CAPA Asia Aviation Summit Day 1: Trump impact on aviation, long haul LCCs, future of Asian FSCs
The CAPA Asia Aviation Summit was held on 15/16-Nov-2016 at the Capella at Sentosa in Singapore. First off, BOC Aviation's Robert Martin and Indigo Partners' William Franke discussed the outlook for long haul LCCs, as well as the aviation implications from Donald Trump's election to US President. Malaysia Airlines CEO Peter Bellew gave a key presentation on the transformation of the airline and plans for its A380 fleet.
Panel discussions addressed the future of the full service airline model in Asia, the opportunities from big data, China's "One Belt, One Road" strategy, joint venture strategies, partnerships/alliances at LCCs.
Day one was capped off by a Gala Dinner with the CAPA Asia Aviation Awards for Excellence.
The CAPA Outlook: low fuel, uncertainty - and turkeys flying
Following a welcome by CAPA Managing Director Stephen Pearse and host Changi Airport Group MD Lim Ching Kiat, CAPA Executive Chairman Peter Harbison gave an overview briefing.
In the past two years the industry has singularly changed as a result of the collapse in oil prices. Despite fluctuations and an expected slow tick upwards, fuel is not projected to be a major hurdle through 2017. The downside is that the rapid decrease in fuel prices drove yields to plummet, erasing some - even all - of the benefit of low fuel prices. This pattern begins to enter a dangerous cycle as low prices create traffic growth, which in turn expects even lower fares. IATA has observed yield decreases to have smoothed out in mid-2016, with premium yields often - but not always - insulated. Some airlines face significant premium yield challenges.
In a strong wind even turkeys can fly; low fuel has boosted most airlines, and even kept some afloat - buying them time. Yet for a few airlines unable to be financially strong during the period of low fuel prices, the inevitable change in operating environment poses significant risk. This is a cyclical industry, like it or not.
The strong airlines are not off the hook, however. Their solid performance invites labour groups to ask for their share of the benefits - and some labour groups do so irrespective of profitability or unprofitability. This risks building increased costs into airlines, making a recovery challenging once oil prices rise.
Asia is in flux. All 10 of the world's largest routes, and six of the next 10, are in Asia, but seven of the 10 largest airlines are in Europe or the US, reflecting the densification in Asia and predicating the coming shift in the global balance of power. Yet Asia's flag carriers are under pressure: Malaysia Airlines, Thai Airways and Singapore Airlines have flat to reduced capacity over recent years. In SIA's case it has shifted growth to regional and LCC units. Cathay Pacific is slowly growing but warns of a "new normal" that requires an adjustment for the long term; things will never be as they were. Collectively Asia's full service airlines are being pressured between the Gulf superconnectors, LCCs and Chinese airlines.
Aviation has long been synonymous with uncertainty. Brexit and the election of Donald Trump as the next president of the USA has simply added more uncertainty to aviation and globally. But the impact of the seemingly inevitable demise of the Trans Pacific Partnership (TPP) - even though it doesn't include aviation - is likely to have a depressive impact on air traffic growth. The resulting level of business stimulation will be much more limited without the TPP, even dampening demand by as much as 5-10% over the next decade.
Indigo's Franke and BOC's Martin share optimism about Trump - and long haul LCCs
This note of uncertainty fuelled discussion during the executive Q&A. Mr Harbison moderated, with BOC Aviation CEO/MD Robert Martin and Indigo Partners Co-Founder and Managing Partner William Franke.
Mr Franke noted that Mr Trump's election comes as there is a lot of change and popularism in the world. He remarked that Trump's aviation implications are speculation, since Mr Trump has not yet made statements about travel and aviation - let alone who might be Secretary of Transport. As it is, far larger cabinet positions are still being considered. Mr Franke noted the transport position would need to be filled by someone who understands the issues.
