Asia Aviation Outlook 2019 And Beyond

Transcript

Peter Harbison:So, thank you for being with us, and I look forward to some challenging and perceptive, insightful views. Robert, we had a bit of a discussion just a month ago in Seville, which we found very interesting. Incidentally, if you look on CAPA TV, Centre for Aviation— is that okay? Centreforaviation.tv. There's a very interesting discussion which we've highlighted between Robert and the CEO of Air Leasing, a bit of a legend in the leasing industry, Udvar-Hazy. Just in passing anyway, because there's some interesting thoughts there. Well, actually, I'm actually going to play that tomorrow morning before one of our discussions. So anyway, let's back to the present and the future. Andy, let's start with you. I talked about fuel, and I guess that's on top of everybody's mind in the aviation business, not just on a cost side, but also on a supply side, I guess, a demand side, because it does affect everything if people have to spend more money on heating oil and the rest. What are your big issues for 2019?

Andrew Herdman:Well, I think just picking up on the themes you outlined this morning, we've been living in a very benign expanding global economy. That continues. The IMF has cut back its forecast for growth next year by a couple of tenths, but we're still talking 3.7% growth. And aviation, as you well know, consistently grows faster than GDP growth, and we've been through a period of very rapid growth in the last 5 years. You talked about a tipping point. I view a tipping point as something different. I'd view that as the risk of a turning point, and I'm not sure I'd buy the argument. If we look back to the period when oil was in the $100, $120 range, we were still growing as an industry then.

Jeffrey Goh:Yes.

Andrew Herdman:It's true that in the last 5 years the growth rate has been well above trend, and that's a global phenomenon, not just fed by— driven by Asia, but I think it says something fundamental about the aspiration to travel and the affordability of travel. And even with the higher oil prices will eventually push up fares, air travel is still going to be very affordable. It's still going to be cheaper to fly than it was 10 years ago. So in a world of rising incomes, growing middle class, I'm not too concerned about the long-term growth prospects. I think that's still a given. The challenge is how successful are airlines at passing on that fuel cost into the fares and preserving margins, and that varies dramatically around the world. We can talk a bit more detail about that. But overall, I'm optimistic about a continuation of growth. Both globally and particularly in this region, and that represents a lot of opportunities.

Peter Harbison:Just, I mean, there are several dimensions to this. One is the global and the other is Asia-Pacific, which is what we're talking about essentially, but, and then you've got passenger growth and cargo growth as well, and profitability. So we've got a number of dimensions to this discussion, but just to take the US, for example, where The carriers basically, the major carriers are basically unhedged, and the impact of fuel has been felt very quickly, and they're back to profitability levels that they haven't seen for about 6 or 7 years in terms of being low. So obviously fuel's had a major impact in there, even though they've been able to increase their yields quite considerably in a very oligopolistic market. Is the, without putting words in your mouth, is the the catalyst or the solution to that really just in the high growth levels that we've got in this region? Will that be the thing that makes it easier for the combination of profitability and growth to occur?

Andrew Herdman:We wish. You would think in a growth market it would be easier to pass on higher costs, but we see the converse. So in fact, the US profits are down a little, but they're still very healthy. And they are— do have the ability to pass on the higher costs. We've seen from the results coming out of the majors in Europe, particularly IAG, They're passing on the cost. The iron rule of this business is the costs get passed on. Lower fuel prices translate into lower fares. Higher fuel prices translate into slightly higher fares. But it doesn't really change the demand dynamic. But there's a lag effect. And as you say, some airlines are hedged. And that means they face less pressure. I think they should. If you're hedged, I think, and you get a windfall profit, you shouldn't pocket the profit. And pass on— you should pocket the profit and not pass it on in terms of lower fares, in terms of maintaining fares at lower levels. But that's what happens. The converse, when you're hedged the wrong way, nobody in the market says, I feel sorry for you, let me pay you more. So I think the hedging is a little bit of a distraction. The key thing is, what are the pricing dynamics? The fastest growing market in the world right now is India. It has the worst profitability. So there's an inverse correlation between growth and profitability. And that's not normal economics. It says something about the dynamics of competition in our industry.

Peter Harbison:You agree, Robert?

