Pierre J. Jeanniot
The State of the Airline Industry – The Continuum of Change
Washington D.C., October 24–26, 2013 >>
Ladies and gentlemen:
It is nice to be meeting in Washington – a great city, and a beacon of democracy!
A city where the decision-making which takes place here has, at times, a huge potential impact on the entire world.
Many centuries ago when Rome was the seat of power, the common expression to illustrate its importance was that “all roads lead to Rome”.
Today, the electronic highways have taken over the role of linking the world.
And given the importance of this city, it may not be inappropriate to state that today all electronic highways – in some fashion – connect through Washington.
And thus it stands to reason that Washington is a natural choice for a conference to discuss the status – and the evolution – of the industry’s distribution system.
The electronic highway is of critical importance to travel, and to the airline world!
But before I go on, a disclaimer!
The views expressed here are strictly my own and do not necessarily reflect those of any companies or associations with which I am or have been associated.
10,000 Foot View
Once again, to paint the background against which airlines’ product distribution will be discussed over the next two days, it could be useful to take a 10,000 foot view of the airline industry.
And to take stock of the forces and the trends which are shaping its evolution.
The well-known periodical, the Economist, observed recently that the emerging markets – the so-called BRIC (Brazil, Russia, India and China) which have led the global economy for a decade- will no longer compensate for the weakness of the rich countries.
Collectively, these emerging markets – the BRIC – will barely match last year’s pace of 5 percent.
In the foreseeable future, growth is likely to be broader based, and include the ten next economies such as Turkey, Indonesia, Thailand, Mexico, etc.
These ten economies have a smaller combined population than China alone!
But we will achieve a more balanced growth from this broader array of countries, and it should cause smaller economic ripples around the world.
Looking at aviation, the latest ICAO forecast indicates that air traffic will remain relatively strong in the near term.
Passenger traffic is projected to increase 4.8 percent world-wide this year, and it will average approximately 6 percent for the following two years – more specifically in 2014 and 2015.
IATA remains optimistic that the airline industry will achieve a USD 11.7 billion profit this year, up from 7.6 billion US dollars in 2012.
The key driver is the industry’s load factor, which is expected to average 80.3 percent – an absolute record high.
Passenger yields are expected to grow a very modest 0.3 percent.
Although all regions are expected to show a profit in 2013 some, as one would expect , will be stronger than others.
Asia-Pacific will lead all regions with a margin of five percent. The main driver is the strong growth in China and in the region’s long haul market.
North American airlines’ profitability is expected to reach USD 4.4 billion. Here the main drivers are consolidation and efficiency measures.
Europe, where the economic conditions are the weakest , is expected to achieve a margin of 1.3 percent, although the market will grow 4 percent.
The fastest growing region remains the Middle East at 15 percent , while Latin America is next with a growth of 9.8 percent.
Unfortunately, African airlines will continue to be the weakest performers, with a margin of only one percent.
IATA notes that, worldwide, ancillary revenues are topping five percent, indicating that many airlines are trying to shore up their bottom lines with this source of revenue.
Are the alliances undergoing a significant transition?
Until recently, the Gulf carriers had stayed away from joining alliances – partly because, given their individual expansion strategies , they had no need for alliances to satisfy their growth expectations.
And partly because the hostility of the European legacy carriers – and their allegations that Gulf airlines enjoyed unfair advantages – would not have encouraged any form of partnership.
However , in the past year we have seen some significant shifts in attitudes on the part of both the legacy carriers and the Gulf airlines.
There is a growing understanding that the world economy is continuing to shift – and so are the traffic flows.
We are now seeing substantial traffic growing between various emerging countries, as well as traffic increasing between emerging countries and developed countries.
And thus, what is happening is not just about the Gulf carriers. It is about a re-alignment of business models to exploit and stimulate those traffic flows.
The legacy carriers, primarily European, are also adapting to this new market reality.
An example of this type of business re-alignment is illustrated by the alliance of Qantas and Emirates Airlines which, as one would expect, has had an impact on the “One World” Alliance.
But, in parallel, “One World” was successful in enticing Qatar Airways into joining their alliance.
The addition of Qatar Airways to “One World” is said to greatly facilitate the access of its members to several interesting Asia-African flows.
