Pierre J. Jeanniot
Commercial Aviation: Challenges and Opportunities
Keynote address to the World Connect APG Conference
Monte Carlo, November 4, 2010 >>
Ladies and Gentlemen:
It is a real pleasure to be participating in this World Connect APG Conference.
I understand this is only the second edition of this type of conference, dedicated largely to the commercial side of our aviation industry – marketing, sales, distribution and the like.
I have known Jean-Louis Baroux for a long time, perhaps longer than I care to remember. As many of you know, Jean-Louis is known for staging excellent Conferences which achieve an appropriate blend of food for thought – and food for the palate.
Mindful of his modest ambitions, I suspect that this event will soon be known as “the Commercial Aviation Monte Carlo World Summit”.
The airline industry is a tough business – always has been and I guess always will be!
I can make that statement with a fair degree of confidence, having lived through during my aviation career at least four major economic downturns.
And I have the scars to prove it!
Which goes to show that I have been in aviation a long time.
In fact when I started, flying was still a little dangerous – but occasional sex was still quite safe!
I know of few other industries that are as capital intensive as aviation, with the need to commit large investments on a long lead time basis, and at the same time as dependent for its revenue on short term variations of the economy and the resulting wide fluctuations in discretionary income.
And this is where we are called upon to use our skills and ingenuity to compensate for the high degree of short-term unpredictability of the demand.
Now as we stand back looking at our industry, it should be obvious that
beyond the consequences of being buffeted by short-term economic fluctuations, this industry is in the midst of a highly significant transformation which is essentially introducing a new era in commercial aviation.
A number of important events and forces have combined, among others, to accelerate that transformation. More specifically:
Some spectacular attacks by kamikaze terrorists – and that threat will continue;
A sudden and highly disruptive oil crisis which could easily recur;
The continued pressure on yield to meet consumer demand;
The progress achieved thus far – and the worldwide trend – in further liberalizing air markets;
A deep economic recession which lingers on, particularly in the U.S.A. and Europe
The rapid economic growth of Asia, more particularly the economies of India and China;
World-wide recognition of our contribution to climate change, and the need for aviation to reduce its carbon foot-print.
All of these factors – and more – are irrevocably changing and redefining commercial aviation and will present us with challenges – but also opportunities.
On the matter of the environment, the industry has set as a target to cap net carbon emissions and achieve neutral growth from 2020 onward.
Since we continue to project that traffic will double over the next fifteen years, it would mean that, by then, our current CO2 emission per passenger/kilometer would have been reduced by 50%!
This is a very ambitious target which requires, among other things, that we accelerate the development – and mass production – of new fuels.
There is a definite marketing advantage to being perceived as “being green”!
Airlines and aircraft manufacturers are heavily involved in testing various fuel alternatives.
Several airlines have successfully operated flights with a 50% blend of biofuel and conventional aviation fuel – and advertised the results to gain some marketing advantage.
A recent study endorsed by Boeing concluded that the fuel blend met, or exceeded, all parameters required such as fuel freezing and flashpoint with no adverse effect on engine or components.
And thus it appears that the mix is also quite safe.
Naturally, airlines also expect that the new aircraft models will play an important part in the achievement of the carbon emission reduction targets.
The airline industry has been asking for new airframe and powerplant combinations capable of delivering fuel burn improvements in excess of 20%.
The significant increase in the use of composite material, improved aerodynamics, and more efficient engines are likely to help us meet that level of improved performance over the next 15 to 20 years, as the entire fleet is renewed.
Unfortunately, launch and production delays have significantly hampered wide-body fleet renewal.
The Airbus A-380 has met – or exceeded – its expected performance, but the manufacturer has been struggling to ramp up production.
Last year, only ten Airbus A-380 were produced, and the hope is that the rate can be increased to 20 for this year (more than 230 have been sold).
Extensive delays and additional cost have also plagued the introduction of the new Boeing B-787, the so called “Dreamliner”.
This airplane was to begin commercial operations two years ago this Fall. It has now been announced that the first delivery to All Nippon, its launch customer, will slip into 2011.
