Pierre J. Jeanniot
Global Air Transport Outlook Overview
ICAO/ACI Global Air Transport Outlook Conference
Montreal, 29-30 June 2006 >>
Ladies and gentlemen,
This Conference is about the future. But the future starts today, and it is most useful to remember where we are starting from.
Allow me to take a few minutes for a brief overview of our industry from my perspective.
Although it is hazardous to make any predictions – and particularly so when it concerns the short-term future – I believe that 2006 will turn out to be the transition year towards a more stable, and profitable, aviation industry.
Less than a year ago, at another industry forum, I offered the following summary assessment of the state of our industry:
All components of the air transport industry are adapting to survive, but our evolution into a hardier species is far from complete.
Pricey oil still threatens. The pressure on yields is relentlessly downward
Capacity continues to outpace demand while fleets are in need of renewal.
Market liberalization progresses too slowly. Regulation remains excessive in some areas – and insufficient in others.
Congested terminals and airways are choking growth.
More than a few carriers are in urgent need of consolidation.
Safety is again an issue.
And the airline industry as a whole continues to lose billions of US dollars every year!
Well, for one thing, there is a mood of optimism about our industry that’s been absent since 9/11 and its aftermath.
Last year’s loss, at $6 billion, was less than expected.
And although oil prices are still impacting the bottom line, the industry could lose as little as $3 billion this year – slightly less than last year – and could make as much as $3 billion in 2007.
Last year, the world’s airlines ordered more than 2,000 aircraft in total from Boeing and Airbus, representing a record increase of 15% in world capacity. Aggregate sales for the two companies should fall to less than half of that in 2006. But that would still represent a lot of increased capacity.
With an order backlog of 4,000 aircraft, equivalent to 19% of the existing fleet, it is time for demand to catch up with capacity.
The more efficient aircraft will tempt airlines into offering lower fares, chasing after market share. This is not the way to long-term profitability.
Part of that new technological efficiency has to translate into profit – and returned to investors.
Warren Buffet once quipped that if a capitalist had been present at Kitty Hawk, he would have done future investors a big favour by shooting down that first flight.
The lower fares offered by airlines today may be somewhat of an illusion – especially when you have to pay extra for meals, blankets and pillows, headphones, baggage exceeding reduced allowances, roomier aisle and exit row seats – and the list goes on.
Although improving in total, the financial health of the industry still differs substantially by region and by type of airline. And among the failures, there are some spectacular successes.
The Asia Pacific numbers are staggering.
Over the last five years, China’s airlines flew record numbers of passengers and cargo, and earned over a billion dollars. The country’s booming aviation sector is expected to see air traffic double in the next five years.
Consolidation is active in China, with Cathay Pacific now acquiring Dragonair. As part of this transaction, Air China and Cathay will each be holding a substantial amount of each other’s shares (approx. 20%).
India’s liberalized air transport market is now – with that of China – the brightest prospect in the global aviation arena.
The centre for Asia-Pacific Aviation has forecast a growth of over 25% per year, and projected 70 million domestic passengers by 2010.
Full-service airlines such as Jet Airways and now Kingfisher are raising the bar on quality.
Low-costs like Air Sahara, Air Deccan, Spice Jet, and IndiGo are major contributors to the sector’s explosive growth and prosperity.
Even traditional Air India and Indian Airlines are transforming themselves into potential money-makers.
Consolidation is also likely to occur in India. We have seen a recent attempt by Jet Airways to acquire Air Sahara.
Malaysia, along with India, has become fertile ground for discount airlines, but a shakeout is looming and the industry’s overall prospects have been somewhat dampened by the continuing losses of the national carrier, Malaysian Airlines.
A new star in the skies of Asia is Indonesia, the region’s now most dynamic domestic aviation market.
Traffic growth has been spectacular – from six million domestic passengers in 1998, to an expected 30 million this year.
With large cities, separated by distance and water, this nation is custom-designed for air travel.
The picture we see emerging in the Middle East is one of three full-service, long-haul carriers – Emirates, Etihad and Qatar Airways.
Their competing hubs of Dubai, Abu Dhabi, and Doha are planning to offer passengers access to a wide array of destinations worldwide,with a fleet of extra-long-haul aircraft now coming on the market.
They are becoming very serious participants in the world market. Dubai’s passenger volume has already reached 76% of Singapore’s Changi hub.
Airlines such as Royal Jordanian, Middle East and Gulf Air will occupy a second tier of restructured, partially privatized and increasingly profitable legacy carriers – regionally focused but linked into the global alliance networks, and offering convenient connections to an array of regional points.
A third group will be the Middle East low-costs, offering discounted, point-to-point services within the region and to destinations on the Indian sub-continent, North Africa and Eastern Europe.
In many ways, the Middle East picture contains many elements of the evolving aviation landscape worldwide.
The European experience is proving that reinvention, restructuring, consolidation and alliances can produce positive results.
The Air France-KLM Group just posted a 2006/06 annual net profit of $1.17 billion.
Lufthansa is back in the black, and expects a positive contribution from the integration of Swiss International by next year.
