Building resilient and innovative responses to supply chain disruptions

Transcript

William Boulter:So our subject this afternoon is supply chain. I mean, I've been in the business a long time in airlines, and I never knew about supply chain for a long time until before COVID when I was at Virgin Atlantic and we ordered the 787. And we ordered the 787, I think we did the board presentation in about 2004 or '05, and the aeroplanes arrived in 2011, right? And that was the first kind of iteration of supply chain issues. I remember going to Seattle and I got my little piece of The, what do they call it, that material? Number of people. Yeah, anyway, yeah, the composite, composite. Yeah, the composite material. And the great challenge with the composite was trying to break it, but you can't. It's fantastic. But anyway, that was my first exposure. And then the 380, Virgin also had 380s on order, which we canceled. But the 380 was late as well, many years late. And those were really the first iterations of supply chain problems. And then, of course, we had COVID, and then we had the ships stuck in the Suez Canal, and suddenly supply chain became a huge issue, I think, in the aviation business. And so that's what we're going to focus on over the next half an hour. I'm going to start with the sort of subject of the moment, already talked about, fuel.

Ramiro Sequeira:Yeah.

William Boulter:I've got a very good panel here, 3 airline guys among them, and Harsha, who's from FlightScope, very operationally organized, Tilman from TUI, Conor McCarthy here from Emerald Airlines in Dublin, and then Romero Oliveira from Iberia. So I'm going to start with Romero, if I may. Fuel, what's the issue?

Ramiro Sequeira:Well, good afternoon, everyone. It's a pleasure to be here and also with my colleagues. Well, for Spain, fortunately, the issue is not so big as other countries. Our analysts in Spain, they don't predict this high risk of storage, of lack of fuel, let's say. What we are facing, like everyone, is the price of the jet fuel that is higher than the Brent. But so far, we are managing this. We are not increasing the prices right now. Still on the demand law, let's say, the prices of our tickets. So, for instance, we had to shut down the route of Varna. There was an issue there, a shortage of fuel. But more than this, we are managing the situation and, well, looking forward to see how this develops. It's true that the prediction is that even if the war issue is solved, the price should not return where it was, let's say.

William Boulter:Right, right. Conor, what's the view from Ireland?

Conor McCarthy:Well, so we operate the Aer Lingus regional network between Ireland and the UK, about 45,000 flights a year, and our main competitors on about 80-85% of our capacity would be Ryanair and easyJet, both of whom are very heavily hedged. So we hedge our requirements each quarter, 75, 50, 25 going out. So right now we're seeing a small price increase because of the unhedged portion, but as this crisis continues, the impact of the high spot prices takes a significant impact on our cost base. But at the same time, our market's fairly well balanced in terms of price and demand. So there's only so much you could pass on to the consumer at this stage. So in a very small margin business, it's a real challenge if this continues. I think most people are hoping that because of the clear economic impact in the United States and recent activity and recent decisions by the US administration, that the hostilities will die down and be allowed maybe go away a little bit. And at that stage, we'd see some recovery. Our big worry then is just whether consumer confidence, consumer demand stays in place.

William Boulter:Fuel surcharges, thinking about that?

Conor McCarthy:Not really, no. Our competition doesn't apply fuel surcharges, so we don't want to be out on our own. We will obviously try and price where we can. But we would have done that before this crisis anyway.

William Boulter:Right.

Conor McCarthy:Yeah.

William Boulter:Okay, Thomas, I go to you next from the airline view.

Tilman Reinshagen:Thanks, William, and thanks everyone for making it. The fact that we're all here, I guess, in record numbers this year shows that it's alive and kicking. On TUI's side, we're also— we're okay. And we've heard it before several times, if another 4 weeks or 6 weeks, Europe would actually run out of fuel, as we hear from the media in kind of an echo chamber at the moment, I think then we'd be more worried. I think it's a bit of a sensationalist moment we see with this message repeating. As a leisure carrier, of course, we don't appreciate that. That's why we're also trying to send a message of confidence that for the moment people shall book their holidays and they shall fly with us. I think we can send that from out here. Being a little bit hostage of a geopolitical situation doesn't feel nice, but in aviation that That's what it is, and I think we've prepared quite well. So while it's unpleasant, I think we'll get through this one as well, and we hope we can provide those services as usual.

William Boulter:Right, right. Harsha, you deal with a lot of airlines from an operational point of view. Give us a sense of how you look at it.