Even if there were extreme views on transport and aviation, Mr Franke noted "the weight of the office has a moderating effect" as left politicians lean to the right while right politicians lean to the left, creating a position more in the middle than during the campaign. Once elected to four-year terms - US presidents want eight years, and seek moderation in order to establish a supporting base.
Mr Martin outlined his belief that Mr Trump wants to get matters done. Mr Martin is optimistic that Mr Trump will focus first on the domestic economy, in part because that - not international policy - gets vote for a re-election. "I think this is good for us", Mr Martin said. "If we have a president who wants to grow America, net-net that's a positive." Mr Martin reminded the audience that the US continues to be the key driver of global growth.
While Mr Franke was supportive of these principles he cautioned about the risk for debt and inflation, perhaps to significant levels. If there is to be a financial crisis, Mr Franke hopes it is not immediately after the new administration takes office. Mr Franke said he is more concerned about the European landscape, where immigration is an issue, Germany's Angela Merkel is less sturdy, and there is the question about Brexit.
The two shifted to an aviation matter still fostering uncertainty: long haul LCCs. Mr Franke remarked that Indigo Partners had looked at the concept. Mr Franke remarked, "I think it will come. It will happen". Despite the encouragement, Mr Franke noted "We haven't found a case where we have the courage to invest…we're a careful observer".
Mr Franke noted that in a trans-Atlantic context long haul LCC implications may be limited, as there are only a few routes that could see high-frequency, year-round service. This is evidenced by Norwegian's numerous but low-frequency (and sometimes seasonal) services. Given the maturity of the trans-Atlantic market, Mr Franke thought there was a higher barrier to entry because of incumbents' schedule offerings, loyalty programmes, and the existing capacity, without significant room for possible stimulation.
Mr Martin spoke of the financial element, in that a long haul LCC operation would need a strong equity base to carry it through quieter periods of the year. Norwegian's long haul LCC starting phase produced a beating on accounts that were otherwise strong from its profitable short haul operation.
This is an issue not dissimilar to all-premium operators, who have struggled with cash flow during quieter periods of the corporate year.
Malaysia Airlines CEO Peter Bellew: keynote on restructuring and growth
Malaysia Airlines, CEO, Peter Bellew.
One long haul LCC trying to defy sceptics is AirAsia X - part of the large AirAsia franchise that originated in Malaysia and has fundamentally changed the market for incumbent Malaysia Airlines.
Malaysia Airlines CEO Peter Bellew addressed the competitive impacts, but also the areas where Malaysia Airlines was not efficient by its own right - irrespective of competitors. Mr Bellew said he did not know why previous Malaysia Airlines management had let AirAsia grow unchecked, but "I'm stuck with it".
"We stopped doing stupid things that lost money", Mr Bellew said, pointing to a number of cases where the timing of a route was wrong, the wrong aircraft type was used, or unsustainable service was offered.
Mr Bellew strongly believes that part of the problem was management's disconnect from the frontline, creating alienation from employees but also making management "incredibly remote from customers". Mr Bellew said managers needed to stop being isolated in offices reading surveys: "there's nothing like standing at the queue…and listen[ing] to people complain to your face". Mr Bellew regularly gets out to the frontline and expects the same of his deputies - and of other airlines. "At senior management, people need to do that", he said of frontline exposure.
Addressing the predicament that he and his predecessor, Christoph Mueller (now at Emirates), found themselves in, Mr Bellew said: "I don't know any business in the world that's been through what Malaysia Airlines has done. It will be successful, and it will be the greatest turnaround in history".
The restructured Malaysia Airlines has looked at changes across the business. There are fuel savings from flying approximately two minutes slower per hour. The number of lost bags has been halved, saving mishandling costs. Mr Bellew said Malaysia Airlines "never asked for a discount on airport charges". Mr Bellew took issue with AirAsia receiving a USD8 discount per passenger on terminal fees at its terminal, with Mr Bellew noting the USD8 difference is greater than the profit per passenger that airlines make.
