Pierre J. Jeanniot
State of the Industry – The Game Changers
Keynote address to APG World Connect
Singapore, November 3, 2011 >>
Ladies and gentlemen, Singapore is a great place to meet!
Singapore has been an acknowledged leader among those south-east Asian Tigers which blazed the way for the explosive economic growth this region is today enjoying. It is an appropriate back-drop for an exciting commercial aviation meeting. A meeting which, in the Jean-Louis Baroux tradition, will ensure that the resulting intellectual stimulation will be matched by its epicurean content.
But first, a brief disclaimer. Let me say at the outset that the views expressed here are strictly my own, and do not represent the views of IATA or any other corporation I have been associated with over the years.
I believe it is fair to say that Singapore is very much a symbol of the changing landscape of aviation. Singapore created the first major international aviation hub in the Asia-Pacific region. This model has since, in some ways been emulated by the Gulf States. Having much to gain and nothing to lose, Singapore was an early promoter of “Open Skies” air bi-laterals which have been spreading throughout this region and all other parts of the world. Among the more recent such development was the Agreement ratified between the United States and the European Community – with Canada joining in – virtually creating an Open Skies condition between North America and the European Community. Among the more important changes in government policies with a significant impact on our industry, was the decision last year by the U.S. and the E.U. to grant anti-trust immunity to some of the key members of the three alliances over the Atlantic. This anti-trust immunity is allowing them to operate in what is now referred to as a “Metal Neutral” formation. This “Metal Neutral” Anti-trust Immunity is a close substitute to a merger, allowing the key members of each alliance full coordination of the major airline functions on the designated routes including scheduling, pricing, revenue management ,marketing and sales.
Immunized joint ventures are perhaps even better than a merger, since they avoid the complications which inevitably come with a full merger. The setting up of immunized joint ventures has since rapidly extended to other markets. Japan’s regulatory authorities approved antitrust immunity for STAR on the Japan-Europe market, (Lufthansa-ANA), and on the Japan-USA routes (United/Continental-ANA). Similarly, antitrust immunity was granted to One World on the Japanese market (American-Japan Airlines). On the South Pacific, Australia and New Zealand competition bodies were involved in providing antitrust immunity to Sky Team (Delta-Virgin Australia) and One World (American-Qantas). Today, over sixty airlines participate in one or the other of the three alliances, but there are very few key players in the hard core of the immunized , Metal Neutral Joint Venture.
Meanwhile, new carriers have been growing in the Middle East. These Gulf airlines have developed a new model – a model which in fact re-invents the concept of national network carrier. The genesis of this new model can be traced back to a decision by the Government of Dubai to single out air transport – and specifically airlines – as one of its strategic industries, and an important tool of economic development. The airline model that evolved was based on the following elements:
• The availability of new long-haul airplanes
• The central geographic positioning of the Gulf
• The full exploitation of 6th freedom rights
• The development of an ultra- modern airport
• Advantageous local tax and operating conditions
Etihad, Gulf Air, and Qatar Airways have followed a similar plan and are developing a global network carrier. Interestingly, Turkish Airlines has adopted a comparable strategy. With the advent of new, long-range, efficient airplanes and an increasingly liberalized market and 6th freedom rights, these carriers are capitalizing on the opportunity to link virtually every major city in the world with a one flight connection through their respective hubs. Burdened by excessive taxation, environmental constraints, expensive infrastructure and high labor costs, European airlines have concluded that the advantages enjoyed by the rapidly expanding Gulf carriers prevent a level playing field. Others in Europe, such as Finnair, see this model as an opportunity.