Harshavardhan Majeti:Thank you, thank you. Good afternoon. Hopefully we keep everyone awake and not put you to sleep. Being a platform provider, we get a chance to see how various airlines are taking decisions when a shock to the system happened, right? For some of us who have been in the industry long enough, I'm sure some of you remember, what, 12, 13, 14 years ago when the fuel price went up to $120, $130. A similar exercise that happened after February 28th. The cool thing that we were able to observe is the airline operations centers, the nerve centers, the IOCCs or OCCs as you call, the people, how skilled they are to maneuver through these difficulties. I think that was fantastic, how they found alternate routes. How do you ensure that you have enough fuel planned? What we are definitely seeing is the reduction in the schedules. What we are seeing is the importance of ensuring that the right amount of fuel is being loaded, especially given that in certain sectors, whether you're going medium or long haul, Sometimes you have to plan for up to 3 hours extra. So more fuel, more weight, more burn, lesser passengers, right? So we are seeing that the people not only coming together to keep your planes up in the sky, but how the resiliency in the industry is able to help airlines continue to operate, move people. And that is the— I think that's the silver lining, if you ask me. Now, how do we Naturally, all of us have looked at it, but as a platform provider, what we are trying to do is, what can we do to help the airline community, especially from an airline operations perspective, to help with the flight planning, fuel optimization, making sure that you can predict what is the needs and plan for your fuel requirements.

William Boulter:Right. I think something's interesting actually for me coming to Berlin. The last conference I was at was in Singapore. A couple of weeks ago, and actually the Asian view on fuel is a lot more pessimistic. Just FYI for those who are interested. You know, you've seen Korea go to a four-day working week. You're seeing Philippine Airlines quite worried about fueling Sri Lanka also. So it's quite a different picture from fairly encouraging words here, I would say. So I want to move on to. Supply chain, you know, since COVID tell us some problems you've had. You know, let's hear it. I mean, don't give the suppliers a hard time, but just interesting to hear how airlines have adapted. Ramiro, do you want to start?

Ramiro Sequeira:Well, I believe the supply chain before COVID let's say, was like an operational issue. Let's say you have a delay here and there, sometimes longer TAT, etc. And since COVID and now, especially the moment that we are living, I believe it's more a strategic issue. You cannot see it only how I manage my operation this year. So you need to start looking forward as a COO or any operational job that you have, even managing MRO. Because if it's not the lack of parts, it's going to be the lack of engines and maybe some problems with the seats and maybe some problems with other equipment at the aircraft. So this is important because if you want to avoid the disruption, if you want to avoid the impact on the client, and especially also on the costs, you cannot see your budget for this year. You need to be seeing at least 3 years in advance. It's what we are doing in order to adjust our schedule.

Harshavardhan Majeti:Right.

Ramiro Sequeira:I'm not saying less or more, it's just adjust, understand better the buffers, understand better the relationship also that you need to create with all the stakeholders. For instance, for this moment that we are facing some engine issues, we are establishing this very close, high-level, weekly basis connection with the suppliers.

Conor McCarthy:Right.

Ramiro Sequeira:Because it's the only way to move forward because we are facing a difficult time to have the aircraft availability that we we should have. On top of this, and reporting since COVID etc., I believe that is always a good side of any crisis or any issue. And I believe as an industry that this is the step for airlines and OEMs to work differently. to work more close in the future, to share systems, to share line of balance of the aircraft, to share with transparency what are the needs from their sides and what are the needs from our sides as OPCOS. And I hope this way to do the things are changing, and maybe in 30 years we are managing the supply chain in a different, very different way, I guess.

William Boulter:Do you think the IAG sort of group structure has helped in that or is helping?

Ramiro Sequeira:Of course, of course. I mean, IAG is always involved in any conversation that we have in Iberia. For instance, this example that I was giving on the weekly high-level basis conversations, IAG is very important to coordinate also the needs, not only the needs of Iberia, but Yeah, super.

William Boulter:Incidentally, I should have said this earlier, please do put your questions onto Slido. Hopefully it'll be up there in a second because I really encourage audience participation. It's what we thrive on. I'll go to Tilman next, maybe just to talk about the sort of issues of the moment, supply chain management.

