Adapting To Modern Competitive Realities

Transcript

Seren Ratwatte:Good afternoon, everybody. Thank you, Peter, for having me. I was hoping this place was going to be half empty so you could get away with it, but obviously you just came for the British Airways draw, right? Feel free to leave now, it's quite okay. But you've me to endear if you wish to stay, and then after me comes my friend Peter Bailey. who, as you probably know, is Irish. Now, I'm sure everybody's been to Ireland, right? Everybody must have been to Ireland. Amazing place. I spent a lot of time there in a much younger version of myself, and I remember that the food was awful, the, the weather was worse, but the people were wonderful. They were absolutely amazing, and I couldn't believe that how you could have such optimistic, cheerful people When the rain was horizontal and the visibility was about 300 meters. Now I come from an island myself. I come from Sri Lanka where the weather's perfect. We have the most beautiful beaches in the world. Sorry, Australia, but you're number two. But the people are miserable and gloomy and completely dystopian. So it's only fair that I give you a very gloomy and pessimistic presentation, and I'll leave Peter to come up here and show you our. up by telling you how wonderful the future is actually going to be. So my presentation is entitled Adapting to Modern Competitive Realities, which is a polite way of saying watch out, it's going to get a lot worse than it is today. A quick word about my airline for those of you who don't know any much about it. Sri Lankan Airlines officially started in '79, but we actually inherited mantle from Air Ceylon, which first flew to Australia actually in 1948. So, is Chris still here? We missed Air New Zealand's debut by 5 years, but we are 70 years old next year. It was something we're very proud of. Just a little bit younger than Air New Zealand, hence I have more hair and I'm a little slimmer than Chris. But I think I got to press this thing, right? I press this thing? Yeah, there we go. So there's what little you know about us. We are the national carrier of Sri Lanka. We are still a government-owned airline, something I'm trying very hard to change, but don't quote me on that. We have 25 Airbus aircraft, A330s and A320s. Just taken delivery of a few NEOs, another one stuck in Hamburg due to engine problems with the LEAP. But 3 more of those to come as well, and a growing regional network. We have over 40 international destinations, in many ways a unique route network, as you can see, very heavily biased towards the subcontinent. We are the dominant carrier into India. We have more destinations into India than any other foreign airline, something we intend to build on tremendously. And the good news is we are flying to Australia's best city in 2 months' time. That's Melbourne, for those of you who don't know. Good to see a few Melburnians in the audience. But as you know, everybody knows this, right? Air travel is very closely linked to GDP. And the richer people get, the more they travel. That especially counts in our part of the world, in the subcontinent, because Travel is very much an upper middle class pursuit in Asia and we really need the economies to expand so more people learn the joys of travelling and hopefully travel with us. Unfortunately, the world economy over the last few years has been slowing down. Asia has done quite well, the emerging markets have done well, but the old world maybe not quite so much. But what's interesting and what is the theme of what I'm talking about today is that aircraft deliveries can't keep pace with changing GDPs. There's a very, very long supply line and you place an order and wait anywhere from 3 to 7 years for the aircraft to turn up. So that's what we're looking at. We're looking at a long backlog of orders and an addition of significant capacity at a time when the markets don't necessarily keep pace. Certainly not at the same yields that you enjoyed when you ordered those airplanes. So what's the reality? Obviously it's overcapacity, and that leads to one of two things: either that or that. And the reality, as we all know, is the picture on the right, because we start getting into this cycle of yield degradation, cheap flights, which is wonderful for the consumer, but it is extremely challenging for the airline investors and owners. A little case study which I will use to try to make my point is Sri Lanka. We've seen a huge increase in seat capacity. That's a good thing. If you know the recent history of my country, not the happiest, but in 2009 we finished a long-standing conflict That's the little drop you see there in capacity. And ever since then, it's grown tremendously. The economy has been doing very well. The tourist arrivals have increased exponentially. And in total, we've seen an 86% growth in seat capacity into Colombo over the last 10 years. And if you just look at 2009 when the war ended, it's been over 100%, which is good. which means that there's more people flying in as well. But who added that capacity? And that is the interesting question. And it's pretty obvious really. There you go. If you can read the chart, it's the, the top half of