Robert Martin:So I've just returned from visiting customers pretty much around the globe over the last 2 months. It's very interesting. We see some significantly different trends going on. Just step back and think back over the last 2 months. We saw Singapore Jet Kerosene hit $96 a barrel in the last month. Today it's $86. So if you're the corporate treasurer sitting there and saying, to hedge or not to hedge, which one do I do? Because depending on where you hedge determines the profitability. So we're seeing a couple of things go on. First of all, First of all, I agree with Andrew. In North America, the big US carriers are able to pass this on through their fares. And I met with 2 US majors in the last month who have told me they're actually achieving 100% pass-through on the fuel increases. So that tells you about the strength of the pricing power in that market. Conversely, in India, we're seeing exactly the opposite. At the time when fuel prices peaked, and we know we have these state taxes on top of the fuel in India, we're seeing a huge fare war running into Diwali, which should be the high season. This quarter should be the high season in India. So it's different competitive dynamics that are driving this. And as I sat this morning sort of listening to the JAL chairman's presentation, I was just reflecting on 2 themes that came out. There are 2 things we see airlines focused on. One is profitability, but there is another one called survivability. And particularly the seasonality of cash flows, to understand those is so important. Think of Icelandair-WOW. The merger happened over a weekend. Basically at the end of last week, Our friends at WOW were out there competing, trying to do purchase and leasebacks in the market. By Monday, there's announcement the deal didn't happen. And basically now we see ourselves with them having a new owner. That's how fast it happens at this time of year. Already we've seen 6 small European airlines disappear since August the 15th. OK. And so the other element that I think has become very important at the moment, other than fuel, is working capital financing for airlines. The big airlines that have been through many downturns are used to having backstop credit lines in place. One of the things I'm seeing with the airlines that have been set up over the last 10 years since 2001, 2002 is for some reason they're not setting these up. So it means when they hit these points where there's a shock to the system or a high oil price, they're having much greater issues Being able to push through those periods than those who just have their traditional house banks where they just draw down backstop credit lines. So we're seeing a big difference in this size. We've been encouraging people to change this, but only some of those carriers are changing their— the way that they're doing things. There's also another theme came out from my visits around the world. Airlines are beginning to focus on carbon and carbon emissions. And you have some markets, such as New Zealand is a good example, where the domestic system seems to be pretty advanced now in terms of how they deal with emissions. But there are other markets where it's not really on the airline's agenda yet. And with Corsia coming, I think this is something the industry's got to move ahead on. And I'm sure our 2 friends here from the airline association will be able to talk more to that than I can.

Peter Harbison:Yeah. Robert, sorry, if I could stay with you just for a moment. The market you didn't mention was China, which is still growing very fast, domestically extremely fast. How do you see the dynamics in that market in terms of the context you were just talking about?

Robert Martin:Well, there is no doubt competition is fierce there at the moment. And there is 2 elements to the Chinese competition. One is within China. And the other is the competition now that they're bringing with their direct flights to Europe and the US and the impact particularly on East Asian carriers. I think you need to think about both of those, and the second one definitely is a major factor when you talk to anyone outside China here in Asia.

Peter Harbison:Yep, yep, interesting point. Well, Jeffrey, you've heard what your colleagues have said.

Jeffrey Goh:I don't need to say any more.

Peter Harbison:That's all I was going to say.

Jeffrey Goh:You can just I think, Peter, there's a danger of overgeneralizing about the impact of fuel in the sense that prices have gone up. You know, as Robert said, that trends are difficult to generalize when you look at different regions. And I think one of the reasons why the US carriers have been successful in the last couple of months and year or two, in spite of the price rises, is that structurally, The market has changed. They've positioned themselves much more able to absorb price increases. Yields are better through consolidation processes. But then it's slightly different, I guess, when you look at the region of Asia, as you say—

Peter Harbison:Sorry, can I— sorry to interrupt you. Just going back to— let's get on the record. The US, even though they've pushed fares up, and it is an oligopoly, their margins have decreased to almost down to about 10%. Which is as low as they've been for a decade. So even though they are pushing their fares up, they're not making the profits that they, they need to get a return on capital.