At this time, there is no reason to believe that this new family of airplanes will not fully meet expectations and offer savings of the order of 20% or better in operating costs … and fuel consumption.
The standard version – the B-787-8 – with a seating capacity of 210 to 250, is expected to replace the Boeing B-767-300ER and the Airbus A-310.
The longer range and higher capacity version – able to accommodate from 250 to 290 seats – will enable many new route to be opened where today the market is too thin to be economically served by a Boeing B-777-300ER or an Airbus A-340-500/600.
Not to be outdone, Airbus has been developing a new long-range wide-body – the A-350 series – which once again promises to improve significantly on its current A-330, A-340s and some Boeing B-777 models.
The A-350-1000 – its larger, long range version – hopes to render obsolete some Boeing B-777 models.
The Airbus A-350-800 would be aimed at competing advantageously with the bigger version of the “Dreamliner”, more specifically the B-787-9.
And thus, the profile of the wide-body, long range international fleet likely to be in service over the next twenty years or so is already well known.
The airframe will be largely made of composite material, the aerodynamics will have been further refined, the engines will provide substantial improvements in fuel burn, and safety and dispatch performance will be higher – resulting in further improvements in reliability and maintenance costs.
And as Emirates has demonstrated, the introduction of a new, modern, cost effective, energy efficient aircraft types – such as the A.380 – can be an important marketing tool!
But what about the single-aisle, narrow-body fleet?
The two major aircraft manufacturers – Airbus and Boeing – are unlikely to launch into the design and development of a totally new, narrow-body aircraft any time soon.
The primary reason is that they both need to complete their respective wide-body programs – and reap some of the resulting financial benefits – prior to committing to some other very costly development.
Both lines – the A-320s and the B737NextGen – continue to sell very well, and the only concern on the horizon would be whether the Bombardier “C” Series is likely to gain momentum and carve up a significant share of the bottom end of the two well-established single-aisle families.
Still another important question is whether both major manufacturers are satisfied with the engines which could be made available for a new narrow-body aircraft.
Wisely, Bombardier delayed its launch decision until it was assured that Pratt and Whitney could guarantee the availability of a new engine.
The Pratt and Whitney 1000G Geared-Turbo-Fan, which claims to deliver 12 to 15 percent lower fuel burn, was simply crucial to the “C” Series promise of 20 percent improvement over existing A-320 and B-737 NextGen current models.
Now CFM International has also proposed to enter the narrow-body engine market of the future, which could deliver 12-15% percent better fuel burn.
Airbus and Boeing have been seriously examining what they would need to do to put new engines on an upgraded version of their aircraft, raising the prospect of a modernized, re-engined A-320 and B-737 family emerging some five years from now.
The decision by the major manufacturers to offer a re-engined A-320 and B-737 five years from now could impact the market share that the “C” Series of Bombardier is hoping to capture.
The market share of the “C” Series will be very much affected by the timing of the re-engining decision, the price of fuel and whether, following re-engining, the “C” Series would still benefit from a 10 percent or so fuel burn advantage.
As of this moment, Embraer does not seem anxious to enter the fray and appears content to compete in the 100-seat or less market.
Worldwide deregulation of air markets has progressed rather slowly, but steadily.
In contrast to some other industries, there was no “big bang”.
A number of regionally integrated air markets exist today in Europe (E.C.), North America, Latin America, Africa, and Asia.
Internationally, the U.S.A. “Open Sky” initiative introduced an air bilateral agreement which removed any constraints as to pricing, capacity, or points served between the U.S.A. and other countries.
This type of highly liberalized air bilateral agreement has progressively become the norm in most of the air bilaterals being negotiated today.
The globalization of trade and the liberalization of the air markets is typical of the powerful forces at work re-shaping the profile of the aviation industry.
To take advantage of liberalized air markets, new business models have emerged – and previous business models have had to question their relevance and redefine their roles.
One thing is quite clear: the days of government-owned national airlines are over.
The constraints of government ownership – and the inefficiencies that came with it -render such an organization incapable of coping successfully with the intensely competitive environment which today characterizes our industry.
