Pierre J. Jeanniot
The Air Transport Industry Today – Is the Customer King Again?
Address to the 15th Cannes Airline Forum
Cannes, October 18, 2006 >>
Ladies and gentlemen,
It is a great pleasure to join Jean-Louis in welcoming you to this fifteenth Cannes Airlines Forum.
Increasingly over the years, this Forum has become the place to discuss the forces of change affecting our industry to conduct business behind the scenes, to forge new friendships, and to enjoy its very convivial atmosphere.
I have no intention of spoiling Jean-Louis Baroux’s fun by revealing the gastronomical delights we all know he has planned for us once again.
But I must admit that I can’t help wondering if people don’t come to our discussions for much the same reason that tourists visit the great sites of France, which has been described to me as “something to do between great meals”!
The theme this year is centered around air transport and its clients: Do we need to be restoring customer trust and confidence in our industry? And are we doing that?
It’s not the first time we’ve addressed this theme. At the seventh Cannes Airlines Forum in 1998, we talked about the then “new” relationships between passengers and airline companies.
The question we asked at the time was whether the passengers were justified in being unhappy.
Eight years have passed, and for almost a decade the industry has been intensely focused on cutting costs, often resulting in reduced service, higher load factors, airport congestion etc., compounded by the frustration and stress resulting from a succession of new security measures.
I don’t recall what we answered in 1998 but I suspect that we were falling somewhat short of meeting our customers’ expectations.
At any rate, the series of economic crises that were soon to follow forced the industry to take drastic measures to ensure its survival.
With the rapidly increasing popularity of the so-called low cost carriers, many traditional airlines were forced to shrink dramatically.
And quality began to sink to the lowest common denominator.
So where are we today?
Do we know what needs to be done to reassure our customers that this industry is fully trust-worthy and dedicated to providing value-for-money services that are safe, on-time and customer-friendly?
That is what we are here to find out.
But first, has this industry sufficiently recovered to be considered today beyond the survival mode? Let’s take a few moments for a brief overview.
Although it is hazardous to make any predictions – and particularly so when it concerns the future – I believe that 2006 will turn out to be the transition year towards “a more stable, if not truly profitable, aviation industry”.
There is a mood of optimism about our industry that has been absent since 9/11 and its aftermath, and I believe that this optimism has not really been dampened by the events of this past summer.
Well, the industry is indeed growing, and because it is growing – and in some areas very rapidly – it will attract more investment.
But investors should choose carefully. As the old joke goes, “there are three ways to lose a lot of money: betting on slow horses; dating fast women; and investing in a poorly managed airline”.
Last year’s loss, at 3.2 billion dollars, was somewhat less than expected, and according to IATA the industry is now expected to lose only 1.7 billion dollars this year.
It could even make as much as 1.9 billion dollars in 2007, an amount that would imply a return on capital of less than 1 percent – which is far below the 8-10 percent necessary to adequately reward investors.
Much will depend, of course, on what impact the continuing conflict in the Middle East -and the manipulation of some disenchanted Muslim youths by terrorist leaders – will have on the price of oil, and on renewed market demand for air travel.
I am reminded that the father of the Wright Brothers, who was a Protestant Minister, had tried very hard – invoking religious reasons – to discourage his sons from attempting to fly, stating that
“If God had wanted men to fly, he would have given them wings.”
Beyond the obvious sensational impact of using aircraft as weapons of mass-destruction, do Muslim extremists believe that we are contravening some Divine order?
Whatever the reason, we are unfortunately likely to continue to be a popular target.
But whatever the latest threat, the industry, and I mean all participants – governments, airlines, airports – will be judged by how quickly it can adjust security measures to reassure customers, reduce the hassle of traveling by air, including airport congestion, and thus minimize uncertainty for airline passengers and also for investors.
Last year, the world’s airlines ordered more than 2,000 aircraft in total from Boeing and Airbus.
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.
The order backlog today represents 19 percent of the existing fleet.
New, more efficient aircraft may well tempt airlines into offering lower fares, chasing after market share. This is not the way to long-term profitability.