Malaysia Airlines has sought to "recalibrate" customers' minds that Malaysia Airlines can be relevant in the budget space by setting aside approximately 15-20 seats per flight that compete on price with LCCs, despite Malaysia Airlines offering a full service proposition. His regional LCC competition is dynamic, with AirAsia and Lion Air (part-owner of local Malaysian airline Malindo) "blowing each other's brains out with low fares - it's crazy".
On the long haul front, Mr Bellew is optimistic that Malaysia Airlines is gaining relevancy, since few passengers now use Singapore Airlines to travel between Kuala Lumpur and London via Singapore. "We've managed to push SIA out of the picture ", Mr Bellew said.
Malaysia Airlines is now in growth mode again and expects to carry more passengers in 2017 than in 2016. "China is the story in our region", Mr Bellew said, noting that was often the case around the world. Mr Bellew flagged the metric that 4% of Chinese nationals have passports but within 10 years the figure is expected to rise to 12%, which may seem small but equates to a net increase of 150 million further passport holders in mainland China. Mr Bellew seeks to leverage Malaysia's status as the only predominantly Chinese-speaking country that Chinese can fly to on a narrowbody aircraft.
There was negative brand sentiment about Malaysia Airlines around the world but especially from mainland China, whose capital Beijing was the destination of the Malaysia Airlines aircraft that disappeared and is yet to be found. As Malaysia Airlines sought to move past the tragedies and begin to remarket itself to the world, Mr Bellew said he defied his marketing team's recommendation to go soft on marketing and the inclusion of airline branding; in particular the key elements of the airline's logo and signature uniform. Mr Bellew feels vindicated as the campaign resulted in the airline's server collapsing for 15 minutes at the hub, such was the response. Web traffic spiked at ten times the normal volume.
Mr Bellew expects to lose 30% less money than originally budgeted for in 2017. He remains concerned about 2017. Although optimistic about benefits to come from Malaysia Airlines' 2H2017 cutover to Amadeus (new PSS and resulting new website), Mr Bellew remarked that "2017 is going to be really messy" due to uncertainty on Brexit, currency and oil.
In the long term Mr Bellew predicts that "there are going to be big, big losers. There's going to be blood on the floor".
One of the most watched developments in the aerospace sector is the A380, and Malaysia Airlines is at the centre of this because of its intent to dispose of its A380s. "We're the proud owners of six spaceships, also known as A380s", Mr Bellew said. Although praising the aircraft's manufacturing and predicting a long service life, he said that the aircraft are still unfit for purpose for Malaysia Airlines.
Malaysia Airlines is working on "Project Hope" that will secure its own AOC in Malaysia, and thus bring the A380 aircraft out of Malaysia Airlines' responsibility and financial accounts. The aircraft will be used for religious charters to Saudi Arabia and the operating/trading name for "Project Hope" will be disclosed before the end of 2016, according to Mr Bellew. Mr Bellew is extraordinarily bold in betting that Project Hope will not only prove the viability of a second-hand market for A380s, but that Project Hope could even add more aircraft. The outlook is perhaps best described by the project's own name: Hope.
The future of the full service airline model in Asia
Mr Bellew's pessimism on full service airline development in Asia was not shared by panellists joining him for a discussion on the future of full service airlines in Asia.
ANA Senior Executive Advisor to the Chairman Keisuke Okada said ANA was confident of its group approach to capture various international and domestic demand via its full service and low cost units. He was particularly pointed in noting that despite the airline's achievements - ANA is larger than its rival Japan Airlines internationally - "ANA has never been the flag carrier" of Japan.
Hong Kong Airlines Assistant Commercial Director Michael Burke does not regard it as possible that major Asian airlines will fail in the medium term. He noted his airline's unique situation in transforming from regional full service to intercontinental full service. Hong Kong Airlines is expanding in Australia and New Zealand, with other continents in its sights as it receives its first A350 in 2017.