Etihad which, despite many delays and modifications by the Indian authorities has now been allowed to acquire a minority stake in Jet Airways, may have introduced some complication in Jet Airways’ previous attempts to join “Star Alliance”.
The situation becomes additionally confusing when one remembers that Etihad is a major shareholder in Air Berlin, itself a member of “One World”, while at the same time Etihad has a major commercial agreement with Air France-KLM , a leading player in “Sky Team”.
In South America , “Star Alliance” is well represented by AVIANCA, the second largest airline group in the region.
Seamless Air Travel
You will remember that the three global alliance airline groups have been promising “seamless travel” between members’ networks – but this has been little more than a marketing claim.
The fact of the matter is that the customer is still flying on multiple airlines with varying degrees of product quality, consistency, and communications practices.
True seamlessness remains more of a target than a fact, and unfortunately, as an alliance grows in numbers of airlines, the challenge of offering a consistent and quality product grows as well.
Regional Capsule: North America
With the merger of American Airlines and US Airways – at this time still opposed by the D.O.J. although it is a fair bet that it will be allowed – the U.S. commercial aviation landscape will have shrunk from six to three large mainline airlines.
When you also add the low-cost giant, Southwest Airlines which is now completing its integration of AirTran Airways, those big four players collectively account for three quarters of U.S. airline capacity.
Consolidation, route reduction and higher fares in the U.S. market are creating opportunities for the new breed of low-cost carriers, led by Spirit Airlines, to capture the traffic which the big three full service network carriers no longer find worthwhile.
With the purchase by Delta of a 49 percent stake in Virgin Atlantic , the three global alliances will have divided the routes between Europe and North America almost equally between them – leaving precious little for the non-aligned carriers.
In Canada, WestJet ‘s launch of a new regional feeder operation is likely to heighten domestic competition, while Air Canada is aggressively pushing into new international markets using Turkey as a gateway to Central Asia, the Middle East and Africa.
Air Canada has also introduced a new leisure airline, “Rouge”, targeting leisure Caribbean and European destinations.
Europe – The Battle for the Short-Haul Market
Last year, the ten members of the European Low Fare Airlines Association (ELFAA) carried 202.4 million passengers, while legacy carriers, members of AEA – the Association of European Airlines – carried 340 million passengers.
The rate of growth of these two groups suggests that in a not too distant future, low cost airlines will have overtaken the legacy carriers in the intra-European market.
The European “Big Three” – the Lufthansa Group, the International Airline Group (IAG) and the Air France-KLM Group – are fighting back, but so far with mixed success.
Lufthansa is planning to grow “German Wing”, its low cost subsidiary , to ninety airplanes by next year
German Wing will gradually take over control of all of Lufthansa’s continental routes, outside of its main hubs of Frankfurt and Munich.
For IAG, the acquisition of Vueling is a very important element of its European strategy.
Vueling has the second lowest cost base in Europe, and its enhanced business offering Is delivering a popular solution to the highly price-sensitive, short-haul sector.
Air France-KLM has set in motion many initiatives to improve productivity and competitiveness, which should reposition its regional offering, its leisure brand, and its alliance and partnership strength.
Meanwhile, “Sky Team” member ALITALIA faces a battle for survival – but it is unlikely to be rescued solely by Air France-KLM. Its shareholders are presently considering whether to invest another 100 million Euros to keep the airline running as it seeks new financing.
Ryan Air’s well established dominance on the Continent – with its 81.5 million passengers -is progressing towards its stated target of 20% market share.
It has launched its first base outside Europe in the Moroccan cities of FEZ and Marrakech, and intends to operate up to 60 additional routes following this first move.
Charging for toilets continues to be the number one story on the social networks. Although Ryan Air says that it has no such plans, it considers that this negative publicity drives people to their website – and sells more tickets!
Defying many predictions, Easyjet – with Carolyn McCall as CEO – has achieved an excellent turn-around, with a year-over-year pre-tax profit increase of 27.9 percent.
Easyjet was able to get a foothold in Russia following the re-allocation of British Midland route rights.
Easyjet has cautiously moved from a purely L.C.C. model to a limited hybrid to cater to business passengers on some key routes such as London-Moscow and Milan-Rome.
It has recently signed a contract with the “Shortbread House of Edinburgh”. The airlines will sell the traditional biscuit on board of its services in Europe, Russia and the Middle East!
