explains about 76% of the traffic flow between these two countries. business traffic between Saudi Arabia and United Arab Emirates has been 35% stronger compared to the traffic between Saudi Arabia and Egypt.6 million premium passengers. ICT infrastructure (B09) and the price competitiveness in the T&T industry (B10) have a positive relationship with the number of passengers travelling on premium seats. will be 9% smaller. The model shows that all three do indeed play an important role 2 . Similarly. As shown in the figure 1. The Figures 4 below shows the top 30 biggest market in 2009. But to be useful that insight requires quantification. Distance and size of economies being comparable between these two markets. all other things being equal. representing about 18% of the total traffic flows of the year. According to the model. Any 10% improvement in policy rules and regulations.2% and 13. 2. The number of passengers travelling on premium seats between the US and Canada was the largest market with more than 400 thousands passengers. premium travel to the United Kingdom was the biggest market with more that 1. among other factors. Middle Eastern destinations such as the United Arab Emirates or Saudi Arabia countries have shown a consistently good business environment in terms of regulatory framework. According to the model. is related to some extent (30%) to a favourable regulatory framework.4 out of 7). the difference in the number of premium passengers is associated.4 out of 7) compared to Egypt (with a score of 2. As such. distance between countries has a negative effect on the number of business passengers. the policy rules and regulation (A01).IATA Economic Briefing March 2011 Price competitiveness is the third important element to take into account when planning to visit or invest in a given country as it captures some of the costs of doing business. As expected from the graphical analysis in the first part of this chapter. premium travel to Middle Eastern destinations.5%. i. this market is strongly related to both economic conditions (55%) as well as the good regulatory framework and ICT infrastructure (20%).e. a well developed infrastructure environment and a relative low cost of doing business. 2 All three of the pillars identified explain a large proportion of the variation of the data (68%) and are statistically significant within a 95% percent confidence interval. The implication of these outlying country pair markets is that it is possible for countries to succeed in boosting or failing to realize the potential of premium travel. premium travel market between China and Hong Kong is explained to some extent by both short distances between these two countries (13%) and also by the size of both economies (56%). For sake of completeness. However. ICT infrastructure and price competitiveness. we developed an econometric gravity-type model. Figure 2 shows outlying examples of where these pillars appear to be strongly related to the number of passengers traveling on premium seats. the model suggests premium travel markets. over and above the flows implied by economic size and distance. Economic size at both origin and destination is the most significant factor in explaining differences between country-pairs. For every 10% increase in distance between economies. economic size explains premium traffic between United States-Japan and United States-United Kingdom by more than 80%. According to the model. such as United Arab Emirates and Saudi Arabia Emirates. to the ICT infrastructure which is more developed in Saudi Arabia (with a score of 4. All the pillars selected. It measures factors such as the extent to which goods and services in the country are more or less expensive than at another destination (purchasing power parity). For this purpose. and taxation level in the country. included in the TTCI have been tested and are not statistically significant within a 95% percent confidence interval and therefore not included in this particular model.8% in number of travellers.
the first market is more than twice the size of the second one. the number of premium passengers on this market could rise by 0. the average score for the three pillars is high at 5.United Kingdom United Kingdom . India is among the countries that showed in 2009 a weak position in terms of ICT infrastructure (2.Japan Japan . On the United Kingdom-Singapore market. Economies and distance are comparable between these two country-pairs. however.United States Australia . are related to premium passenger numbers.Hong Kong Germany .0 out of 7) but also in terms of regulatory framework (3. TO WHAT EXTENT CAN PREMIUM TRAVEL COMPETITIVENESS? BE BOOSTED BY IMPROVING T&T Many countries have a great potential to increase the number of business travellers.United Arab United Kingdom .United Kingdom Australia .5 out of 7). assuming all other factors remain unchanged.United Kingdom Canada .Saudi Arabia China .United States United States .China UAE .Canada India .6% if the GDP of India improves by 1%. Premium travel market from United Arab Emirates is one of the biggest market serving India with about 70 thousand travellers a year.France United Kingdom . i.Germany New Zealand . all else being equal. Alternatively.7 out of 7) as both score are below the regional average of 4.United Kingdom United Kingdom .United Arab Saudi Arabia .000 business passengers. Using the model developed. another example shows that economic size could be as important as the business environment of the destination country. at 51.5 out of 7 (compared to a regional average of 4.Singapore France . This number could be improved by 30% if India could manage to raise its infrastructure and the regulatory framework to the regional average. by improving one or several of these drivers.Singapore Indonesia .Japan UAE .New Zealand China .Japan Japan .Australia United States . .United Kingdom United Kingdom . the performance of the first market is associated to the excellent infrastructure.India Thousands Top 30 country-pairs in 2009 Figure 4 Traffic flows between the United Kingdom-Singapore and Thailand-the United Kingdom is another example that shows to what extent pillars. Premium travel between Lebanon and Kuwait (see figure 2) is explained to the same extent by the favourable environment (33%) and economic conditions (35%) Number of International Passengers by Country-Pairs Source: IATA PaxIs Number of Premium Passengers 450 400 350 300 250 200 150 100 50 Hong Kong . In Asia.South Korea South Korea .Indonesia Japan .IATA Economic Briefing March 2011 economic size explains to a greater extent (60%) the travel market between United Kingdom and United Arab Emirates.e. we assess by how much changes to the drivers of the premium travellers could boost the size of the premium travel markets over and above the flows determined by economic size and distance. which suggests these economies are attractive for business travel.India Singapore .Australia United States . factors apart from economic size and distance.5.China China . which explains about 50% the size of premium travel flows between these two countries. According to the model.United States United Kingdom .United Kingdom UAE . However.
