CAPA’s inaugural Airlines in Transition CEO summit gets under way today (19 Apr-2012) in Istanbul with a thought-provoking introduction from former US Department of Transportation (DoT) Undersecretary for Policy, Jeffrey Shane. Mr Shane, now a partner at Hogan Lovells, is the chairman of the summit, which brings together low-cost carrier and full service carrier CEOs in a unique setting. Over the next two days, airline CEOs will discuss the blending of the LCC and FSC models and the resulting evolution of the industry.
“Examples of cooperation between the two categories can be observed with increasing frequency,” Mr Shane said as part of his introductory remarks.
“It clearly makes sense to explore the potential for expanding this cooperation in the interest of serving markets more robustly and more profitably. But it is the strong hope of your conference chairman that our exploration of these opportunities for enhanced cooperation will engender a conversation of even broader scope.”
“How can the industry exploit more robustly the real economic potential of its vast customer base? The unbundling of services heretofore has been treated as a consumer-friendly innovation; why has the unbundling of air fares infuriated air travellers and engendered a punishing regulatory response? How can airlines and airports cooperate in ways that help to restore enthusiasm for air travel while realising greater mutual benefit? Is there a more robust role for LCCs in global airline alliances? How can IT platforms be made to deliver a richer, more satisfying customer experience in the interest of growing the business? How can social networking be harnessed in ways that will grow traffic and enhance the customer experience? Is it time for the industry to mount a serious campaign to lift artificial government restrictions on inward investment and foreign control of airlines?” Mr Shane asked.
Mr Shane expects the summit to “be a uniquely valuable meeting – one that has the potential to hasten the game changing innovations that the industry so badly needs”.
Five thought leaders to lead discussions at Airlines in Transition
Mr Shane will be joined by four other thought leaders in chairing seven panels that will discuss various related themes. The other thought leaders are Professors Rigas Doganis, Michael Levine and Nawal Taneja as well as Royal Brunei Airlines deputy chairman Dermot Mannion. Over 130 delegates are attending the summit, which is taking place at Istanbul’s famous Ciragan Palace.
In his prepared introduction, Prof Levine states that “except for a few outliers, LCCs are evolving to include more legacy-like convenience, including aggregation, better schedules with lower utilisation and purchase incentives like FFPs. But these moves put them in danger of losing their cost advantage. As LCCs reach their online growth limits, the question becomes whether, as legacy airlines have done, they can increase their system scope and conveniently aggregate passengers through affiliation without destroying their cost advantages.”
Prof Levine, a former EVP at Northwest Airlines and Continental Airlines, continues: “Airport operators can attempt to facilitate this, but their efforts are necessarily limited. An alternative might be alliances, but alliances with legacy carriers convenient enough to attract passengers require cost-increasing changes in infrastructure, operations and systems. An alternative might be to create a new alliance of LCCs that balanced convenience against cost in a sustainable way. This is the challenge going forward. The moment has already arrived in mature competitive markets like the US, Western Europe, Canada and Australia, but paradoxically it might be easier to do in growing markets like Asia, where there is less sunk infrastructure and systems investment.”
Prof Taneja, a well published business author and industry strategist points out that “airlines are changing their business models rapidly to adapt to the unprecedented market volatility resulting from the expanding needs of customers (significant improvements in value and, in particular, customer experience, for example), unambiguous increase in competition (from low-cost carriers worldwide, Persian Gulf-based carriers, and carriers based in China, for instance), increase in the cost of doing business (exacerbated by the sudden fluctuations in the price of fuel, various forms of government-imposed taxes, and so forth), and the actual and potential entry of technology firms in distribution (Google, Apple, Amazon.com, etc.). To deal with the increase in market volatility and the business risk airlines must rationalise their costs and implement new strategies for customer-centered innovation to increase customer experience.”
Prof Doganis, a former non-executive director of easyjet, states in his prepared introductory remarks that “to deal with the low-cost challenge, legacy carriers have restructured or reduced their short-haul networks and adopted many service and marketing features introduced by the former. But this may not be enough to ensure profitability on their short-haul networks. It is also unclear whether as a result of these changes the two business models are converging. What is clear is that as a result of the enhanced competitive environment and the structural instability within the industry, many airlines, such as Qantas, JAL or Air Berlin, are scrambling around to find a new business model that will be viable.”
Mr Mannion, a former CEO of hybrid carrier Aer Lingus, predicted in his introductory remarks that in 2020 “LCCs will be even more dominant on short-haul” and “only a limited number of full-service carriers will survive on short-haul”. But he adds that while “legacy carriers which cannot adapt will be driven out of short-haul … full-service carriers will continue to dominate long-haul, especially the ‘big three’ from the Middle East". Mr Mannion warns that “smaller carriers will face a very bleak future if they don’t adapt and restructure”.
Mr Mannion expects “LCCs will continue to struggle on long-haul” while “FSCs will remain dominant in the long-haul market. In truth, long-haul business just seems too complex for LCCs to manage. Complexity is the enemy of the low-cost sector and the challenges associated with long-haul passenger service are often seen as simply ‘out of scope’. For that reason various recent experiments with low cost/no frills on long-haul have not really shown any enduring signs of success. This is unlikely to change,” he says.