Jeffrey Goh:Not quite, but domestically it's still a very tough, you know, competitive sector for the US carriers, no doubt. And then the major part of the market for those majors in the US is transatlantic, and you know, there are a couple of hundred flights a day just between Europe and, and the US. But if you look at the Asian market here regionally, a large part of the travelers, as you put in your introduction, are on the low-cost segment. And I think that's where perhaps you will see slightly more impact in terms of the ability to grow by the low-cost segment. The other interesting thing I think it's worth pointing out is we're beginning to see more long-haul low-cost operations. And that would be the interesting part as to how it unfolds in terms of price increases. But I think hope springs eternal with new aircraft and new technology. That's probably going to be, you know, changing the environment, the ability of carriers going long-haul low-cost too.

Peter Harbison:Yeah, it's a difficult time to be going long-haul, isn't it? Suddenly when fuel prices are going up, challenges. And just on that topic, the LCC versus the full-service carrier, And the short and long haul. Which, I mean, in this region particularly, which carriers, to use Robert's approach, are looking more sustainable in the face of higher fuel costs? Obviously, the proportion of fuel cost becomes greater in a low-cost carrier. And you've talked about how the full-service carriers have probably a better ability to increase their fares.

Andrew Herdman:Yeah.

Peter Harbison:Who are going to be the winners out of a doubling of fuel prices in the last 18 months? I mean, you're all full-service carriers, I know, but—

Andrew Herdman:No, they've got lots of LCC subsidiaries. And most of the seats down the back are selling at very competitive prices against all comers. And the markets overlap and hybridize, as you were saying this morning. Just to echo and pick up on some of the points being made, In China, it is very competitive. The profits are coming down. They're generally unhedged as a matter of policy, so they felt the brunt of that, and they've also got a currency effect. Robert's point about financing, I agree. It's very easy to finance aircraft because the aircraft is seen as collateral for the future. And that leads us down the path of thinking we can always go to the market for finance. It's not so easy to finance an airline. If you say you're short of operating working capital and you need financial support, or you're trying to get an equity IPO away, the market is fickle. The market is hard-nosed about making those judgments. And we're seeing that in terms of airlines failing. In this part of the world, we haven't seen airline failures, but we have seen people curbing their growth ambitions. You mentioned the fact that the Middle East carriers have lost some of their ambition in terms of the growth rates they were sustaining. So in the end, the capital markets are generous in terms of financing all this future growth, both of aircraft fleets and in terms of infrastructure, airport infrastructure, but there is a A bottom line, which is, is it going to be profitable? And we heard from the JAL presentation the price of failure. And that was a very effective— the Japanese equivalent of a Chapter 11 restructuring, which, of course, the US carriers have been through. And you're reborn in a much more profitable way. So we may see some other failures. But overall, the low-cost carrier, full-service carrier— If you look at who's capturing most of the revenue, who's capturing most of the RPK traffic, who's capturing most of the profits, it's still the full-service carrier network model. And now that the carriers, the low-cost long-haul model is appearing, and those look more and more like network carriers with connectivity and so on, these distinctions are very, very blurred. I don't think it's helpful to make the simple distinction between full service versus low cost. So overall, the question is, is long-haul low cost profitable? WOW Air, value zero, was pioneering that. We've got AirAsia X here. You've got Norwegian.

Peter Harbison:I'd be reluctant to extrapolate too much from WOW Air, because Icelandair was basically going head to head with it in a growth program. Not a holistic market thing. It's more of an individual market. I think of Iceland, a tiny little nation with a great soccer team, which just couldn't necessarily sustain 2 carriers going head to head. There just weren't enough routes in the world.

Andrew Herdman:But the difference is, in the low-cost space, you saw Ryanair, which is still extremely profitable, has been for a long, long time. And there are role models of how to do low-cost right, keep scaling up, be very profitable, maintain profitability, set the bar in terms of success. In long-haul low-cost, I challenge you to name an example of success in that same way. You know, success seems to be break-even in a good year. Norwegian's results, AirAsia's results—

Peter Harbison:Very early days. Come on, give them a break.

Andrew Herdman:Sorry?