One of the significant factors that has forced the re-structuring of the traditional network carriers has been the emergence – and the surprising strength – of the so-called “low cost” carriers.
During the aftermath of the U.S. deregulation, many new carriers came into being, attempting to follow the Southwest model.
Most were unable to survive past the 1990 economic recession.
It was up to Europe to re-launch the concept New carriers such as EasyJet, Ryanair and others gave the low cost model new impetus.
Today, low cost carriers have established a presence in every region of the globe, exerting strong competitive pressure on the more traditional airlines.
Those have been compelled to redefine their presence in the market and to adjust their domestic and regional networks.
The growth of the “low cost” carriers has been nothing short of remarkable.
A study published earlier this year by the Centre of Asia-Pacific Aviation indicates that the total growth of the world capacity deployed since 2001 is equal to the growth experienced by the “low costs”.
The number of seats flown by the “low costs” grew from 7 percent to 22 percent of the total!
Not every new entrant has been successful but still, by the end of last year, approximately two thirds of all newcomers since 2000 had survived.
Which means that adding up the players present in all the regions of the world, some 128 “low costs” were in operation.
What makes the “lowest price” marketing strategy of the “low costs” so successful is, of course, the simplicity of its business model.
It is a no-frills service – a single class, one type of aircraft only, with high-density seating and high aircraft daily hour utilization.
A low cost generally has low overhead, few fixed costs, extensively out-sources, employs younger, lower-paid employees – and distributes its products almost exclusively through electronic media.
Responding to these competitive forces -and to take advantage of the new flexibilities offered by the more recent, regional economic integrations – several traditional airlines have decided to re-group through mergers and acquisitions, and develop alliances.
This marketing strategy is centered on offering the convenience of a worldwide network.
The re-grouping is well underway in Europe.
Lufthansa – which earlier absorbed Swiss International, the former Swissair – has more recently completed the acquisition of Austrian Airlines, British Midland, and Brussels Airlines, a quasi low cost which was created following the demise of Sabena.
Air France and KLM were first in Europe in successfully completing their merger. The model they developed has in some ways set the pattern for others to follow.
The Air France/KLM Group has also recently acquired an important participation in Alitalia, which commits the Italian national carrier to become part of their group eventually.
The third European group – comprised of British Airways and Iberia – is now completing its much delayed merger.
Of course, there are many other national airlines that have so far remained independent, but it will be increasingly difficult for all of them not to join one or other of the groups or to participate in some form of merger or, at the very least, some association.
In North America a similar phenomenon is present, and we have recently witnessed the merger of Northwest and Delta Airlines.
United Airlines is completing a merger with Continental Airlines.
And thus, we have three major regroupings of traditional airlines emerging in the U.S. – each aligned with one of the three major European groupings.
Joint ventures across the Atlantic have already been in the making, with the Air France/KLM Group and the Delta/Northwest group concluding a commercial agreement which brings under one umbrella all their respective trans-Atlantic services.
The same approach has been developed by Lufthansa, United/Continental, and Air Canada – and American Airlines and British Airways have also concluded a similar agreement.
All these activities clearly point to setting the stage for a “mega merger” of airline groups on both sides of the Atlantic should that ever be permitted under the U.S./European Community bilateral agreements.
The process of regrouping airlines is going on, as well, in other regions of the world, in particular in Latin America with the activities initially led by the Lan Airlines and TACA, the Central American Airline.
As a case in point, Brazil’s TAM in August of this year announced plans to merge with the LAN Airline Group – which would create the largest airline in Latin America.
Consolidation is also very much contemplated by the low cost airlines … as illustrated by the recent acquisition of AIRTRAN by Southwest Airlines.
It is most interesting that despite the difficulties experienced by national carriers to survive under the pressure of the low costs, new airlines – which could be called “national airlines” – have emerged and are rapidly establishing a position in the international market.
Over the last decade, some small States in the Persian Gulf have developed ambitious new hubs and are actively engaged in expanding their operation into the sixth freedom market which exists between their tiny States on the one hand – and Asia, Europe, and America on the other.