And then there is the case of Turkish Airlines which considers itself to be a European airline.
• Its ambition is to connect the world via Istanbul, to compete and even outgrow its Gulf rivals.
• Strategically placed between Europe and Asia, as well as the Middle East and Africa, Turkish is one of the fastest growing airlines, having carried 38.5 million passengers last year.
Turkish Airlines is a recent addition to “Star Alliance”.
The outlook for the Asian market remains relatively bright despite the recent slowdown in traffic growth.
China expects domestic air travel to double by 2020, at which time it plans to have 240 civil aviation airports – up from 180.
But the gap between the demands of the rapidly growing airlines and the supply of experienced professionals is widening – potentially restricting growth.
Following the lifting of economic sanctions, Mynamar’s international and domestic markets have been growing very rapidly, and LAOS aviation has doubled over the last fifteen months.
Low costs are beginning to enter these markets.
Within South Asia, the L.C.C. penetration of the short-haul market is now 50%, but the medium-haul markets between South Asia and other parts of the Asia-Pacific region remain relatively undeveloped.
This market is now being targeted by Air Asia X.
On the Indian Sub-Continent, the government of India has now given conditional approval to the proposed investment for an up to 24 percent stake by Etihad in Jet Airways.
This will likely impact the market dynamics in the area, opening up the vast Indian market to a major Gulf airline – and providing Jet Airways access to the powerful Abu-Dhabi hub.
Air Asia hopes to obtain approval for a 49 percent investment in a joint low cost venture with TATA Sons Limited.
As we have already seen, the three major Gulf carriers are pursuing very different strategies.
• Qatar Airways is joining “One World Alliance”;
• Emirates has chosen to grow a strong relationship with Qantas;
• Etihad’s path has been to take a minority stake in many carriers, and use those relationships to achieve cost and revenue synergies. Those investments now include Air Berlin, Air Seychelles, Aer Lingus, Virgin Australia, and more recently, Jet Airways.
The other airlines in the area are struggling to survive – with the exceptions of Air Arabia, the largest low-cost carrier in the Middle East and Africa , which continues to grow rapidly, currently 13 percent compared to last year.
The LATAM Airline Group marked the first anniversary of its merger between LAN and TAM with an overall loss of USD 300 million, partly attributed to the depreciation of the Brazilian currency.
LATAM remains confident to achieve the long term financial benefits of the merger.
Regrouping AVIANCA, TACA Airlines, AEROGAL and Tampa Cargo , the new AVIANCA brand will be gradually introduced, seeking to project a new phase of growth of the Latin American carriers to the world.
AVIANCA Brazil has more than doubled in size in less than two years, and hopes to benefit from membership in Star Alliance.
AVIANCA Brazil is owned by the Synergy Group, which is the largest shareholder in the new AVIANCA and remains the only bidder in the sale of Star member TAP Portugal.
COPA has emerged as a leading carrier in the Intra-Latin American market, leveraging Panama’s strategic position in the middle of the region – and its superior airport.
With an annual operating margin of at least 17 percent since its 2005 initial public offering, COPA is highly profitable.
New Aircraft Overview
Hopefully, the Dreamliner’s nightmare is over!
Following a series of minor mishaps, the grounding of a Boeing B.787 fleet for four months was unprecedented.
Although the cause of the problem was never precisely identified, the extensive redesign of the Lithium C-ion battery system provided sufficient safeguards to allow the aircraft to return to safe operations.
Airbus has not been totally without problems. They are still fixing cracked wing components on the A.380’s currently in operation, as well as those on the assembly line.
Modified wings will not be available until 2014.
The Airbus A.350-900 successfully started its series of test flights, and the quality of the early results is most encouraging.
Good progress is being made on the development of the larger A.350-1000 with its engine, the Rolls Royce Trent XWB-97 …
However, the backlog on the smaller A.350-800 is eroding in favour of the larger variant.
Boeing has announced the launch of the B.787.10. This is an eighteen feet stretch of the standard B.787-9 version which will accommodate forty more seats.
The B.787-10 will accommodate 300 to 330 seats with a range of 7000 miles.
A few months ago, Boeing announced the launch of the B.777-X project. This new aircraft is unlikely to be in service until the next decade.
The B.777-X family will offer a new composite wing and a new GE9X engine , with capacity ranging from 353 to 406 seats. The B.777-X family is proposed as a response to the Airbus A.350-1000.