Low cost carriers are now providing 23 seats out of every 100 flown by all the world’s airlines. They continue to enjoy an excellent growth rate in the double digit range (growth was 15.7% in 2010 over 2009). Low cost carriers are growing in every region. In 2010, the capacity share of seats offered was:
• 17.7% for Asia-Pacific
• 28.7% for North America
• 35.0% for Europe
• 29.9% for Central/South America
Much of the low cost carriers’ growth in Southeast Asia has been made possible by the acquiescent attitude of governments accepting – tolerating – cross-border operations by non-flag carriers. As liberalization spreads in Asia-Pacific, we can expect the number and proportion of seats offered by low cost carriers to grow rapidly. To counter the penetration by low cost carriers, several legacy airlines have decided to launch a low cost subsidiary – or in some cases, to acquire control of a low cost carrier. Focusing on this particular region, and more particularly the Indian sub-continent:
• Jet Airways , Kingfisher and Air India launched – or acquired – low cost subsidiaries a few years ago to counter the flurry of low cost airlines which emerged rapidly following the decision by the government to open up the market. For instance, Jet Airways created Jet Konnect, and acquired a low cost renamed “JetLite”.
• Those low cost subsidiaries have provided a counterweight to Indigo and Spice Jet, now well established – and growing – Indian low cost carriers.
Elsewhere in the region, several legacy carriers have launched – or are planning to launch – low cost subsidiaries:
• Qantas’ Jet Star domestic low cost subsidiary is doing quite well, and plans to form Jet Star Japan, with Japan Airlines and Mitsubishi.• Thai Airways is working with Tiger Airways Holding of Singapore to establish a joint venture low cost carrier, based in Bangkok.
• Tiger Airways Holding is also trying to launch – or re-launch – two more low cost airlines, one in the Philippines (SEAIR), and the other in Indonesia (MANDALA).
• All Nippon Airways is planning to launch PEACH, a new short-haul , low cost carrier based in Osaka.
• Finally, while Asia-X and Qantas’ Jet Star are making progress at getting established , Singapore Airlines has recently announced its intention to establish a new, no frills, low fare airline operating wide body aircraft on medium and long-haul routes.
Excluding the Chinese orders, Asian low cost carriers account for about 55 percent of the narrow-body order book for Airbus and Boeing. This would take their share of the region’s operating single-aisle fleets to more than 45 percent by 2015. The implications of this projected growth would be particularly significant for the region’s flag, or legacy carriers.
Similar development is occurring in other regions of the world. For instance, Air Canada has recently announced its intention to launch next year a new, low cost, long-haul subsidiary. If you can’t beat them, join them! In Europe, Brussels Airline was acquired by Lufthansa, and Iberia owns some 48% of Vueling, the Spanish low cost carrier, and plans to start another low cost, Iberia Express. And thus, many legacy airlines have decided to participate in the low fare market … in one way or another.
Modernization of Air Traffic Management is intended to be an important game changer. It was somewhat ironic that a number of members of the European Community would agree to abolish their borders on the ground – through the Schengen Treaty – but at the same time fiercely defended the need to keep them in the air! Since then – and with much delay – the concept of a Single Sky has been accepted.
And indeed, some very impressive targets have been set for “SESAR”, the European Air Traffic Management modernization project. European Air Navigation Services are expected to achieve a 50 percent reduction in service cost per flight by 2020, while at the same time accommodating a 3-fold increase in traffic. It should also contribute a ten-fold improvement in safety, and a 10 percent reduction in environmental impact , presumably by reducing flight stacking and straightening air routes. These targets have not been universally accepted.
The European Head of CANSO, the Council of Air Navigation Services Organization, has expressed serious concern as to whether they are indeed achievable. The technology and operational objectives have been agreed, but it is not totally reassuring that implementation is in the hands of politicians in some forty States!
Europe does not need all the current air traffic centers, which today number more than one per country. In fact, it is likely that the whole of the European airspace could be adequately served by four to six air traffic control centers. Beyond the technical complexities -which are being addressed – the problem is very much political. Air traffic controllers are highly skilled and well-paid professionals whose function is supported by other skilled jobs. These specialists will quite naturally fight for their jobs, and politicians are reluctant to see these important jobs disappear from their constituencies.
Nevertheless, somehow Europe is slowly creeping towards implementing a Single Sky through agreements to set up “Functional Airspace Blocks”… (F.A.B.s). While these avoid the delicate subject of mergers, these States are hoping to achieve greater operational efficiencies – and lower costs – by sharing their respective successes. There is evidence that this approach is developing a natural – but slow – momentum.
