Asia Airline Outlook 2015: A Perspective

Transcript

Peter Harbison:Always interesting in this region. It's a massively complex business. It's changing so dramatically fast. And of course, this region is, is so many different places. We're constantly conscious of that. We're coming off the back of the ASEAN talks yesterday, which have again, I think, I'd like to be a bit more positive, but I hear a lot about roadmaps, and roadmaps are really the way to get there. I think perhaps we're getting there with ASEAN, but we'll hear more about that later on. The TPP, the Trans-Pacific Partnership, is also something that occupies our minds very much in terms of trade, and then there are other things directly in the industry like oil, which is probably one of the positive notes at the moment for all of us. I'm going to say a few words, nothing terribly profound, but it's really just to— and it's really just to try to put some perspective on what's happened over the last 10 years because there is so much going on, because it is such incremental change. We live with it every day. It's sometimes easy to lose sight of just where we've come from because where we've come from and recognising where we were is really useful in trying to work out where we're going to be in 10 years' time. So what I'm going to do is try and talk a little bit about perspective in my first presentation here and show you a lot of pictures. I'm going to skip through a lot of things very quickly, but hopefully they'll form a useful basis too for for some of the things we're going to talk about during the next couple of days. So let's go. The 2 issues I'm going to handle here, and there are many, many others of course, are the way airline groups are forming, and I use the word group very, very loosely, the sets of cross-border joint ventures that LCCs are producing, but also the way the full-service airlines are creating mini groups within their airline to try to combat the various forces that are going on. And then it's impossible not to talk about China in any discussion, so I'll finish with a couple of words about the expansion of China. Let's look at life before the LCCs. As I say, I'm trying to provide some perspective here in terms of where we've come from and where we're likely to be. Until 10 years ago, we probably had a dozen airlines or so. Really, they were the ones who provided everything. Obviously foreign airlines coming into the region, but these were the airlines we travelled on. And that didn't change for a long time. There was a bit of, little bit of coming and going, particularly in China, and I'm not going to talk about the China market specifically other than at the end. And then We had— we have had, and it's important to remember it now, the most remarkable shift in the balance of power that any industry in the world has ever seen. In the space of a decade, we saw the emergence of a massive number of new airlines, some of them operating domestically, many of them actually operating across borders and totally transforming the way the market operates. It really has been quite dramatic when you see it like that. Now that's— that dozen or so airlines are still there and they're having to live in a totally new marketplace. Where do we look like being in 2025? That's really what I'm asking here. So I talked of groups before. One of the sorts of groups, and as I say, I use the word very loosely, groups is the establishment of low-cost carrier cross-border joint ventures. These have been very, very important because they have actually been far more important than ASEAN ever will be, probably, in terms of liberalising the marketplace because they've cut across the old controls on ownership and control effectively, allowing low-cost carriers to establish in different marketplaces to have much more efficient operations, to have different bases, and in the process obviously changing the way people fly. I heard Tony Fernandes talking the other day. He said of the 100 routes that they fly or so, only 26 of them had airlines flying those routes before AirAsia started. That's the sort of thing we're talking about. It's not just about price, it's about transformation of markets. And as I say, AirAsia paved the way. Now, I'm not trying to plug AirAsia here, but I think that, that picture really from a couple of million in 2003 to 50 million in 2014 and 60 million this year is, is really the, the kickstarter in a very big way for getting things very different. And that cross-border joint venture model is now It's not perfect. Certainly AirAsia's had a few losses and suffered, and of course if you look out there on the right, AirAsia India isn't in the middle of the Pacific Ocean, it's some way across to the left. I'm not going to talk about India here, but Bennett Samaya will give us a very interesting presentation later on. So that's AirAsia. Jetstar, likewise, the same sort of model, trying to establish bases across the region. Vietjet is also in much earlier stages but going along the same direction with a joint venture in Thailand. Tigerair, again, has had some ups and downs. It's down to 2 at the moment but has had a few other attempts at it. Lion Air, just really starting to move now outside of Indonesia into Thailand and Malaysia. Spring, one of the most successful low-cost