which seems to be driven by other factors that are not captured through the model. Premium travel market to some Middle Eastern countries. Explanatory variables include the following T&T pillars A01: Policy rules and regulations. ANNEX SPECIFICATION OF THE MODEL We have used a gravity model to capture the business and structural effect of the change in the number of passengers travelling on premium seats. The analysis identified some outliers.8 and 2. which is one of the major markets for France with more than 25 thousands passengers during 2009. Another example in Europe is the travel market between United States and Russia. United Arab Emirates.g. factors captured by the T&T pillars.9 out of 7 respectively compared to the regional average (3. ij ijt Where Y is the dependant variable – the number of business passengers travelling between country i and country j. Data on number of passenger travelling on premium seats is from IATA PaxIS database. Russia shows a relatively low regulatory framework and ICT infrastructure (3.5 and 3.3). The time range of the model covers the period 2007 to 2009. with about three thousand premium passengers in 2009.9 to 4. the number of business passengers from Italy. For particular country-pairs.5. Similarly. is another group of outliers as those countries are providing favourable environment conditions for business activities. In 2009. bringing the value of this pillar to the sample average (4.707. CONCLUSION This chapter shows that the number of passengers in premium seats are not driven only by economic activities between countries. The model demonstrates that any effort to improve one of the drivers will boost the size of this travel market.4 respectively) compare to the European average (4. The total number of cross section (country-pairs) included is 12. Even if this pillar explains a small proportion of the difference in number of premium passengers (12%). value of the 9th pillar (B09) and value of the 10th pillar (B10) . the value of the 1st pillar (A01). such as traffic flow between United Kingdom and Australia.IATA Economic Briefing March 2011 European economies have low scores for the price competitiveness of the T&T industry.5 out of 7) would increase the number of inbound business by about 60% between the United Arab Emirates and the United Kingdom. The other variables are GDP (in real terms) of origin and destination countries. The formal description of a panel data model is: Yij t f ( X ijt . ) ij t ijt Leading to the following linear specification: Yij t X ijt . e. GDP of country j. explain to some extent (30%) the number of premium passengers. B09: ICT Infrastructure. distance between country i and j. such as policy and regulation. countries such as United Kingdom and France showed a relatively low score of 2. ICT infrastructure and the price of competitiveness of the travel and tourism. but depend also on other factors. The number of premium passengers from United States to Russia has the potential to increase by some 23% if Russia raised its policy rules and regulation and ICT infrastructure to the European average. X is a matrix of regressors – including GDP of country i. such as historical relationship.953.9 out of 7). would increase by 50% if France manages to improve it price competitiveness from 2. through the time period t. The dependant variable of the model is the number of passengers travelling on business seats. B10: Price competitiveness of the T&T industry.8 and 4. distance between country-pairs. assuming all other factors unchanged. The total number of observations is 36.
54 -61. distance between countries has a negative effect on the number of business passengers. Explanatory variables C1 C2 C3 C4 C5 C6 Constant Real GDPi x Real GDPi Dist: Distance A01: Policy rules and regulations B09: ICT Infrastructur B10: Price competitiveness of the T&T industry Coefficients 3. with the correct sign and estimated with standard errors that are robust to serial correlation.the error term between country i and country t is the time period covering 2007. the policy rule and regulation (A01).38 T-statistics 17. .2009  UNWTO (United Nations World Tourism Organisation) Tourism Highlights – 2010 Edition  CATS – Corporate Air travel Survey – IATA – 2009 Edition  IATA 2008 Air Travel Demand: Measuring the responsiveness of air travel demand changes in prices and incomes.92 0. 2008  Gravity Model: an application to trade between regional blocs. Cambodia. Süleyman Tuluğ Ok.49 4.IATA Economic Briefing March 2011 is the overall constant of the model ijt ijt is the fixed cross-section specific effects between country i and j . All drivers identified above are statistically significant and the model explains a large proportion of the variation of the data with an R square of 68%.International Research Journal of Finance and Economics. 9  Gravity Models: theoretical foundations and related estimation issues. IATA economics briefing No. 4th edition Upper Saddle River. ARTNetCapacity Building Workshop for Trade Research Phnom Penh.2008.41 123. NJ:  Prentice Hall.22 1. prepared by Oxford Economics USA  UK Business Air Travel – Flying on business – a study of the UK business air travel market – December 2009  Travel and Tourism Competitiveness Report 2007.H. Product of GDP at both origin and destination is highly significant.79 0.45 0.2003  What determines Intra-EU trade? The gravity model revisited . 2010  Green. W.3 4.26 14.e.60 -0. Immaculada Martinez-Zarzoso. i. ICT infrastructure (B09) and the price competitiveness in the T&T industry (B10) have a positive impact on the number of passengers travelling for business.19 Coefficients are in log assuming cross-section fixed effect (rounded to two decimal places) All the coefficients are statistically significant. 2000 Econometric Analysis.2008 and 2009 years We estimate the model in (natural) logarithm terms using panel data technique including fixed effects representing drivers specific to the individual country: log( Passengers ) ij t C 1 C 2 * log( GDP i * GDP j ) t C 3 * log( Dist ) ijt C 4 * log( A01) ijt C 5 * log( B09) ij C 6 * log( B10) ij ijt [CX F ] The estimation of the model is broadly in line with our expectations. REFERENCE:  The return on investment of US business travel. All the pillars selected.
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