Meanwhile, it is vitally important to ensure that SESAR and its U.S. counterpart, NextGen, progress in concert. And to that end , U.S. and European specialists have already been working for some time on Atlantic inter-operability. The objectives of “NextGen” are comparable to “SESAR”. “NextGen” is required to increase air traffic capacity of the U.S. skies by some 250 percent over the next two decades. (The number of air travellers in the United States is expected to grow from 700 million to 1.2 billion in 2030.) The F.A.A. claims that the new system will save some 2 billion dollars of fuel per year (based on 2009 prices). The system will also improve delays in bad weather, and the handling of ground movements at airports.
As in the European project , “NextGen” will call for airplanes to be equipped with Automatic Dependent Surveillance Broadcast (ADS-B).
Other regions of the world are also developing modernization plans.
Canada and Australia – each with a huge airspace to cover – are moving ahead with ADS-B implementation. And Japan, in support of its long term vision of the future air transportation system, has developed CARAT (Collaborative Action for Renovation of Air Traffic Systems). A framework for cooperative action between Europe and Japan was recently signed to ensure interoperability between SESAR and CARAT. South Asian countries must also make sure that their Air Traffic Management Services are modernized in step, to achieve worldwide commonality.
The new wide-body aircraft generation, with its composite structure and fuel efficient engines, is introducing significant new elements contributing to the reshaping of our airline industry. The Airbus A-380 has essentially delivered its promise, and although its introduction was much delayed – and its implementation was very slow – the airplane has established a well-defined niche. As we know, this aircraft plays an important part in some Gulf airlines’ expansion plans. The Boeing 787, also delayed by some three years, finally started last September delivery to All Nippon Airways (ANA), its launch partner.
This is the standard version of the Dreamliner , the B-787-8. The two other versions of the B-787 will follow by 2013 – the -9, a larger model with similar range, and then a higher density model with much shorter range. (this has yet to be confirmed). At this time, the Airbus wide-body competitor – the A-350 series – will also be delayed by at least two years, but will also hopefully achieve the same improvements in operating costs and fuel burn. You will recall that that both manufacturers claim that their new wide-bodies will deliver a better than 20 percent improvement … over the models they are intended to replace.
What about the narrow-body fleet?
Wisely I believe – given the enormous investment in time, skill and money still required by the two major manufacturers to complete their respective wide-body developments – they both decided to postpone such an initiative. The Airbus A-320 re-engineering strategy has clearly paid off.
The NEO is well ahead of its 1000 order target set by Airbus for its first full year of marketing. The A-320 NEO is planned to achieve a 13 to 15 percent improvement in fuel burn over the standard A-320, and to be available in 2015. Boeing – which had claimed that its customers would prefer to wait for a new narrow-body – has now been forced to reconsider. Increasingly concerned about losing some of its key customers, Boeing has now made the decision to re-engine its B.737NG series -to be called the B.737MAX. The first delivery is now promised in 2017-two years after the A320NEO. In my view, this confirms that neither manufacturer is prepared to risk producing a clean-sheet, new narrow-body model before the end of 2020.
However, within the next few years the field is going to get fairly crowded in the narrow-body market. The Bombardier C-Series, with a capacity of 110 to 140 seats, plans to be available by 2013. The C-Series offers a 12 to 15 percent improvement in fuel consumption over the older B-737 and A-320s. The Russians’ entry from SUKHOI – the Superjet 100, with a first delivery date in the second half of 2012 – claims a similar performance for its models, which offer capacity ranging from 100 to 130 seats. The Chinese have also entered the fray with the COMAC C-919. This entry clearly takes aim at the A-320 and B-737 market given its size, seating capacity and range. The C-919 was planned to enter service in 2016, but could be delayed by at least one year. Nevertheless, the Chinese airplane did attract the attention of RyanAir , which signed a M.O.U. with COMAC for the C-919 at the Paris Air Show.