The A.320 NEO (New Engine Option) may well be history’s fastest selling jetliner – but Boeing’s 737 MAX is close behind.
Airbus promises a 15 percent fuel burn improvement compared to the standard A.320.
Boeing , not to be outdone, claims a 16 percent upgrade.
The improvement is largely dependent on the performance of new engines. Also, the Airbus A.320 NEO will feature sharklets, which improve fuel performance.
• The Pratt & Whitney 1100G (geared fan) has already achieved 12 percent better fuel burn than the CFM 56.5B currently on the A.320.
• The LEAP-1A of the GE/SNECMA Joint Venture is hoping to start tests next year. It will be the first commercial fan to incorporate ceramic material components.
The smaller version airplanes of both series, for example, the A.319 NEO and Boeing 737-7 MAX, are almost obsolete before delivery – and are not selling. These smaller versions account for only 2 percent of orders.
Airbus is considering some modifications which could take the A.320 NEO to 235 seats from the current 180 seats maximum permissible. (This will require two additional doors.)
Bombardier’s “C” Series has started test flights.
• The CS 100, covering the 100-125 seat market, is aimed at airlines wanting superior runway performance.
• The manufacturer has proposed a 160 seat variant by extending the fuselage of the CS300 by two feet.
• The performance of the “C Series” is highly dependent also on the Pratt & Whitney geared-fan engine, which has now been certified.
The decision by Embraer to re-engine its E-jet series has provided additional competition to Bombardier and the 70 to 90 seat Mitsubishi.
ATM – Europe
Single European Sky – a Failed Project?
The European Commission (E.C.) has been pressing Member States to comply with the Single European Sky targets – but many of them have not.
National interests – and powerful labor unions – continue to prevent the achievement of significant economic benefits, and the elimination of national borders in the air.
Slim Kallas, the E.U. Transport Commissioner, acknowledges that air traffic control continues to be too expensive, and hampered by high levels of delays.
The European Air Traffic Management systems are estimated to impose an additional cost of 5 billion euros per year on travelers.
Meanwhile, devoid of many political issues, SESAR – the Single European Sky Air Traffic Management Research joint undertaking – saw its mandate extended for a further eight years.
The new 600 million euro funding will focus on:
• Developing means to allow airplanes to fly more direct routes.
• Integrating new types of aircraft, such as drones, in the air traffic management system
Is the Single Sky Dead?
Europe is displaying a disconcerting lack of political will.
Perhaps the dream of the Single Sky is dead!
ATM – North America
The U.S. Next Gen ATM program , targeted for full implementation in 2015, is said to be on track.
Two crucial foundations for the system should be largely completed by the end of this year.
• “ADS-B” – Automatic Detection Surveillance Broadcast which allows 2-way links automatic positioning – is being implemented, and
• ERAM – the En route Automatic Modernization Program – is set to replace by the end of this year the operating system used by the F.A.A., at twenty of its en route centers.
The U.S. has also set 2015 as the date when small, unmanned aerial vehicles (U.A.V.) will be permitted to fly in all areas of the national airspace, although at the start the F.A.A. is likely to restrict U.A.V. operation to line-of-sight of the operator on the ground.
Only small U.A.V.’s – with a mass less than 25 kilos flying below 400 ft. over non-populated areas and within line of sight of the operator – are to be operational by 2015.
ATM – Asia
The Seamless Asian Sky (S.A.S.) concept is moving well.
The objective is to ensure that from an operational perspective, the airspace boundaries are transparent – or seamless.
The regional heavyweights – China, India and Japan – are providing valuable input, and will enable smaller countries to find their place in the jigsaw.
The Seamless Asian Sky plans to tie in as much as possible with the U.S. NextGen, and the European S.E.S. implementation.
Europe has climbed down over imposing Emissions Trading, finally responding to worldwide opposition.
Referred to as the “STOP THE CLOCK” decision, it agreed to suspend the Emissions Trading Scheme (ETS) for one year.
A global, market-based measure was discussed at the 38th ICAO Assembly this October. Governments mandated ICAO to develop a single Market-Based Measure (MBM) for implementation from 2020.
The last IATA AGM passed a Resolution in June suggesting that ICAO should adopt a global solution aimed at achieving a “carbon neutral” growth by 2020.