the chart which is all the Gulf carriers: Emirates, Etihad, FlyDubai, Qatar Airways, Air Arabia, Rotana Jet, and everybody else. And if you take the increase in capacity just by the Gulf carriers alone, it's 155%. It's twice the addition of capacity by the other carriers, including Sri Lanka's national carrier. So obviously we are setting ourselves up for a problem here. We are adding capacity at such a rate and we are adding capacity from a region that does not support it. So obviously this traffic has to come from somewhere. If you look at the seats versus passenger growth, as you can see, the light blue line is the number of seats originating in Sri Lanka and going to the destination carrier's home base. The gray is the passengers actually traveling to that base. Most of them, especially in the cases of Qatar, the UAE carriers, are going somewhere else because only a tiny portion of the passengers actually travel to Dubai, to Abu Dhabi, or Doha. Except in the case of Saudi Arabia, it's a much more healthy mix. Most of the passengers going to Saudi Arabia on flights to Saudi Arabia are actually travelling to Saudi, that is their final destination. But as you can see, in the case of the other Middle Eastern carriers, it's not. So there's a, there's a mix of the capacity that we have now. To Bahrain, Sri Lankan, that's the light blue, has a daily flight. Gulf Air has 5 a week. Kuwait, we have a daily flight. Kuwait Airways comes here 10 times a week to Colombo, going up to 11 very shortly. Oman Air, we have a daily, they have 2 dailies. Qatar, we have a daily, they have 3 dailies. That goes up to 4 dailies starting from today. Saudi Arabia is the only place where it's in our favour. Saudi Air only flies from Jeddah. We fly to Jeddah, Riyadh, and Dammam, so we have more frequencies. And of course, in the case of the UAE, it's ridiculous. They have 6 times as much capacity as we do on the same market. So you can see where this is all going. Where did all these passengers go? That's an interesting point. And these are only estimates because it's very hard to get the real data. But only 32% of the passengers on flights to the UAE actually went to the UAE. The remaining 68% went everywhere else. And given the fare structure of the airlines these days, you know that he who has deeper pockets is going to win. So here's an interesting statistic related to something somebody else talked about this morning. 44% of passengers on Singapore-Sydney flights actually go to Singapore. Whereas only 4% of passengers on Sydney-Doha flights go to Doha. The remaining 96% go elsewhere. So essentially what the Middle Eastern carriers and some others are doing is draining the traffic from the notionally representative carriers onto their airplanes. So the whole idea of a bilateral agreement is actually a joke. It doesn't apply anymore. These guys can come in with deep pockets, great service I must add, and I did work for them for a little while so I'm being slightly disloyal, but anyway let's not worry about that. And the fact of the matter is that they dilute the yields to the point where business becomes non-viable. That's your Europe to Sri Lanka average fare just over the last 4 years. As you can see, the price has more than halved in the— between 2013 and 2016 on that sector alone. And that is not a yield that's sustainable. You cannot continue to operate as a normal airline unless somebody else is, is making up the difference. So what happens in the end? It's quite simple. That was our route network in 2012. We went to a whole bunch of countries: Heathrow, two destinations in Rome, Charles de Gaulle, Frankfurt, Zurich, and Moscow. And as you can see, the numbers were reasonably healthy. This was the conflict had just been over, so numbers were building. But six thousand from the UK, three thousand from Germany, almost three thousand from France, etc. Today. That's my European route network. I got one destination. I've had to pull out of everything else because I just could not operate without bleeding to death. And what's happened to the numbers? The numbers are absolutely fine. Numbers have practically doubled. In the case of the UK, 6,000 to 10,000. Germany, 3,000 to 7,000. France, 2,000 to over 3,000. Russia's healthy. So the traffic is still coming in that yields that make an operation like mine unsustainable. And while this might be good for some sectors of the economy, you know there's a long-term deficit here somewhere. Somebody's got to pay these bills. And it's the same really for every sector. Hang on a second, I think I missed a slide here. My apologies. No, sorry. The worldwide average fare between 2015 and 2017. has come down significantly. And this, these numbers are slightly distorted because actually in some markets they've held. In North America, for example, capacity is limited, there's control of it, so the fares have held up reasonably well. In other parts of the world, like inbound to Sri Lanka, fares have just plummeted due to the problems I just talked about. Now, Here's quite an interesting one. That's the last 10 years. World air traffic has grown significantly starting from a baseline of 100, increased by 66% essentially, which is, which