carriers in the region, has now established in Japan with Spring Japan. And so what's happening, what's being forced upon the full-service carriers is a need to recalibrate with this totally different environment. The impact of changes has been most marked in Southeast Asia because that's where a lot of the early growth of the low-cost carriers came from and where really the markets were more liberal too, which is why it's happened faster. It's why we've got 60% of all seats within Southeast Asia on low-cost carriers and only 10% in Northeast Asia on low-cost carriers. So in this circumstance, the flag carriers are reassessing their expansion plans. How fast do we expand now? because they've had some nasty financial results pushed on them because of what's happened, started deferring orders or transferring them across to where they do have low-cost subsidiaries, transferring them across to those subsidiaries. And then on long haul where the market is sometimes quite different, particularly if you're not too, too affected by the Gulf carriers, the strategies are a little bit different. So let's look at some of those so-called full-service airline groups that that I'm calling groups. In Korea, still very limited subsidiary operation by Jin Air and Ebusan with the 2 major carriers there. Japan— Japan's always different. The team that ANA has underneath their brand is a whole number of brands is really not where they're going to be in 10 years' time, but it's a result of sort of consolidation in the Japanese market. It's a very different market. JAL very effectively working with Jetstar though. And in Taiwan, they were quite late to come to the party. They did not think the low-cost carrier market was going to go anywhere, but they're starting to move there and TransAsia Airways has got its VietAir subsidiary, China Airlines with Tigerair. Hong Kong again is a different market. They're all different markets. Cathay Pacific is a different sort of airline. It has, to a large extent, long-haul to long-haul, which in some ways insulates it. It's also operating out of a highly capacity-constrained airport, and the Gulf carriers are not as powerful in that market as they are certainly in Southeast Asia. But then we see the emergence of Hong Kong Airlines out of HNA, and it's its sister traveller HK Express, low-cost carrier. Thai likewise has started to move into having its own little group. The most interesting probably in a lot of ways for the science— the scientists among you is the combination between NOK and Scoot. So you've got essentially 2 major carriers, 2 competitors who've been really, really serious competitors over the years, Thai Airways and Singapore Airlines, actually combining in a subsidiary, pretty much subsidiary, combination of NOK and Scoot in the medium to long-haul NOK-Scoot low-cost operation. And then Malaysia, which is, as we all know, going through a very, very substantial recalibration at the moment because of its effective bankruptcy and then reformulation now. It doesn't really have a very effective group and we'll see what happens after after Christoph Müller has gone through and formulated a new strategy. And then in Vietnam, Jetstar and Jetstar Pacific is working with Vietnam Airlines to combat what's going on with Vietjet. And then in Indonesia, Citilink is pretty much a domestic operation and not really a substantial group. But Garuda has some time ago seen it necessary to do that, competing in a domestic market with Lion Air which has again come from nowhere to take over the dominant share of the domestic market in Indonesia, a very big market. And last and certainly not least, Singapore Airlines which has probably partly by sort of accident but also increasingly now by design a fairly interesting group. The flag carrier itself, the long-haul high-quality product, SilkAir, which is a full-service regional operation, and then TigerAir, which probably, hopefully, will be wholly owned by Singapore Airlines in the very near future, and Knox Scoot, which is a full subsidiary. So what we see there is the profile of how arguably an airline group, a full-service airline group, can work. On the left-hand scale you see the positioning between full-service and low-cost, and then on the horizontal scale moving across from regional to long-haul. So at full-service level you've got SilkAir feeding into Singapore Airlines. This is classically how it's been done as a full-service regional operation. Then at low-cost, fairly disintegrated if anything, Tigerair and Scoot operations. They are now being folded much more into connecting into the full-service operations. Very carefully done because you don't want to spoil brands, you don't want to soil brands, you don't want to have customers dissatisfied because they're going from a better quality product to a much more low-frills operation. And— but that I think is perhaps the short-haul and long-haul low-cost operations on both ends is quite an interesting 4-sided activity. I suspect that, in fact, that Tigerair and Scoot will probably not be separate entities by this time next year, which will make that whole equation a lot simpler, and it'll make the process of change for Singapore Airlines that bit easier. It's been through a tough time. It's had to compete with the Gulf carriers as well as