In the Gulf, Emirates based in Dubai, Etihad operating from Abu Dhabi, and Qatar Airways whose operation is in Doha have all ordered large fleets of aircraft.
To illustrate their ambitions, Emirates has put in an order for 90 Airbus A-380s and 70 Airbus A-350s.
In the case of Qatar Airways, they have recently put in an order for 80 Airbus A-350s and five A-380s.
It remains to be seen if, in the present context, these three new airlines based in the Gulf will actually be able to grow and prosper.
The Asian market is growing very rapidly – and this is particularly true for the Indian Sub-Continent and China.
In both of these large regions, well-established champions such as Cathay Pacific, and new rapidly growing international airlines such as Jet Airways of India, are unlikely to stand idle and allow the Gulf carriers to take away their markets.
The availability of new airplanes with long-range capabilities allowing flights to operate directly between Asia, Europe, and North America, for instance, using Boeing B787s and Airbus A-350s, will easily enable any Persian Gulf hub to be bypassed.
This situation suggests that price competition involving those very important Asian markets will likely be very active in the next timeframe.
The recession in Asia has been short-lived and the growth of air traffic is once again nearing double digits.
The Asia-Pacific region has just recently surpassed North America in terms of annual passengers boarded, more specifically, 647 million passengers vs. 638 million passengers in 2009. It is forecast that in a few years from now, the Asia/Pacific region will represent 50 percent of total air traffic worldwide.
The other regions that are also enjoying excellent air traffic growth are South America – particularly Brazil – and of course, the republics that were previously part of the Soviet Union.
And we should not forget about Turkey which, with its large population, is also growing very rapidly.
Lastly, it is worth mentioning another small but growing business model used in addressing the needs of an important segment of air travel demand.
Until the last economic recession, the number of private and corporate jets was increasing rapidly.
Tongue-in-cheek, one might be tempted to say that the increase over the past few years in executive remuneration was driving this expansion!
You may remember images of the U.S. automotive industry’s top brass flying to Washington in their private jets to beg for tens of billions of bailout money to save their respective companies.
The utilization of private airplanes has been made increasingly affordable by various formulae such as “fractional ownership”, or simply by contracting over a period of time with a supplier willing to guarantee aircraft availability, when required.
Additionally, there is no doubt that the security-related hassle – and confusion – at most airports has contributed to the popularity of private and semi-private aircraft which enable the user to largely by-pass this frustrating experience.
Although the economic crisis has dampened this expansion, we should fully expect that this sector will soon recover with vigorous growth.
The most recent forecast published by Airbus Industries predicts that by the year 2028, air traffic demand will have nearly tripled – and that the fleet of passenger aircraft with over 100 seats will have grown from some 14 thousand in 2009 to over 28 thousand … by 2028.
To accommodate this projected growth, congestion of the various infrastructures would be a major issue if not vigorously addressed.
The characteristics of the airports at which you operate can be both a challenge – and a marketing opportunity to exploit.
This has been well understood by the Gulf States, which are planning the expansion of their hub airports to support the growth of their airlines.
One factor helping to fuel airport congestion is the growth of the world’s major cities, coupled with the fact that more people are becoming economically mobile.
This was a major factor in the decision by Airbus to build the A-380.
This “very large airplane” substantially increases the number of passengers which can be carried on any one flight between the mega urban centers.
Equally valid was the strategy developed by Boeing in proposing the B-787-9 – its long range version – aimed at opening new city-pairs and creating many new mid-size hubs.
The other important infrastructure which can significantly affect the quality of our product is air traffic capacity.
Fortunately, the need to modernize both the European and the American air traffic control systems was finally recognized.
The SESAR project proposes to unify Europe’s ATM Systems, create capacity to handle a threefold increase in flight movements, improve safety by a factor of 10, and reduce by 10 percent the environmental impact per flight.
SESAR components and procedures will be progressively implemented from 2010 to 2020.
The U.S.A. Next Generation Air Traffic Management System – NextGen – has been under development for some time and will require some 20 billion US dollars up to 2025 to complete its development.