is a good number, good for all of us in this room. What's driven this growth? There you go, a little harder to see, but Sri Lankan's up there. We've grown 40-odd percent. American United exponential growth, but that's mainly due to mergers as we know. Qantas slightly down, Singapore Airlines is just about hanging there, yeah, New Zealand's done quite well. But anybody with even the most rudimentary grasp of mathematics knows that that doesn't add up to 166%. It's not possible. There have to be some other players in the market. Well, here they are. And we have to rejig the scale to make them work. So Qatar Airways has gone from 100 to 492. Etihad and Emirates not, not far behind. But even this is not the whole story. There's even worse. Look at that. FlyDubai from nowhere has added 2,800 times the capacity that they had earlier. I mean, that's— these are crazy numbers. There's at the end of the day a finite number of people in this world and a finite number of passengers on aircraft. So if you add this much capacity, it has to come out of somebody else's pocket and there has to be some sense to what's going on here. But there's no sign of a slowdown. Look at those orders. China, 1.3 billion people and 3,000 airplanes in service, another 617 on order. That's a good number. Australia, small population but a large airline fleet. And a reasonable amount on order. Japan, same fleet size as Australia, funnily enough. Much larger population. Look at India. 1.3 billion people again, but one-sixth the fleet of China. So obviously they've got a lot of room to expand, a lot of potential there. But look at the UAE. 9 million people, the same number of airplanes as India. You know where all that capacity is going and you know who's being carried on those airplanes and it's not traffic. Not Indian traffic going. It's just being routed through hubs that are essentially enjoying. What's the polite way of putting this? I don't want to say subsidies, but that's that's the bluntest word. And Qatar, three million people, 189 airplanes, and another 213 on order. I mean that that that makes no sense whatsoever. New Zealand now. has 5 million people and 149 airplanes. But as you saw when you— if you listened to Chris this morning, it's a very robust business and it's a business that's centred on New Zealand, on traffic that works in that region. So there is a business model to support that, but perhaps not at the scale that the Middle East carriers are putting on. So, what happened there? Just one second. So overcapacity, very simple. Cut your prices. You've got to fill those airplanes, right? You've got empty seats. Doesn't look good. So when you fill— cut your prices, there's no pricing discipline as such these days. You just keep cutting the prices until you find bottom. And you attempt to capture market share by adding more capacity because you remember you've got that whole pipeline of orders coming your way. You've got to do something with them. So you're So you keep adding flights to Colombo. Oh, we've only got 4 777s a day, let's, let's add a 5th. It really doesn't matter, there's not enough traffic to fill them. It doesn't matter, we'll do it anyway, we have the aircraft, what are we going to do with it? And then of course you lower your yield to fill those seats and ultimately it leads to more overcapacity. So the vicious cycle, it really doesn't end. And airlines like mine with limited access to capital and limited financial support from the their governments are going to find that it's almost impossible to compete. And historically we have been a capacity-driven business model. We don't— and the airline world does not react to demand. It just tries to fill the capacity it's already ordered because of those constraints we talked about earlier with the supply chain of aircraft orders. And if others can add capacity and you don't, You just get left behind. So you add more capacity to safeguard your revenue, but then you find that your your seat factors drop. So then you add more capacity, just trying to growing revenue to fill those flights. And irrespective of how good your service is, and we have a very good full-service product, it doesn't matter because it's price that matters these days. It's purely a price-driven business. And as you add more and more capacity to a limited market, you're going to keep driving the price down until— I don't know where this ends, to be perfectly honest. There's only one winner in this. They're the passengers. But we know who the losers are, which is essentially most of us in this room. Airlines in the US went through this since deregulation, and it took them the best part of 40 years to sort it out. But now there is capacity discipline in the US market and the Big 3 plus Southwest have allowed prices to stabilize and the business is profitable again. Unfortunately, that is not the case in my part of the world for the reasons that I pointed out. And unless something is done to arrest that and in some way control capacity, I think there's going to be a lot fewer people coming to CAPA conferences in the future, Peter. Thank you for listening to me. Appreciate your patience.

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