Pierre J. Jeanniot
APG World Connect Conference – Concluding Remarks
Washington D.C., October 24–26, 2013 >>
Ladies and Gentlemen:
Once again, it appears that Jean-Louis has asked me to do the near impossible!
We have had two days of spirited – at times exciting – but always informative and most interesting debates and presentations.
Clearly, it would not do justice to the contributions to this conference to boil it down to a few words in ten minutes!
I will not attempt to do so (although a few highlights should be mentioned.)
So rather than a more elaborate summary, I will confine my remarks to a few observations.
The airline Distribution System needs to evolve … and it is evolving.
This conference has illustrated rather well what changes are occurring – or I should say, what changes are beginning to occur, since we are very much in a transition mode.
What will be the ultimate shape of this Distribution System?
How efficient – and useful – will it be?
This has some way to go to be clearly visible. It has been suggested that it may take four to six years!
It should be obvious that all the participants in the airline industry – be it airlines, G.D.S’s, travel agents, airports, perhaps as well as air navigation providers (although they were not present at this Conference) – all participants have a stake in these debates.
All those participants are interdependent, and they are to some extent linked through the Distribution System.
As the Distribution System evolves so is their relationship likely to evolve.
Common sense suggests that everyone should gain from better cooperation. Clearly, it should be a win-win for all participants.
Unfortunately for the legacy airlines, their lack of profitability has been most frustrating.
And the tendency has been, at times, for airlines to look beyond their own operations for reasons to explain their inadequate profit track record.
IATA has recently published another study on the “Profitability of the Air Transport Value Chain”.
This is the latest – and the third such study – but the main observations have not changed significantly from one study to another.
The study continues to indicate that airlines have the lowest returns of all the participants in their value chain. These include the manufacturers, the G.D.S’s , the airports, and the travel agents among others.
The study concluded that there were problems in the value chain – not too specific – but additional causes including inefficiently designed regulations, poor industry infrastructure, and commoditization of the airline product were identified.
Each sector of the industry managed to earn a higher return on capital
during every past business cycle, than the airlines.
Over the past forty years or so, the price of air transportation has dropped 60 percent in real dollar terms.
Over that period, load factors have increased from a world average of 55 percent, to 80 percent, aircraft utilization has gone from 8 hours a day to 10.5 hours a day, and fuel consumption per tonne/kilometer is now less than half.
But all the efficiency gains generated have been passed on to the consumer in terms of lower prices.
The airlines have shown tremendous generosity towards their customers – but investors have certainly not been privileged.
Investors in airlines have received a return on capital which, on average, has been USD 17 billion less every year than they would have earned by investing in another industry of similar risks.
It is somewhat ironic that the highest return on investment of any participant in the air transport chain is in the Distribution System.
More specifically, the Computer Reservation Systems (C.R.S.’s ) provided by the Global Distribution Systems (G.D.S.’s ) on average earn a very satisfactory 20 percent Return on Investment (R.O.I.).
And one should remember that the airlines created the C.R.S.s and subsequently decided to sell those very valuable functions!
Some 15 to 20 years ago – I was the Director General of IATA at the time – the cost of sale and distribution of the airline product had reached a level that exceeded 20 percent of total costs.
This included promotion, advertising, commissions to travel agents, loyalty programs, etc.
The airlines concluded that these costs were getting out of hand and needed to be addressed.
E-ticketing was introduced as a cost reduction measure.
Travel agent commission programs, with some of the “Super Commissions”, were an easy target.
In parallel, the growth of the Internet was having an impact, along with the rise of the “low-cost” carriers.
The success of the low-cost carriers in direct selling to the consumers using the internet was suggesting that large elements of the selling and distribution costs could be eliminated – or at least substantially reduced.
The legacy carriers were dragged into the ‘”low-cost game” rather unprepared, and unable to lower their costs sufficiently.
Of course, the perishable nature of aircraft seats and the low marginal cost of flying an additional passenger is certainly one of the reasons why prices often get below costs.
But selling at “low-cost fares” – and producing at legacy costs – was not likely to result in a profitable industry, even at peak load factors!
This was clearly not the road to achieving satisfactory profitability.
And the legacy airlines felt somewhat frustrated – and unfairly disadvantaged.
They were the ones “starving at the end of the food chain”!
Turning the airline product into a commodity is certainly the result of legacy airlines’ – perhaps unwilling – strategy to compete with the low-cost airlines.
Unfortunately, in my view, a strategy almost exclusively focused on price!
The airline industry needs to get back to better product segmentation, with options – all of which resulting from a better understanding of consumer needs and how to meet those various customers’ expectations.
The application of “Big Data” marketing shows some promise in individually targeting customers.
An improved Distribution System which better answers the customers’ needs and expectations – where all the participants have a proper role and a proper place – is what needs to evolve.
The result must lead to a better yield – and sustained profitability for everyone!