My own view is that taxes are a regressive measure – and given that the ultimate aim is to develop, low carbon substitute fuel – the emphasis needs to be placed on increasing funding for bio-fuels research and production!
Connectivity continues to grow, and providers say that mobile usage in flight is following the same trend as on the ground, with data usage increasing rapidly.
In the air, passengers are using their mobile phones more for data services – such as internet and texting – than actually placing voice calls.
In 2013, about five million mobile devices will have accessed the AeroMobile network.
More than fifteen million passengers have been connecting since the service was launched in 2008.
A study on the “Future of Airline Distribution”, commissioned by IATA and published in December of last year, predicted that:
• by 2017, 50 percent of bookings and ancillary purchases will be made on mobile devices
• and that air travelers are more likely than the general public to use smart phones and tablets;
Not surprisingly, the study concluded that the airlines need a system that can help not only to distribute their flights, but also merchandise their products – and value – across the various channels.
The system should support extensive fare and product transparency, dynamic pricing, ancillary product merchandising, and retailing.
New Distribution Capability
Airline Business magazine believes that, over the last year, the most important development in airline distribution is the introduction of the New Distribution Capability, “N.D.C.”
As we know, N.D.C. is a set of technology standards which will give the airlines an ability to distribute all their content through third parties, while retaining control over how it is presented.
N.D.C. will allow airlines to independently offer dynamic shopping and pricing through any channel.
The messaging system will be a modern messaging technology such as X.M.L.
The application to establish a new distribution capability – N.D.C. – was filed in March with the D.O.T. in Washington, in response to comments filed by third parties. Those parties were concerned , or opposed, to N.D.C. – as initially proposed – on matters of antitrust and privacy.
The G.D.S.’s are possibly the most exposed to the changes that N.D.C. is trying to bring about.
Some G.D.S.’s have requested some clarification, and will want to ensure that N.D.C. will not impact some of their product developments.
They have generally expressed a willingness to participate – if allowed to do so.
Hopefully we will hear their views at this Conference.
Travel Agents’ View
Bruce Bishins, President of the Travel Agents Association of Canada and Managing Director of ARTA USA, believes that
“There is a compelling reason for travel agents to get involved in IATA’s New Distribution Capability (N.D.C.) – or risk being left at the gate.”
There will be an impact on front-office selling, middleware facilitation, and back office routines and accounting.
It will definitely change the way things are done today
In his view, the travel agent community needs to become intimate with N.D.C., or they will find themselves eclipsed by airline websites and /or any emerging new entrants that want to sell travel.
Again, we will likely hear their views during this Conference.
The travel sector’s approach for the past two decades has been to push customers towards lower prices through lower cost and yet more uniform – and lower – cost distribution channels.
This has overly emphasized price as the primary, if not the only, product differentiator.
While customers value price significantly, it is far from being their unique preoccupation.
Clearly, travelers have different views, different desires, when it comes to their traveling needs – and in terms of their shopping preferences.
The basic theory which governs consumer behaviour has not changed.
How much consumers are willing to pay is still very much a function of their perception of the value they are receiving. And that has not changed!
A famous cosmetic company uses the slogan “our products may cost a little more, but you’re worth it!”
That company and many others have understood this relationship , and the need to place the consumer at the center of their marketing strategy.
There is a need to make customers the strategic focus – and for customers to be at the centre or our preoccupation.
There is a need to better understand their individual needs in order to serve each of them better, and to provide to each of them the best, most satisfying, end-to-end experience they deserve.
The industry should move away from a model focused exclusively on price – and, for that matter, on reducing distribution channel costs – to a model that seeks to maximize returns by best serving their customers’ needs.
I recall that Bill Clinton, then a Presidential Candidate, launched his campaign in this city with a rather simple – and explicit – slogan … and I quote
“It’s the economy … stupid!”
Ladies and gentlemen, when the industry’s load factor – worldwide – has now reached over 80 percent and this airline industry is still a long way from being profitable, it is time to do a little soul searching.
It is time to change our strategies. It is time to refocus consumer expectations.
To paraphrase Bill Clinton, it’s time the airlines recognize that if we are not profitable
“It’s the yield!”
And in the airlines’ elusive quest to achieve sustainable profitability – could the travel agents be an important ally?