But clearly, part of that new technological efficiency has to translate into profit, and returned to investors.
Although improving in total, the financial health of the industry still differs substantially by region, and by type of airline.
And among the mediocre and 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 increase at more than 10 percent per year over the next five years. And although China’s airlines lost about 3.0 billion yuan in the first half of 2006, carrying close to 75 million passengers, its airports made 1.5 billion yuan.
It seems Western airports aren’t the only ones to do better than their airlines.
Slide 13 India
India’s liberalized air transport market is now, with that of China, the brightest prospect in the global aviation arena.
It’s domestic market is expected to grow as much as 25 percent annually over the next five years.
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.
Malaysia, along with India, has become fertile ground for discount airlines.
Air Asia has just ordered forty more A320s. 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, which has become the region’s most dynamic domestic market.
Traffic growth has been spectacular, from six million domestic passengers in 1998 to an expected thirty million this year.
With large cities separated by distance and water, Indonesia is custom-designed for air travel.
JAL seems to be a fading star in the Asia-Pacific region.
After losing 32 billion yen in the same period last year, it reported a quarterly loss almost as big this year (26.7 billion yen), and is facing mounting challenges after a series of safety mishaps and management in-fighting.
Singapore is losing ground to Dubai as an aviation hub.
Dubai’s passenger volume has already reached 76 percent of the Changi hub.
The good news is that the Singapore government is seeking to further liberalize air services with its neighbors including Malaysia, China, and India to defend the hub status of Changi.
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 will enable those carriers to offer access to a wide array of destinations worldwide with a fleet of extra-long-haul aircraft now coming on the market.
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 focussed but linked into the global alliance networks.
A third group will be the Middle East low-costs offering discounted point-to-point services within the region.
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 posted an annual net profit of 1.17 billion dollars for 2005-2006.
The Group is reporting strong traffic growth so far this year and announced a net profit of 224 million Euros for the three months ending in June.
Lufthansa is back in the black, with a net income of 183 million euros on 5.2 billion euros in revenues in 2006, and expects a positive contribution from the integration of Swiss International by next year.
Swiss actually made money in the second quarter.
British Airways announced a soaring pre-tax profit of 620 million pounds for the year ending March 31, 2006, and reported a 154 million pound net profit for the first quarter ending June 30th.
The British have yet to buy into the European consolidated model.
Second-tier carrier Aer Lingus has reinvented itself into a profitable airline, and SAS earned 60.2 million euros in the 2nd quarter.
But others, like Alitalia and Olympic, remain basket cases.
Ryanair, Europe’s largest budget carrier, and EasyJet, the second largest, are reporting strong traffic growth.
Air Berlin has become the third largest low-fare airline with the acquisition of DBA, formerly Deutsche B.A., and made a net profit of 30.1 million euros during the 2nd Quarter ending June 30.
Eastern European low-costs are still proliferating, however, and we can expect further consolidations.
So despite some rough air ahead, the European sector can expect to enjoy an improved level of stability in the years ahead.
Elsewhere on the American continent, a number of Latin American airlines have become 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.
Volvo do Brasil has now acquired the 79-year-old airline for 24 million dollars, plus a pledge to invest 485 million dollars in the bankrupt carrier.
In August, Varig was flying only ten planes out of a former fleet of 65 jets.
Mexicana is taking aggressive measures to cut its annual costs by 20 percent, and grow its network, to take on the new budget carriers recently launched in its backyard which have captured 12 percent of the Mexican market in the first quarter of 2006.
In Canada, a new industry equilibrium appears to be in the making.
Air Canada reported a net income of 258 million dollars for 2005 just a year after the airline’s restructuring, and achieved a net income of 118 million dollars in the seasonally slow first quarter of 2006.
WestJet also posted strong profits both last year and in the first quarter, as did Air Transat in its recent second quarter.
WestJet now enjoys some 30 percent of the lucrative Canadian transcontinental market, and sees niche opportunities for itself on the trans-border.