being right in the heart of some very, very aggressive low-cost airline operations. And I'm going to do some generalisations now, but essentially, as I've said, the need to change that has been forced on them has been largely driven by low-cost carriers and Gulf airlines. And we shouldn't underestimate the impact of the cargo downturn either, particularly in North Asia with Korean, EVA, for example, who've relied very, very heavily on cargo. As has down here Singapore Airlines. And all of those have really forced very, very substantial reassessments of where the airlines need to be and where they can be in the future. So just looking at classifying these very, very roughly into 3 categories. First of all, the ones who are using the groups more strategically, more effectively are probably Singapore, JAL, and arguably Vietnam. ANA has not really got the combination together yet, but it's going in that direction. And of course, Peach is very, very successful in the domestic market. Cathay hasn't really changed its strategy very much over the years, but is nonetheless still going pretty well. The second group who are probably having to look much harder at where they are in the marketplace, particularly Malaysia Airlines obviously going through the traumatic process it's just been through or going through, is in its case definitely tending to— looking like tending to focus much more on regional operations than long haul. Garuda, not quite as obvious, but similarly. David in that respect. And neither of them really has a sort of effective group that I talked about with Singapore Airlines. And then thirdly, I'm being a little euphemistic here. These are the airlines really who don't, I think, have a strategy that's going to prepare them for the next decade. They're going to have to make some of the other changes. I'm not saying they're in trouble or anything like that, but They just strategically probably do need to be looking at, as I say, evolving their overall strategy. OK, then a few words quickly about China. We always knew and always will know that China is going to be a very, very important part of the market, not only in terms of travellers but also in terms of the airlines themselves. They haven't really been very big players. in Asia, given the size of the Chinese market. Only about 7% of their seats are in the international marketplace, and there's a tendency to look long haul when the— particularly when the major carriers are going international. What's starting to happen though this year, and it's quite dramatic, is about a 40% increase in passengers carried on Chinese airlines internationally. And It's the more stark because if you look at the fairly steady growth since 2010— this is the first 8 months of this year compared with equivalent periods in the previous 5 years— when you look at that fairly steady growth, suddenly you've got a change. There is a change in the market and that is something that's going to impact all of us across the region quite significantly. And of the 15 top Chinese airlines, 10 of them will be flying wide-body aircraft next year. These are all in some very good analysis done by our Asian team on our website if you can— if you want to go across and have a deeper look at some of these. But we see in there something that isn't reflected anywhere else in the world, that you've got 10 major airlines, 10 very substantial airlines, who will be going long-haul and probably will be going international. But also, it's not just the big ones, it's the smaller ones. 2 years ago, the CAAC opened the door formally, formally, to low-cost carriers, and we now have, give or take, at least 4 in the market. Spring was the market leader by a long way and is right out there in terms of strategy and so on, but that fledgling fleet, which will be flying in in Asia is now starting to grow and becoming more vociferous, more aggressive in the marketplace, and starting to change things like distribution along the particular lines that China is best suited to. So there are changes coming with that, and they will spread across the region, as has Spring Japan, we've seen with the establishment there in Tokyo. And at the same time, the full-service carriers expanding their operation very dramatically. And I think that growth trend will continue right through next year and beyond. So it's going to mean some very, very substantial changes. In terms of the incumbents adjusting to a new marketplace, we're probably about halfway through that process. got a long way to go before this market starts to stabilise in terms of what the models are going to look like. Oh, and by the way, I haven't mentioned India in this. You might have heard that IndiGo IPO'd a couple of weeks ago. The valuation placed on that was $4 billion. The float was drastically, enormously oversubscribed. and it's an extremely successful airline. And with 430 aircraft coming along and an existing quite young fleet, so most of those aren't necessarily replacements, I think we're going to hear a lot more about IndiGo in this marketplace too. So that ends my initial comments. Hopefully there's a bit of food for thought there and we're going to delve into a lot more detail with, with many of these areas. Thanks for listening to me.

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