Peter Harbison:Give them a break. I want to see them succeed. It's very early days to be making that sort of assessment. But sorry, if I could go more seriously back to one of the points that that you sort of referred to Robert on. The other thing we haven't talked about explicitly is, of course, rising interest rates and the fact that a lot of debt is denominated in US dollars and the US dollar is rising as well. How important is that relative to, Robert perhaps, to the impact of higher fuel costs, which are also denominated in US dollars?

Robert Martin:I would actually throw in a third element, which I think is more volatile, and that is foreign exchange rates. If you are a large domestic carrier or even a large international carrier but with non-dollar revenues, I'm afraid the foreign exchange can hit you much faster than the rise in interest rates. If you think about it, rates have risen today. We're just over 3% for 10-year swap rates. You know, in history, actually, that's low. The average over the 20 years that precede the last 10 is over 5%. So this is still a low interest rate environment historically. And the rises have not been sharp. So far they've been pretty slow. The volatility in foreign exchange, if you've been in Brazilian real, Indonesian rupiah, Indian rupees, even the Russian ruble over the last 10 years, This has been huge. And so this is where you get hurt. And then particularly if you also then rely on domestic working capital lines that are based on domestic interest rates, where unfortunately the rates go up to protect the currency at the same time as a foreign exchange issue happens, that becomes very difficult. So I would say to me, the 2 biggest factors are foreign exchange And fuel. And the hardest bit is the volatility of it. It's not so much the absolute move. If it's smooth and over a period of time, you know, India traditionally moves down about 6% to 7% per annum. But if you suddenly get 15% in a year, it's a much more dangerous issue.

Jeffrey Goh:Yeah.

Andrew Herdman:And forex isn't just a financial cost. It can change demand because it changes the attitude towards foreign travel in particular. If interest rates rise domestically, as has been mentioned, that can also turn off demand within the domestic market. So I think between fuel, forex, and what can you do about fares, that's the conundrum at the moment from an airline CEO point of view.

Peter Harbison:It's a great business, isn't it?

Jeffrey Goh:Just coming back to your question, Peter, on who's going to win between the low-cost and the full-service, I think it's a loaded question there. I think that there are 2 factors.

Peter Harbison:No, it wasn't. It was a totally open question.

Jeffrey Goh:There are 2 factors there. One, not to belabour the point about WOW when you say, you know, it's going head-to-head with Icelandair, but I think WOW is a good example of, in my view, too rapid an expansion where they're going across the Atlantic, and that is a really cutthroat market at the end of the day. It's not just with Icelandair, it's, you know, all the other transatlantic pax as well. The other is, and I think, you know, Coming on the back of that is discipline about whether you're going to chase market share or you're going to chase profitability and yield. I just came on the back of a meeting with our board chairman for board strategy just over the weekend, and he's from Copa, as you know. That's a very clear-cut case study of discipline. The market is growing in the North-South American axis. But yet it is a very clear discipline and strategy that they have without chasing the market. And I think that's very important as you face price rise, fuel price increases in particular.

Peter Harbison:Yeah, I mean, Copa is a good example.

Robert Martin:Maybe, Peter, if I can just add to that, because actually there's a good example. The Latin American market, we can learn from this. Avianca Brazil, Avianca Colombia, 2 Even the fast-growing carriers over the last few days, Avianca and Colombia have come out and said, we're going to defer 50 single-aisle aircraft. So I think we're at that point where people are sitting back and saying, okay, we've got all these orders, but do we really need them all in the timeframe we've ordered them? So I think we're going to see some moving back of these order books from the people who have made large orders. That will happen over this winter.

Peter Harbison:I mean, isn't it though massively difficult to, to predict where— when you're a new, relatively new carrier in the market, you're actually— you can't be really responsible because you've got to— you've got to— you don't have any market share to protect. You've got to get some market share. And if you're seeing the market growing at 10% a year for the next 5 or 6 years, you want to be in that market. How on earth do you, do you order the sort of aircraft that you want?

Robert Martin:Operating vessels. That's why we exist. Traditionally, that's why operating lessors exist.

Peter Harbison:You've got a biased response, yeah.

Robert Martin:I've got to come here and pitch my book, OK?

Peter Harbison:Do you agree, Andy?

Andrew Herdman:Yeah, alternatively, you take a punt and say, I'm going to order 100 narrowbodies or 200 narrowbodies. And you showed a chart where people are ordering 300, 400. Those are speculative order positions in a market where Boeing and Airbus have got 8-year backlogs. It's probably a safe speculation.