Aviation contributes less than 3 percent of total worldwide CO2 emissions. However, air traffic is projected to continue to grow at an average rate of 4.5 to 5 percent per year for the foreseeable future.
Today, the entire air transport industry has agreed to some rather ambitious targets. More specifically:
• An annual improvement in fuel efficiency of 1.5 percent on average per year to 2020;
• Capping net emissions from 2020 onwards – in other words, achieving carbon neutral growth from then on;
• Cutting net aviation emissions by one half by 2050 compared to 2005.
These targets are now widely accepted and enjoy the support of the entire air transport industry – the manufacturers, the airlines, the airports and the navigation service providers.
Every member of this great industry is expected to contribute to CO2 emission reduction:
• We have already stated that the implementation of SESAR and NextGen is targeted to achieve a 10 percent improvement, on average, in flight environmental impact.
• The new generation of wide-body airplanes from Boeing and Airbus which are coming on line will contribute some 20 percent reduction in CO2 emissions.
• The re-engined Airbus A-320 NEO and the Boeing B-737MAX will provide a 12 to 15 percent improvement in emissions.
• The next single aisle airplane generation in fifteen years will have to provide a minimum of 25 percent to better than match this level of reduction …
Meanwhile, the introduction of new players such as the “C Series” and the Russian, as well as the Chinese entries, will need to contribute some 12 to 15 percent:
• Biofuels are likely to make a significant contribution to carbon emissions reduction. The use of some biofuels has shown reductions in the order of 75 to 80 percent in CO2 emission. It is estimated that with some encouragement from governments, as much as 15 percent of the industry’s needs could be met by biofuels by 2020.
Dozens of airlines have already operated flights using a mixture of conventional and biofuel , with very satisfactory results.
Non-food biomass such as algae is a favorite, but many other sources are being tested. And thus, we should feel confident that the airline industry is rising to the challenge and will indeed meet its ambitious carbon emissions reduction targets.
So why would the European Community feel an absolute need to force fit international aviation into its Emissions Trading System?
This has created a crisis of major proportions.
• The U.S. airlines have launched a legal challenge;
• China has threatened to impose measures on European airlines;
• The Asia-Pacific Airlines Association , as well as the Latin American and Caribbean Air Transport Associations, have called on the governments of their region to reject the E.U. Emissions Scheme.
To illustrate the inappropriateness of this decision, the Air Transport Association of America provided the European Community with a typical example using a U.S. airline flight from San Francisco to London Heathrow. The E.U. rule would apply to the aircraft even before the airplane begins to taxi from the gate and yet, as a percentage of emissions, only 9 percent would take place over European airspace. What if every other government was to decide to impose a scheme of its own? Clearly, the need for an international agreement appears obvious.
With the recent rise of interactive social media websites, people can engage in virtual discussions, send and receive images, videos, and express their views to thousands – even millions – of other people around the world. Technology is moving on, and it is now commonplace to use mobile phones and various tablets and pad devices to exchange information and surf the internet.
One of the largest social media is Facebook, where over 500 million registered users each have a page. Other leading sites are Twitter, for the exchange of short messages, and Youtube to watch and share videos.
Airlines are making increasing use of these social media to reach and interact with their customers. This will be discussed extensively at this Conference.
Many airlines now employ dedicated media staff to monitor their social media presence 24 hours a day. Southwest Airlines, for instance, claims to have well over one million “friends” on Facebook, and one million followers on Twitter.
Many carriers have set up social media “fan pages” for frequent flyers, and offer special advantages to users. Some social media sites allow passengers to exchange information on travel plans so that they can meet up on a flight or at a hotel. The variety is becoming endless.
And thus, today travelers connect and get content in many different ways. Airlines can genuinely provide truly personalized service to their customers. Social media provides a great way to deal with crises. Facebook and Twitter were found by some airlines to be a particularly effective way of keeping their passengers informed during last year’s volcanic ash cloud disruption. An airline with a strong brand – such as Virgin – can use social media to reinforce it.