British Airways has boosted its profits for the first quarter of this year to 168 million… up from 2.0 million last year but has yet to buy into the European consolidated model.
Second-tier carrier Aer Lingus has reinvented itself into a profitable airline. But others like SAS, Alitalia and Olympic remain basket cases.
Ryanair, Europe’s largest budget carrier, still expects profits to grow by 10% this year.
Second-largest Easy Jet anticipates similar profit growth.
Air Berlin, poised last year to become the third largest low-fare airline, is now losing money.
In Eastern Europe, low-costs are still proliferating.
But we can also expect consolidations in the crowded European low-cost market.
Still, despite some rough air ahead, the European sector can expect to enjoy an improved level of stability in the years to come.
I’m sure my American friends would love to hear a similar prediction for the U.S. industry. Unfortunately, there the litany of difficulties continues unabated.
By contrast, in Canada a new equilibrium appears to be in the making.
I’ll have a little more to say on the North American situation in tomorrow’s regional outlook section.
Elsewhere on the American Continent, a number of Latin American airlines are successful money-makers. Lan-Chile and TACA are good examples.
Brazil’s more recent low-cost, GOL, is enjoying spectacular and profitable growth.
Unfortunately Varig, once a great airline, has continued to disintegrate, its restructuring hampered by its ownership situation and the continued involvement of the government.
But all in all, in most regions of the globe the airline industry is shaking itself out into a more diversified model, and is showing signs of heading towards more stability.
Traditional airlines, trimmed into profitability, are still very much alive – whether in India, in the Middle East, in Europe, in Latin America, and even in Canada.
Low-costs are occupying a lot of space, but they aren’t taking over the whole industry.
Many believe that the low-cost model doesn’t work past three hours flying time because of extra costs associated with longer turnaround times, increased need for in-flight services, etc.
Full-fare, full-service is back in vogue. This is certainly so on the longer haul.
A new breed of mega-carriers is emerging to serve integrating international markets.
While some hubs may lose their relative importance, others are becoming the favourites of tomorrow’s travellers.
Whether the rate of growth of this more stable, and kinder, airline world is sustainable will depend, however, on how well the infrastructure can accommodate an airline industry driven by profit – as well as demand.
For several regions, the traffic growth prospects are indeed exciting!
However, India’s bright air transport future could be severely limited by inadequate and sub-standard airports.
Not enough Chinese airports are available for civil aviation, although we know that China plans to open 48 new airports over the next five years.
Governments around the world are increasingly hard-pressed to finance the billion of dollars needed to relieve airport and airways congestion, particularly when taxes and fees – earmarked for infrastructure improvement – end up serving other public needs, deserving as they may be.
Airport privatization is therefore a welcome trend. But given their quasi-monopoly status, airports must exercise strict control on their costs and avoid passing cost increases directly to the airlines – and the travellers.
We all know who the worst offenders are, and that includes one airport named after a Canadian Prime Minister.
A proper balance needs to exist, and while it is essential that profits are adequate for cost-effective and timely infrastructure development, controls should exist to ensure that return is commensurate with the risk – and not excessive.
Relieving congestion in the air is an equally pressing concern for the future.
There again, progress is being made.
The recent reduction of vertical separation minimums over Europe, the Atlantic and North America has doubled airways capacity and will save billions in operating costs over the next decade.
The “Single European Sky” concept has been accepted in principle, although still a long way from being implemented.
Galileo should be operational by 2008 and other promising concepts are in development.
But we need to get them off the drawing table – and into the air!
Making airways more efficient saves fuel and that’s good for the environment, as well as for airline balance sheets.
We all like to think that by keeping the emission rate under 3% we’ve done our part as good corporate citizens. But is that enough?
More initiatives are required.
Virgin’s Richard Branson’s announcement of his intention to build plants to produce an environmentally-friendly aviation fuel from cellulosic ethanol is interesting.
Whether or not Sir Richard’s particular good intentions prove viable, I believe that developing bio-fuels for aviation – as we have started to do for automobiles – is worth exploring.
And we must certainly carry on the good fight to safeguard and improve airline safety.
Accidents with passenger fatalities doubled in 2005 after two of the safest years since the creation of ICAO in 1944.
I applaud ICAO’s recent initiative in seeking consensus on a global strategy for aviation safety.
This industry must always keep safety the number one priority… front and centre.
As well, we need to reach consensus on the harmonized use of biometrics, shared data bases, and other measures to enhance security and reduce the hassle of travelling by air.
Technology is providing us with more efficient and environmentally friendly airplanes which should enable airlines to significantly reduce their operating costs. The manufacturers will tell us more on that this afternoon.
Together with the current efforts to simplify the business processes, which must also improve convenience for passengers and shippers, this would further contribute to improve airline bottom lines by millions of dollars – and make it all that much easier for our next speakers to find ways of financing the future of our great industry.
Will this produce sufficient profit to be retained by the industry to justify the very large investments required for fleet expansion and renewal, as well as for the infrastructure required to sustain the projected market growth?
This question, ladies and gentlemen, is central to our debate, and I look forward to the valuable contribution of our various speakers today to help us to get closer to an answer.