Peter Harbison:My point is, how can you avoid being speculative? Because we don't know. What the market's going to look like in 5 years' time. We know it's going to be bigger.

Robert Martin:You place smaller orders with options the way the industry used to operate. This idea that we've moved to mega orders over 10 years, I think, is crazy.

Peter Harbison:But the market's been totally disrupted in Asia, hasn't it? I mean, we've got 20, 30 new carriers in this market in the last decade or so. I mean, that's, that's a whole different market. You can't use old-fashioned comparisons with that, can you?

Robert Martin:But people have to think very about where is the capital coming from.

Peter Harbison:Yeah.

Robert Martin:And they need to look at the liability side of their balance sheet and keep pace with what they're doing on the asset side of the balance sheet. And that is what has not been happening over the last decade.

Peter Harbison:Yeah.

Robert Martin:Basically, people have placed the orders and they're hoping people are there to do sale-leasebacks at delivery. Look at Premier. We've forgotten they only went down less than a month ago. Basically, they went out and ordered a number of planes and again tried to grow too fast. And they didn't keep the liability side of the balance sheet in check at the same speed as they're growing the asset side of the balance sheet.

Peter Harbison:Well, just if I could, Robert, say on the operating leasing, you had some interesting comments earlier this week about impliedly the potential for consolidation in the leasing industry. that there'd been a bit of excessive exuberance in, in terms of pricing to buy and to consolidate. How do you see that going, and how does that flow on into—

Robert Martin:Well, maybe let me first of all explain exactly what I said, because—

Peter Harbison:Sorry if I got you wrong.

Robert Martin:Peter, you're normally right, but there are people out there who, to use Mr. Trump's phrase, put out false news.

Jeffrey Goh:Fake news.

Robert Martin:Fake news, even. So what I said was, every year we review What we see on the operating lease market, and we look at, for the bigger players around the world, what is their appetite for doing new transactions in the next year. And we identified a couple of years ago that people's aspirations are about, if you aggregate them together, are about double or triple the size of the actual market. So obviously people aren't going to win the market share they want to. So where that ends up with is if you can't Acquire from the manufacturers because of the overbooking. The purchase and leaseback market gets driven to a point that is unattractive in terms of returns to your shareholders. You'll then live with the third option, which is to acquire other leasing companies. And we've been seeing some of that going on. And I think that will continue. The consolidation will continue over the next sort of 4 or 5 years.

Peter Harbison:So But the point at the end of that question was, so what's the impact of that on airlines?

Robert Martin:It's very little, actually. This is not a market that's very—

Peter Harbison:Doesn't push prices up?

Robert Martin:No. I think sort of when you consider there's 350 active leasing companies out there at the moment, I wish it would have that impact. But unfortunately, it's not true. The top 10 really only sort of control about half of the market. Even if you've got consolidation within that top 10, it's going to bring it down maybe to 8. Still plenty of demand out there for airlines to compete.

Peter Harbison:Jeffrey, Ueki-san mentioned it, and I mentioned it too in my presentation, the ever-present issue of pilots. What's— I mean, and obviously this is something that's talked about in Star quite often, Star Alliance. What's your takeaway? What's going to happen in 2019 and beyond? Are we going to be able to Yeah, I think, Peter, that's—

Jeffrey Goh:I mean, it was a good point that you teed up earlier this morning. It's a chronic problem. I mean, the other chronic problem that we've been talking about, the supply side of aircraft coming into the market, it's more the ability of the infrastructural landscape to be able to handle all that growth as well. But from a pilot perspective, as I go around talking to our chief executives, it is a problem. It is a problem even within the alliance where Pilots are moving from one airline to another.

Peter Harbison:And the price goes up each time.

Jeffrey Goh:Well, so the 2 points I was going to make out of that were, one is the inflationary pressure on costs, on labor costs, and that has in fact driven some countries that have developed legislation to incentivize foreign pilots to come into the country with all the tax incentives and so on. And the second, my concern is Probably more as a question mark is, as we begin to push more pilots out quickly into the operational setting, there's a question mark on safety. How ready, how soon can these pilots be ready? Are we being driven to your conundrum, your dilemma there, the commercial imperatives of getting pilots out there? So I think that's more of a question mark to me, but certainly there's inflationary pressure on costs. will be very evident. It's really evident having spoken to a number of our members too.