Of course, few U.S. carriers are doing as well as Southwest. Its second quarter earnings were 333 million dollars, compared to 144 million a year earlier.
Nevertheless, the U.S. industry’s litany of difficulties seems to be finally abating.
American Airlines reported net income of 291 million dollars in the second quarter, the highest quarterly profit in six years.
Continental reported a 198 million dollars second quarter profit, nearly double last year’s, and the highest quarterly profit since 2001.
United emerged from three years of bankruptcy protection in February and had its first profitable quarter since 2000, an estimated 119 million dollars on 5.1 billion dollars in revenues.
Alaska Airlines earned 71 million dollars on 710 million dollars in revenues in the second quarter.
Of the major U.S. carriers, only Northwest and Delta are still lagging behind.
Northwest’s bankruptcy reorganization added a billion dollars to its first quarter loss, and its second quarter loss totalled 285 million dollars.
Operating expenses fell 12 percent, and recent union agreements to cut labour and pension costs seem promising.
Delta is still struggling to emerge from bankruptcy protection.
It had to silence its Song low-cost subsidiary in May, and lost 2.2 billion dollars in the second quarter.
But excluding huge reorganization items, the airline achieved its first adjusted profit in six years.
U.S. Airways posted a record $305 million second quarter profit, second only to Southwest, and expects to post profits for the remainder of the year.
“The primary driver of this turnaround”, said CEO Douglas Parker, “was the merger” with America West completed a year ago in September.
Parker says that Northwest and Delta are prime candidates for mergers – and I agree.
After losing more than 38 billion dollars since 2000, eight of the ten largest U.S. carriers reported a combined net income of 1.2 billion dollars for the second quarter – the first quarterly profit since 2000.
Can we believe that we are witnessing here a true recovery?
There are still fundamental problems with the U.S. industry, and I believe that there is still a need to downsize and consolidate.
Unfortunately, in my view, Chapter 11 has been preventing the required consolidation of the legacy carriers.
When Pan Am and Eastern were allowed to disintegrate, other airlines picked up the pieces worth saving – such as part of their fleets, gates at congested airports, and a number of international route rights.
Low-costs now represent 42 percent of the U.S. domestic market, and their share will probably level off at 50 percent.
Now, eight legacy carriers competing for the remaining 50 percent are far too many to ensure a stable, profitable industry.
One way or another, consolidation has to take place.
There are bound to be more mergers and consolidations, domestically and internationally.
I don’t wish to discourage membership in the various airline associations, but the world doesn’t need 280 marginal carriers.
With the proliferation of new carriers, inspiration ran wild in chosing the names of some of the new airlines, and I think that the results do not always inspire confidence.
Didn’t New Zealanders worry that Kiwi Airlines was named after a bird that can’t fly? The airline did not last very long for that matter.
Is Aspiring Air, another New Zealand carrier, truly an airline? Or hoping to become one?
Is the Chinese airline Lucky Air, with a fleet of only one aircraft, somewhat not begging the question?
Is Shangri-La Air in Kathmandu as mythical as its name?
Would you want to be the next customer on Japan’s Air Next?
This is not projecting a very serious image!
To return to our brief overview
All in all, in most regions of the globethe 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 almost everywhere. But the jury is still out in the U.S.A.
Low-costs are occupying a lot of space but they aren’t taking over the whole industry.
Full-fare, full-service is back in vogue – and the customer, once again, is king.
The industry is returning to the basic notion that competing on product value is a better way to profitability that competing on price alone for market share.
Of course, not all carriers are returning to this basic strategy.
Ryanair begs to differ, in fact promises that by the end of the decade “more than half if (its) passengers will fly free”.
Ryanair’s secret? Besides an austere cost structure that makes Southwest look profligate, Europe’s most profitable airline puts a price on virtually everything – from peanuts and beverages to baggage check-in, and now, cell-phone use.
Ryanair intends to offer in-flight gambling next year and take a cut off each wager.
The latest security measures, which drastically reduced on-board cabin baggage, may well increase the number of lost bags.