This new system will introduce cutting edge, satellite-based navigation technologies with more precise flight tracking, provide a single Information Management System, improved data links, and a single weather information system.
The objectives for NextGen are similar to those of SESAR.
Ladies and gentlemen, how do we see the commercial challenges and opportunities for aviation – given the forces at work reshaping the industry?
I believe that we can make the following observations and comments:
First, the good news: we can expect significant market growth:
The desire to travel and see the world – and the need to travel for business reasons – will continue to grow worldwide, which means that.
The industry forecast – calling for traffic to double every fifteen years – is likely to prove correct. I would expect that the industry will carry approximately five billion passengers in 2025.
Much of that growth will come from Asia-Pacific, with China and India providing the lion’s share, and with the other emerging economies likely to be important contributors to that growth.
And, our industry will be much greener:
The combination of new aircraft types with lower fuel burn and maintenance costs as well as improved air traffic control should eventually provide airlines with a 20-25% reduction in operating costs.
The production of biofuels will eventually meet some 50% of the air industry’s requirements.
We will need to continue to adapt our business models:
Europe and North America will continue to move towards a more fully integrated air market
In most regions of the world, low cost airlines will continue this move towards a 50 percent share of the regional/domestic market.
With low cost airlines’ greater maturity and diversity – and legacy carriers’ improved cost discipline – the two business models will increasingly converge.
On the subject of infrastructure:
It is likely that airport capacity will vary considerably from one region to another.
This will always be an important commercial challenge to mitigate – or an opportunity to exploit.
However, I believe that significant improvement in air traffic control capacity resulting from the implementation of the various components of SESAR (Europe) and NextGen (USA) will be achieved.
The combination of the electronic networks and sophisticated biometrics will increasingly give air travelers a great deal of control in handling their travel needs, as well as checking and boarding, and including baggage handling at the airport.
While this increases passenger convenience, it also improves airline productivity and costs.
And thus we may have good reason to feel optimistic about the future of our industry. But it is equally obvious that there is no shortage of challenges.
The industry may be recovering from the last economic crisis – but its financial situation remains somewhat fragile.
Our past experience has shown that we continue to fail to learn how to manage through every economic crisis, and unless we do better, the financial situation of the airline industry will not improve.
The drive to increase market share continues to fuel the tendency for the whole industry to provide far too much capacity.
Which brings much pressure to bear on the commercial people who are expected to react on short notice and fill that capacity – without any significant deterioration of the yield!
How does anyone develop a sensible long-term commercial strategy, when the pressure to meet next month’s revenue targets and bottom line objectives can become all-consuming?
As the saying goes …:
“When you got many alligators biting at your ass, it’s hard to remember that you came in to clean the swamp.”
Thus, it seems to me that in the foreseeable future, the battles for the customer will be as fierce as ever.
There is no room for complacency. Keeping ahead of the game will continue to require much ingenuity.
Every sale is important and can count – as long as it generates an incremental contribution to the bottom line.
And of course, we should always remember that we are fundamentally a service industry, and that the human dimension is an important – indeed a central element – of the service we provide.
Understanding your customer is fundamental, and having first hand knowledge – and relations – is invaluable.
The founders of the Ritz Hotel used to say:
“A complaint is an opportunity with a client.”
However, with passengers fully able to handle their own reservations, checking, boarding etc., we may be losing a very important personal contact.
Some airlines are compensating to some extent for this lack of personal contact by making extensive use of web-based social networks.
They are increasingly using “Twitter-like” networks to listen to what their customers have to say – and are also finding this social network to be a good way to promote their fare sales.
Versions of Facebook are likely to be used extensively to keep a personal contact with the traveler, and allow a platform for discussion.
Facebook is now reported to be the most used website by in-flight WiFi users.
Some airlines are also busy developing a variety of i-phone applications to deal directly with their clients.
Unlocking the full power of social media for travel application and services is the latest way of keeping in touch with the customer.
All of which simply adds one more important dimension contributing to the never-ending transformation of our aviation industry – and continuing to make it an exciting world in which to be involved.