Peter Harbison:Andy, is it worse in Asia where the growth is faster?

Andrew Herdman:The demand growth is strong, and if you look at the future order book, it's about 40% of the aircraft are coming to Asia, and that means about 40% of those pilots that are needed are needed in Asia. The number of pilots available is just about right. But there is a bidding war going on. You talked about the US carriers feeling the pressure. They're passing on the fuel cost in the fares, but they've also got rising costs because they've had staff settlements, particularly for pilots and other groups. They've got a rising cost.

Peter Harbison:Which is a disappointed end too, yeah.

Andrew Herdman:But again, we've got to be a bit careful because the forward projections of 10 years, 20 years, how many pilots do we need, fortunately a lot of those are needed in the latter stages. We've got to look at today.

Peter Harbison:Mm-hmm.

Andrew Herdman:And the number of pilots coming through is about right, but they're being drawn up from smaller operators, regional jet operators, general aviation, and so on. And that's putting a lot of pressure on those segments of the business and where experience levels are falling amongst very smaller operators. At the top of the food chain amongst the major airlines operating big commercial jets, what's happening is we're seeing a— A reduction in the range of salaries. So particularly in low-cost regions of the world, salaries are moving upwards, and Jeffrey mentioned countries that are drawing in— China is well known— is importing a lot of pilots at very high salaries, basically to make sure they can man those aircraft. At the same time, they're increasing training, and I'm a believer that the private sector training organizations will see this as an opportunity and will expand accordingly. But in the short term, it's pretty tight, and it's a global issue. On the safety side, I'm reasonably comfortable that standards will be maintained, but it's well to keep it in mind.

Peter Harbison:I mean, we can't— just on this region, we constantly hear of stories sort of vaguely without any obvious substance to them, but of aircraft sitting on the ground because an airline is short of pilots, or or cutting back on their schedules because of the pilot shortage. Is that something that your members are talking about?

Andrew Herdman:You hear it anecdotally, but it's hard to put your finger on it. But I think there are cases, and I have spoken to a number of CEOs who say, yes, when we're looking at the short-term capacity planning, that's one of the factors. They are losing— you know, as they're losing pilots and they say, what have we got? As to the retirement age, retirement ages are generally being pushed up. Which is going to alleviate some of the pressure. There's no getting away from the fact that a growing industry is going to need more—

Peter Harbison:Sorry, we just lost— he wasn't saying anything controversial either.

Robert Martin:Maybe if I can just add, Peter, on aircraft sitting on the ground, we're seeing something new beginning to appear in the market at the moment, which is we're seeing the turnaround times for Mm-hmm. And as we dug into it, what we've realized is some of these issues we've seen on the primary side with new engines going into service, having to have more support to help them get into service, is beginning to have a knock-on effect then on some of the existing engine types and the speed at which the spare parts are arriving at the shops.

Peter Harbison:Mm-hmm.

Robert Martin:And so we're seeing a lot of delays. This is something we really hadn't focused on until this year.

Peter Harbison:The supply chain.

Robert Martin:The supply chain is— yeah, this is another area where the supply chain is creaking. And there's a second issue as well, which is— and you mentioned earlier about regulators. When you think of the huge number of aircraft that we expect to come into Asia-Pacific, we've got to make sure the regulatory side moves at the same speed. And a good simple example of that is when we're transitioning an aircraft from one country to another, country, we obviously need both aviation authorities to sign off on the transfer and for manufacturers to sign off on any changes that we may be doing to the aircraft through their certification systems. And we're seeing some logjams there, and again, it's just purely down to the large number of new aircraft types entering the market over the last 4 years, 25 new types. And so this is putting stress also with the certification agencies in each country and the speed at which they can turn this around. You may remember the A320neo got delayed from September last year till May this year into China. And so that created a whole backlog of aircraft that should have been delivered purely from the certification issue. Right, and that's China, which This is something that costs consumers.

Peter Harbison:Be better prepared than most. Yeah.