By the way, have you ever wondered where unclaimed, undelivered airline baggage ends up? The U.S. carriers sell those to an outlet in Alabama.
This outlet gets about one million visitors a year for merchandise that includes everything from emerald rings worth $100,000 to wedding gowns – hopefully lost after the wedding.
I am told that this is the State of Alabama’s largest tourist attraction!
One cannot help but wonder if lower fares are not somewhat of an illusion, when you have to pay extra for meals, blankets and pillows, headphones, roomier aisle and exit row seats, reservations made by phone and so on.
To differentiate themselves from those “pay-for-everything” low cost carriers, several airlines have decided to re-introduce a number of amenities in economy by creating a Premium Economy Class.
The new class offers wider seats, extra legroom, improved meal and beverage service, personal entertainment, computer outlets, separate washrooms, and even a separate cabin, for a price about 25 percent more than economy.
Air Canada, Air New Zealand, British Airways, Thai, and United all offer this type of product differentiation in one form or another.
Economy passengers on Cathay Pacific get a hot meal and beverage service, even on one-hour flights.
Qantas Airways and Virgin Atlantic offer personal, on-demand video screens in all classes.
Even low costs such as Jet Blue and WestJet now have live satellite TV sets in the back of every seat.
Gulf Air has trained nannies to look after children even in Economy Class on long-haul flights, and at no extra charge.
For high-living, First Class passengers, Gulf Air offers “Sky Chefs” on all A330 and A340 flights.
The Chefs, trained at top hotels, meet privately with each passenger to discuss the menu offerings and service options, and then personally prepare and serve the meals.
British Airways offers gourmet meals to their First Class customers in high-end airport restaurants before some overnight flights.
Qantas Airways has a First Class lounge with a stand-up bar and leather sofas on its new A340-600s.
I remember when Air Canada introduced its first 747s, the airline decided to have an upper deck lounge with a dance floor, and flight attendant hostesses in long skirts.
It didn’t last long; wives started to complain that this was one amenity too many.
Lufthansa pampers First Class passengers with their very own terminal at Frankfurt airport.
Virgin Atlantic’s “Upper Class” includes flat beds, in-flight massages and limo transfers.
Qantas has cocoon-style sleeper seats in Business Class.
British Airways’ “Club World” has slightly shorter flat beds than in First Class.
Most carriers are reluctant to go “flat out” in Business Class, however, because it is still an important differentiation with First Class.
New seats, more amenities, improved meals, and bigger bins are not the only way to a better business product.
Continental had the novel idea to improve their product – by ensuring their employees would all be friendly and knowledgeable!
The ultimate business-class product differentiation is the all-business-class flight, such as offered for several years now by Privat Air-Lufthansa between Dusseldorf and Newark.
Last October, a new so-called “boutique” carrier, Eos, began offering all-Business Class “super-luxury” flights between Stanstead and JFK on Boeing 757-200s.
The aircraft, originally designed to seat as many as 220, are outfitted with only 48 “pod suites” that allow each passenger much real estate.
Amenities include cashmere blankets.
Another all-business, boutique carrier to surface recently is MAXjet Airways, which flies 767-200 ERs almost daily between Stanstead and New York and Washington.
I think that it is abundantly clear that there is a sizeable market out there of airline customers who want more comfort and quality, and who are willing to pay for it.
These may be the same people who pay 40 to 70 thousand dollars for a quality car.
The aircraft manufacturers have not been insensitive to travellers’ expectations of increased quality.
Larger windows, roomier storage bins and better in-flight air quality will offer passengers significant improvements in airplane comfort – at least that is what is claimed by the manufacturer.
The Boeing 787 will have windows 65 percent bigger than today’s standard.
Instead of shades, a film over the windows can be adjusted to block out sunlight during movies while still allowing passengers to look out, much like a limousine.
A fuselage built largely of carbon-fibre composites will allow higher humidity in the cabin and lower pressure, which means travellers will arrive feeling less tired and less dehydrated.