Mr Burke said that Hong Kong Airlines needed to reduce CASK, which it has done through aircraft utilisation and densification projects. The final element is flying further. Mr Burke stated that a daily Auckland service has meant that New Zealand has overtaken in ASKs the airline's seven daily flights to Thailand.
Hong Kong Airlines is deploying widebody aircraft to Japan, competing against its sister LCC HK Express. Hong Kong Airlines' widebodies have a premium cabin, whereas HK Express is high-density single-class. This difference was championed by local rival Cathay Pacific as an advantage for the full service airline flying widebodies against high-density narrowbody LCC flights. But DVB Bank SVP Aviation Research Albert Muntane Casanova said "that's not sustainable" competition logic on the part of full service airlines.
Philippine Airlines Senior Financial Advisor Ian Reid remarked that countries like their flag carriers and are unlikely to let them fail. Mr Burke opined that governments are often their problem, as government ownership means government interference.
Mr Reid noted that PAL is evolving, with the introduction of premium economy, which he estimates to ask a 70% higher fare than economy - despite taking only 30% more space. This is a better return than business class, which he projects to ask a 400% higher fare, and it requires 2.5 times as much space.
While much of Mr Bellew's competition is with economy class airlines, he is optimistic on the future of premium service. "People want to be in front of curtain", he said, noting that this is particularly the case in Asia for premium full service, and even economy full service, travel: "there is snobbery about travelling on a full service carrier. That will keep me in business".
Although Malaysia Airlines has cut its long haul network to London only, Mr Bellew argued that full service airlines have an advantage over long haul LCCs on that service and medium haul to Australia/New Zealand, since cheap economy tickets are funded "with 30 people in the front".
Mr Reid noted that the pointy end is important, but changing, and Philippine Airlines had removed first class since "the only guys flying first class were the staff".
The panel was interested by British Airways' "reverse disruption" - reconfiguring some 777-200s with more seats (10 abreast in economy) that will give the type a lower CASK than the competitor Norwegian's 787s. Mr Burke could not see a step change in long haul competition coming without efficiency improvements beyond the existing 787/A350, which would be "5-10 years away if invented tomorrow".
Big data: start with data and then create processes
Many full service airlines are banking on a step change in their business through the use of big data. Travelport VP Damian Hickey best summarised the situation by paraphrasing a remark that big data is like teenage sex: everyone is talking about it, no one knows how to do it, but wants to because they think everyone else is.
SITA President Asia Pacific Ilya Gutlin noted how data is evolving, and wanted to remind the audience that yield management was one of the first plays on leveraging data.
Sabre Airline Solutions Head of Sales & Business Development Asia Pacific John Chapman gave credit to airlines for identifying their loyal passengers yet noting they have yet to scratch the surface on identifying all their other passengers. He said the data exists but is siloed, as the data is not shared across departments or even linked with other data sources.
HK Express CEO Andrew Cowen agreed with this sentiment, remarking, "We have reams and reams of data but that's not the same as implementation".
Amadeus Global Head of Sales & Commercial Travel Intelligence Didier Mamma said big data requires companies to re-architect flows by starting with data and then shaping processes, instead of starting with processes and bringing data in.
Aviation implications from China's 'One Belt, One Road' strategy
Chinese University of Hong Kong Director of Aviation Policy and Research Center Dr Law Cheung Kwok gave an outlook from his views on China's aeropolitical and infrastructure developments. National University of Singapore Professor of Aviation Law Alan Tan noted how China's One Belt, One Road initiative had limited applications for airlines. CAPA Senior Analyst Will Horton agreed, noting airlines have to curry favour with the government and want to be seen as contributing to the One Belt, One Road initiative without incurring substantial losses.
Spring Airlines President Stephen Wang saw One Belt, One Road fitting into Spring's larger double-digit per annum international growth. ForwardKeys Chief Marketing Officer Laurens Van Den Oever noted the potential for tourism growth in One Belt, One Road countries. At the extreme end is visitor growth to Morocco.