Robert Martin:Yeah.

Peter Harbison:I was talking numbers before. We effectively have 800 aircraft arriving in this region with all of the issues we've talked about next year. Is that going to happen? If it does happen, is it realistic?

Andrew Herdman:I think some of those are going to be pushed.

Jeffrey Goh:Yeah.

Andrew Herdman:Into the future. Roughly speaking, there are about 8,000 aircraft— depends where you— what the cutoff is— in the Asian fleets. So that would represent about a 10% growth, and that's ahead of what's expected. So realistically, some of those will get deferred. Retirements is the other factor you've got to calculate. But overall, supply-demand on fleet has been reasonably balanced. Load factors have been rising. Load factors are high, both historically and, you know, that's being sustained. So that points— that contradicts the notion of overcapacity. I'd just like to echo a point that Jeffrey raised, which is infrastructure. 2019 and looking beyond, one of the biggest challenges for Asia and the rest of the world is airport infrastructure and air traffic Airport management infrastructure. It's very capital intensive, very long lead times. It's not a granular market in terms of airlines deciding to buy aircraft. It needs governmental planning approvals. They're very large projects, $5, $10, $15 billion projects, and that's a big issue for the industry, both airlines and airports and governments working together to coordinate. A lot of great infrastructure has been built in Asia. We have some of the world's best airports. But we need more of them, we need them in a timely fashion, and we need efficiency as well as capacity.

Jeffrey Goh:If I should just add to that, Peter, I think certainly one of our European members have— has begun to look at trimming capacity, principally because of infrastructural constraints in European airports. I mean, this year in the summer in particular, I can't say much about Asia here, but in Europe, on-time performance has been terrible. And one of our primary members is actually trimming capacity because of these bottlenecks that are happening out at the airports. And I think it's very important for the stakeholders to understand, I mean, to build on Andy's point here, that there are ways of, although there are long lead times, but in the shorter term, there are ways of getting the stakeholders together in a more calibrated fashion of getting through passengers, you know, through the terminal in particular. We're not just talking about navigation and sort of slots, we're talking about terminal capacity as well. And I think that's where there is optimism, at least for me, from a technology point of view, in trying to solve the processing of passengers to terminal more quickly.

Robert Martin:Maybe, Peter, if I can just add, Jeffrey and Andrew talked about the demand side. There's also some supply-side issues. Just to use this year as an example, we were expecting to take about 60 deliveries in total this year. At least 6 of those are going to end up being pushed over the year-end due to supply-side issues at the manufacturers, where the supply chains aren't keeping up basically with the manufacturers' expected production rates. We expect that to continue through 2019.

Peter Harbison:That's an industry issue, isn't it? I'm intrigued too, we sort of hear incrementally stories coming out about the impact of a trade war on the—

Robert Martin:This is not a trade war issue.

Peter Harbison:No, no, no, I realise that, but I was going to ask that specifically. Is there, is there a supply chain issue for the aviation industry in the prospect of wider, wider trade wars?

Jeffrey Goh:Jeffrey, what do you—

Peter Harbison:is anyone talking about that in your area?

Jeffrey Goh:Yeah, I mean, I'm just going to be careful how I phrase this. We've certainly seen some number of cooperation applications that need to be put through regulatory authorities being either deferred or withdrawn with reference to, for example, the disputes that's taking place, particularly across the Pacific.

Robert Martin:Right.

Jeffrey Goh:And that's having some impact in terms of growth and revenue projections as well. So certainly I think there has been some— there is an impact on the disputes that are taking place, no doubt about that.

Peter Harbison:Andy, are you seeing that too?

Andrew Herdman:I think you mentioned business confidence. There's an uncertainty, added uncertainty to investment decision-making, so it's certainly being talked about, but most businessmen are not seeing any significant impact. of the current trade tariffs and so on. On the consumer side, consumer confidence is still high. That under— I don't see that being affected right now, and so we're not really seeing it in terms of traffic demand. In terms of secondary effects, spillover from trade disputes into regulatory approvals disputes and so on, widening, you know, Less multilateral cooperation, frictions, tit-for-tat, looking for negotiating angles, that's something to worry about. That's something that businesses need to worry about, including ours. On the cargo side, air cargo—

Peter Harbison:Business confidence is still very high, isn't it?

