For the past decade, Airline Economics has been looking at the aging populations of Japan, the UK and many EU nations and adjusting fleet forecasts accordingly. Until now, aging populations have continued their annual air travel unabated, save for COVID restrictions. But the trend of aging populations reducing air travel requirements is gathering pace, especially within Japan. This could and should lead to one of two things – either airlines need to reduce capacity (COVID has helped in this regard), or airlines need to downsize aircraft types.
Since the retirement of the 747-400 fleet, there has been a global move to downsize aircraft, and in this Japanese airlines lead the way. They have been a good barometer of how many other markets can and have performed over recent years. Many eyes are now looking to see if airlines serving the Japanese market will move the downsizing trend towards narrowbody aircraft. Will 737s and A320s give way to smaller aircraft in the Embraer family and the A220? Embraer will certainly hope so, and indeed thinks that this will be the case based on a presentation at Airline Economics Growth Frontiers Tokyo on April 18. It is well worth looking closely at trends in this area as the Japanese population decline gathers pace.
As we all look at Japan and Europe when discussing population decline, we are perhaps overlooking the mammoth in the room - the changes that are well underway within China.
China’s working population (16-59 years of age) currently stands at less than 875 million – that is just 60% of the population, and birth rates are falling dramatically as urban middle class women delay having children. In China, women traditionally get married before considering buying a house and then having a child, but trends show that Chinese women do not wish to get married at 18-25 and this is impacting the housing market; masses of residential towers now stand totally empty across China.
Moreover, and more importantly, China’s rapidly inverting population pyramid is for the greater part driven entirely by the late one child policy. The policy only worked to stabilise the population while the 16-59 age bracket outweighed the dependant population above and below it. The only method available to the Chinese to offset the inevitable stress on the population pyramid remains immigration, but immigration, far from being a saviour, has actually given way to an exodus of the middle class and is in fact falling rapidly and shows no sign of abating, especially among mobile middle classes. This is driven by varied political, social and economic reasons.
China’s aging population problems are far more acute than those that Japan and other countries have faced, as the Chinese welfare system is far less advanced, the provincially managed pay as you work pension scheme actually saw contributors overtaken by pension claimants back in 2014, and central government will have increase state pension contributions at some point or risk significant economic decline. The pandemic’s impact on the older generation may have eased this economic issue but the Chinese government has already stated that it expects the working population of 16–59-year-olds to fall by another 35million between 2021 and 2026. As such, we can expect the demographic structure of China’s population to mirror that of Japan in 2021 by 2040. This means it is highly beneficial for all in this sector to look very closely at the Japanese airline fleet and capacity trends of the mid 1990s and then plot the trends between then and now. It is likely that the data will show a need for those with vested interest in Chinese aviation to prepare for great changes to aircraft fleet requirements between now and 2040. Even so, the Chinese requirement for aircraft will have to continue to grow over the next decade – the question is what types, delivering in what timeframes, will be of greatest benefit.
Within this changing dynamic, it can be asked whether India can step-up to be the new global economic manufacturing powerhouse as the Chinese population declines rapidly. It is also debatable whether China may see more social unrest as it decides between military or social welfare spending (it cannot do both at the current rate of population decline). China may see a period of rapid decline unless something drastic changes the status quo. Dealing within the Chinese market has significant uncertainties and distinct and rapidly growing risk profile. Those companies with assets within China should make very sure indeed that the rest of their global portfolio is balanced against the possible loss of this market at some point. Being overweight in China is a growing risk. Cue the Chinese lessors taking over the domestic fleet from foreign lessors – it is already happening.