One Belt, One Road might backfire as foreign airlines - such as the Gulf airlines and Air Astana - continue to use their positioning and catchment areas around One Belt, One Road as a reason to be given more traffic rights - which China and its airlines are reluctant to see happen.
Joint ventures: trust thy partner, use profit-sharing model
The close of day one focused on partnerships, ranging from joint ventures to alliances. Seabury opened with a presentation about the evolution of JVs. Seabury VP and former Delta Air Lines MD Alliances David Bishko cautioned airlines in a JV not to "try to take advantage and get ahead". He had had experiences with airlines, asking whether they had found a way to get ahead in a partnership.
Equality of terms and the sync between respective managements is necessary for JVs to work, and Mr Bishko remarked that "cultural misunderstandings" had caused JVs to miss financial targets they should otherwise be able to achieve.
The passenger perspective of JVs is not the same as that of airlines. As Mr Tan remarked, airlines are metal-neutral but passengers are not. Mr Bishko remarked that from his experience at Delta with Air France - Americans preferred to fly on Delta and the French preferred to fly on Air France.
Product equality is challenging. Mr Bishko gave the example that unlike Delta Air France had first class, while Delta had more dense seating in economy. The solution was to differentiate the customer offering. "Good JVs", Mr Bishko said, "are turning that [difference] into a positive".
The differences between revenue- and profit-sharing JVs were discussed. Mr Bishko was reluctant to move to a profit-sharing model but post the Delta/Northwest merger CEO Richard Anderson took the helm and said a profit-sharing model was final. Mr Anderson had had experience from his time at Northwest, which had a JV with KLM. Mr Bishko soon realised profit-sharing was right.
Bringing the conversation back to Asia, Embry-Riddle Aeronautical University Asia Assistant Professor June Lee sees the potential for further JVs in the region.
LCC alliances: Value, U-FLY & independece
The partnership discussion shifted to LCCs, with a panel discussion moderated by KPMG Global Head of Aviation James Stamp. Jeju Air CEO Ken Choi explained that Jeju Air had found traditional interline too complicated and expensive, but the Value Alliance - which it is a founding member of - makes the proposition and implementation much easier. Jeju Air will implement the necessary technology in 2017.
Value Air and Asia's other LCC alliance, the U-FLY Alliance, are powered from IT with Air Black Box. Air Black Box General Manager Asia Pacific Mildred Cheong noted that their solution allows airlines to "retain brand equity".
Likewise with Asia: not a member of either LCC alliance is the Jetstar Group, and arguably the LCC alliances were formed to give the smaller airlines greater bulk against the dominating weight of two of Asia's LCC groups. Jetstar Asia CEO Bara Pasupathi said Jetstar has an internal alliance amongst its affiliates and has been growing it for 12 years. Jetstar has interlines and codeshares and allows one airline to partner with the group as well as having access to the group-wide network across multiple AOCs.
Mr Choi of Jeju Air and the Value Alliance said the alliance still needed to extend network reach. "The market we're missing obviously is China", Mr Choi said, adding that India, Indonesia, Vietnam and Hong Kong are also missing spots.
The U-FLY Alliance has expanded once, with Eastar Jet from Korea joining and giving the alliance its only non-greater China, non-HNA-affiliated member. Asked if there was a limit to the extent of geographical coverage, Mr Cowen remarked that U-FLY uses the strapline "U-FLY the world" and they did not see a limit. Mr Cowen noted that CNN anchor Richard Quest did an around-the-world trip using only LCCs, although these were not part of one single LCC entity.
Day one concluded with a Gala Dinner with the CAPA Asia Aviation Awards for Excellence, hosted by Oriel Morrison, anchor at CNBC Asia
See related CAPA news: Air NZ, China Eastern, Malindo, PAL, Spring, BOC's Martin, Mactan-Cebu win CAPA Asia Pacific awards