Not to be left behind, Airbus last summer basically junked its previous derivative strategy by opting for a completely new 10 billion dollar design with a wider fuselage, and slightly higher speed.
This new airplane is now called the “A350Xtra Wide Body (XWB)”.
To compete with both the Boeing 787 and the B-777, it will need to more than match the advanced features claimed by its competitors, such as enhanced cabin lighting, wider windows, etc.
In the regional jet arena, Embraer’s new midsize 170 and 190 aircraft offer big-jet comfort and four-across seating.
Somehow Bombardier continues to delay, perhaps indefinitely, its decision to build a new regional jet – to the delight of Embraer which is becoming the new leader in this product niche.
It remains to be seen whether Sukhoi’s entry will become a serious challenger.
All that new in-flight comfort will make little difference to passengers, however, if they are grinding their teeth in frustration by the time they get aboard.
Larger overhead bins are not a benefit if the only thing one will be allowed to place in them is a clear plastic bag containing a passport, keys, and baby formula.
A popular Montreal humorist, Josh Freed, joked in his newspaper column at the time about a security guard asking a passenger to swallow some of his Viagra medication before boarding, to ensure it was a genuine prescription drug.
My friend Jacques Duchesneau, President and CEO of the Canadian Air Transport Security Authority, will have I am sure a good deal more to say about that subject tomorrow.
But it is evident that we are still taking far too long in screening passengers and their luggage.
We’ve known about the threat of chemicals on planes for at least six years.
Some of you may remember Operation Bojinka, when two Kuwaiti terrorists blew up an unsuspecting Japanese businessman in his seat on a Philippines domestic flight, using liquid explosive placed in a contact-lens case.
It was a test for a plan to blow up a large number of aircraft over the Pacific.
European researchers have thus far spent 46 million dollars in a project called “SAFEE” to create a non-hijackable plane.
The concept calls for the airplane to be equipped with a system to spot suspicious passenger behaviour – a collision avoidance system that will prevent the airplane from being steered into buildings, an autopilot that will guide it automatically to the nearest airport in the event of a hijack, and sensors that will minutely observe passengers throughout the flight.
But what use will these technological advances be if we, as governments and industry, still cannot reach consensus on the harmonized use of biometrics, shared data bases, and other measures that are available now to enhance security and reduce the hassle of travelling by air?
Technology isn’t always the answer.
When NASA fist started sending up astronauts, they quickly discovered that an ordinary ballpoint pen would not work in zero gravity.
To combat the problem, NASA scientists spent a decade and hundreds of millions of dollars to develop a pen that writes in zero gravity, upside down, and at temperatures ranging from below freezing.
The Russians used an ordinary lead pencil.
Aircraft movements now total about 70 million annually.
Many Governments around the world are increasingly hard-pressed to finance the billion of dollars needed to relieve airport and airways congestion.
But it is not, in many cases, because of a shortage of funds collected through taxes and fees.
I read recently that less than 5 percent of the “passenger facility charges” collected over the past 15 years at LAX has been spent on improving facilities.
Air traffic delays are another source of air travellers’ frustrations, not to mention the cost of wasted fuel and its impact on the environment.
Here again progress is being made.
The recent reduction of vertical separation minima over Europe, the Atlantic, and North America has doubled airways capacity.
The “Single European Sky” concept had been accepted in principle, although it is still a long way from being implemented.
Galileo should be operational by 2008, and other promising concepts are in development.
And the industry is beginning to seriously examine the possibility of alternative bio fuel.
I would like this Forum to conclude that we continue to make progress towards becoming a truly global industry – appropriately rewarding our employees, caring for our customers, and annually distributing good profits to shareholders.
But above all, I would like to see our customers back on the pedestal, particularly at the airport.
Our customers should have at their disposal, in every class, a full range of quality, value-for-money products to meet their needs, and their pocket books.
Our common objective should be to ensure that our customers do not have any reason to worry about security and safety.
We also should be able to reassure them that our industry speaks the truth, and does the right things.
I will be most happy if airline customers in the years to come can claim, once again, that getting there by air is half the fun!