Andrew Herdman:Yes. And air cargo demand is— growth rates are slower than last year, but we're still talking about volumes that are higher than last year, which saw a big surge. So that's still very healthy. And in the short run, some of the trade tariffs stimulate air cargo demand as people adjust, just as we're seeing for Brexit. But in the longer term, tariffs are bad for trade, and bad trade is not good for air cargo. So looking forward into next year, the crystal ball is very cloudy in terms of air cargo demand. But right now, it's holding up really well.

Robert Martin:I'll just add, I think November, still, we're going to see some uncertainty. There's a lot of focus now on the G20 in Buenos Aires at the end of this month, when— which will be the next occasion when President Trump and President Xi Jinping can meet. And I think let's see what comes out of that meeting. That will set the tone for 2019.

Peter Harbison:Very good conversation, apparently. Very good conversation.

Robert Martin:The good news is we went through the US elections and there was no surprise.

Peter Harbison:Yeah, yeah, that's, that's sort of good news. Yeah, some anyway. One of these silly last, last things, one in, in one number. If 2017 was 10 in terms of benign profitability, traffic growth, what's 2019 going to be? Jeffrey, you have the honour of starting.

Jeffrey Goh:I'd say about 8.5. In the short term, there's going to be some tightening, but longer term, I think, you know, what Andrew was saying too, that It's very positive and very healthy, but having just spoken with a couple of our CEOs, particularly in Europe, perhaps not in Asia here, there's going to be a bit of tightening. The other thing that's worth pointing out, perhaps it's not a phenomenon here, but it's an evolving phenomenon, Peter, in Europe, is there is a concern from a regulatory point of view and from the point of view of certain lobbyists of cheap tourism.

Peter Harbison:Mm-hmm.

Jeffrey Goh:That is going to impact some of the low-cost operations.

Peter Harbison:In terms of slowing it down?

Jeffrey Goh:€19 for a weekend, there's concern growing in terms of carbon and pollution and so on as to whether that can be sustainable. And so I think in the short term, there's going to be a little bit of tightening. In my view, if it's 10, probably 8.5.

Robert Martin:For airlines, 8. For us, 9. The reason why I say that is, and I agree with Jeffrey's comments, we can't have We can't ignore fuel and FX that's going on in the airline market. But as a company, I hated 2017 because things were so good. We had huge numbers of new competitors coming to market. Interest rates were low. The competitive situation was very tough for us. And so to a certain extent, moving into a less one-way street environment is good for us. We tend to do better when there's some volatility around.

Peter Harbison:So you can be the Grinch.

Robert Martin:I've never been described as that.

Andrew Herdman:I'd give it an 8, and I'd reflect on the fact that prior to 2017, it wasn't obvious that it was going to be so benign. You can always see risk factors, and there are plenty of risk factors come along and hit us, and we have to be resilient. In terms of long-term sustainability, yes, we do have to be We have to be very concerned about environmental sustainability. The industry is always striving for fuel efficiency. That continues relentlessly. We do need a market-based measure to achieve our carbon-neutral growth from 2020 target, and ICAO, the 192 member states of ICAO, agreed to introduce the Corsia scheme, and that is on the minds of airlines, all international airlines from January 2019 have to report all international flights, all emissions. For the first couple of years, it's a reporting regime, but from 2021, you will be required to purchase carbon offsets for a proportion of your total emissions. So that's a big administrative challenge right now, not just for airlines, but for states who have to administer that and calculate on a global basis.

Peter Harbison:Mm-hmm.

Andrew Herdman:I think that's a key part of the industry meeting its medium-term climate change goals, and it's very important because we talk optimistically about growth in the future, but as Jeffrey says, it has to be sustainable growth. We've got to be concerned about environmental sustainability, and the wider travel and tourism sector also has to think about sustainability in a broader sense, not just in terms of climate impact, but in terms of the carrying capacity of the planet. Thank you, Jeffrey. of tourist destinations. So that's, that's a bigger, a wider discussion within the industry.

Peter Harbison:Thank you for that. Thank you, gentlemen, very much. Very interesting conversation, and hope you learned a little bit from it. Thank you, and give them a big hand.

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