Conversely, social media can quickly spread an unfortunate incident – and damage a reputation. You may remember the case where a Canadian musician, frustrated by United Airlines’ refusal over eight months to offer compensation for his damaged guitar, composed a song which appeared on Youtube.
The song was entitled “United breaks guitars”. It became a worldwide hit, was viewed over 10 million times, and proved to be a Public Relations disaster for United! But not everyone is convinced of the value of social media. Some airlines – such as RyanAir – consider it to be a costly use of resources with questionable value. And some people feel that extensive use of social media can have “Orwellian” overtones as regards personal privacy.
Airlines have often expressed concern about the cost of using the G.D.S. to distribute their product , and some have attempted to by-pass Global Distribution Systems – avoiding their fees – and provide a direct link to travel agents. But GDSs are also diversifying.
Sabre is planning to open, in the coming months, the Sabre Red app center”. This will be the first on-line marketplace to connect travel buyers – including travel agencies, travel management companies and leisure operators – with third-party developers. Taking advantage of the high speed of the communications networks which have become widely available, people are turning to devices which can offer a wide choice of features, such as tablets and pads.
Google and Apple are tempted to move for a greater slice of the airline distribution business by developing travel applications. In fact, Google’s recent acquisition of I.T.A. software indicates its intent to build a new flight search tool which could get end-users quickly to a site where they can buy a ticket.
The center of gravity of aviation has been shifting to Asia. Asia overtook the U.S. – the largest air travel market – in 2009. According to the Center of Asia Pacific Aviation, the world’s top ten routes are now in Asia Pacific. Year over year, the Asia-Pacific region -in terms of seat capacity offered – has been growing by 11 percent. Although intra-regional traffic is growing strongly, the year-over-year increases in flight frequencies to and from the region grew by 13 percent.
Taking a much larger role in meeting the intra-regional demand, low cost airlines are expected to grow by 20 percent per year over the next few years. The market presence of low cost carriers on the international scene is still very modest, but Air Asia X, Qantas’ subsidiary Jet Star, and the soon to be launched Singapore Airlines’ new subsidiary are determined to make a good attempt at penetrating this market. The inter-continental low cost carrier has now emerged as the new frontier.
Despite the region’s rapidly increasing demand for low cost products, it is interesting that the demand for premium traffic is also growing. IATA’s latest survey, published in August of 2011, reported that premium traffic within the Asia Pacific region had increased by an impressive 14.8 percent!
This contrasts to a decrease of more than 9 percent within North America. Another study conducted by the “Global Business Travel Association”, also released in August of 2011, re-enforces the increasing popularity of premium travel in Asia-Pacific.
The choice of airline for Asian travelers is being influenced by their preference for superior food and beverage options, as well as for hi-tech amenities.
Ladies and gentlemen, our industry continues to change – and nowhere is change occurring more rapidly than in this region, Asia-Pacific.
The main driver in this region is, of course, the exciting economic expansion which fuels the exploding growth of aviation. Although this expansion will be tempered from time to time by the unavoidable pressures of economic cycles, the long term prospects remain strong.
Supporting this growth – and enabling it to unfold – are a number of significant game changers which, on a broader front, are driving the transformation of our industry worldwide. These transformation forces are bringing both opportunities – and challenges – to which we must continue to adapt if we are to survive and prosper. The history of our industry has shown that we have seldom taken advantage of market growth to improve our profitability.
If I was to make a projection, I would expect that our somewhat irrational pricing behavior is unfortunately likely continue in the future. And this means that along with continued pressure for cost reduction, you will need to continue to fight for every dollar of revenue. And thus, in our competitive jungle, there are some fundamentals which will not change and which, in closing, can be illustrated and summarized by the following African proverb:
“Every morning in Africa, a gazelle wakes up.
It knows it must run faster
than the fastest lion, or it will be killed.
Every morning, a lion wakes up.
It knows it must outrun
the slowest gazelle, or it will starve to death.
And so, ladies and gentlemen,
It does not matter
whether you are a lion or a gazelle.
When the sun comes up
You had better start running!