Tilman Reinshagen:Well, the roller coaster that is the supply chain post-COVID, where we all came out of a terrible time and wanted to crank up the volumes, and we were finding empty storages, empty supply chains, and supply levels of 70% or below. And I know some European aircraft manufacturers that made us wait half a year to a year for any aircraft to be delivered. I think we've all passed that. I think in the past years, we've moved to a place where now most of the things are rather stable. And I think the biggest learning, which I would venture most of us have made, is that some of the things we thought were a commodity, you could just basically reverse auction them out there and many suppliers would scramble for it. You now have to go into more strategic alignments because they're not as given as you would have thought before. So, for example, base maintenance, which used to be a commodity and we'd fly aircraft all over the globe in order to have them maintained. Yeah, some of them went down or didn't even come back after COVID. And now, TUI having some part of it as a vertically integrated own heavy maintenance, in the center of Europe, which in the past we would have said, okay, heavy maintenance center of Europe, how does that compute unit cost-wise? But it's actually an asset for us now. And what we're trying to do post-COVID, and I think that's a major learning in our supply chain and procurement, is we want to be what we call a customer of choice. Yeah, so the suppliers where we used to maybe push them harder, nowadays we We, I guess, appreciate the value of long-term relationships more. So this approach of being closer to them and maybe looking behind the scenes and actively helping them to find a stable position, we've learned the hard way that that's actually something post-COVID which is high on our list.

Harshavardhan Majeti:Right.

William Boulter:And you pay them on time now? We've always done.

Tilman Reinshagen:What do you mean?

William Boulter:Okay, Harsha, do you want to?

Harshavardhan Majeti:I mean, it's an interesting question. I would actually expand it a tad bit more, just not from COVID perspective, as Flightscape being an airline operations platform provider, these events we have to continuously keep track of. So we actually expand the horizon to, let's say, since 2010. Since 2010, if I got my math right, there were 9 major events, whether it is geopolitical, whether it is OEM-driven, whether it is, let's call it, the Icelandic eruption.

William Boulter:Yeah.

Harshavardhan Majeti:ash situation, all of them have created shocks, whether it being, yes, we are talking about supply chain, but all of them leads to one place. Everything culminates on the day of operations, and we have to help these gentlemen run the airline. So one of the key things that we didn't anticipate, but we were able to see post-COVID, is which nobody talks about, is the supply of talent. So the biggest observation from a platform provider for us is the lack of sufficient talent, whether it be the pilots, whether it be the aircraft mechanics, whether it be the crew schedulers, flight dispatchers. That was one of the biggest gaps we have seen. There are carriers who came to us and asked us, can you dispatch our flights? Can you do crew rostering for us? because they didn't have sufficient talent. So yes, there are a lot of other things that I would like to call out, but for me personally, what I've seen is the need for focus on talent in the age of AI and how do we handle that. Right, right.

William Boulter:Good point. Conor, some comments on current issues? Yeah.

Conor McCarthy:Well, if you— our fleet is a fleet of ATR 72s, so the ATR is not a new platform. We're not operating new technology engines like Iberia. Our engines were designed 40 years ago, same with the propellers and landing gear. So one would expect post-COVID that you, you would bounce back and not have the kind of issues you saw, you know, in the A320neo or the 737 MAX world.

William Boulter:Right.

Conor McCarthy:But in fact, it's, it's been quite quite severe. We had an aircraft grounded for 9 months waiting on a nose landing gear, and in the course of that 9 months, we made what we call in the industry a Christmas tree of it because we used the engines, the propellers, the prop hubs, everything to try and keep the rest of the fleet going. So operationally, it created huge issues for us, but then what we've seen is the secondary effect is the economic effect. So notwithstanding the the adjustments to your flight schedules that you have to do as a result of being an aircraft down, you then find the suppliers start to railroad through some pretty significant cost increases.

William Boulter:Yeah.

Conor McCarthy:So we've seen LLP costs on the engines go up by 200% in 5 years. We've seen the cost of a propeller hub, which is about $80,000 list price. We were offered those secondhand for $300,000.

Ramiro Sequeira:Really?

Conor McCarthy:Because there was no supply. And when you're stuck with an aircraft on the ground, you get absolutely rogered by the middlemen in the business. And it's not helped much by the tier 1 producers who haven't got their production back. So the big thing we heard through the last 4 years is, you know what, we can't get castings, we can't get forgings, we've had a powder metal issue, etc., etc. And, you know, some of those issues are understood, but actually what we've seen is suppliers, particularly single-source suppliers, absolutely leverage their position. And the OEM, in our case ATR, hasn't really had the power to manage them. So it's a big issue we have because ultimately it feeds through to higher costs, So on the ATR platform now, which is really efficient from a fuel point of view, happy to hear that at the moment, is maintenance cost per seat is now our single biggest cost.

Ramiro Sequeira:Yes.

Conor McCarthy:And that all goes back to supply chain. And the other thing that happens with all of this is you run short of parts, everything is coming in on an AOG shipment, and that automatically doubles the cost of transport. So these supply chain issues just ripple right out. Thankfully, we see this big supertanker turning. We've insourced landing gear overhaul, for example. So Dublin Aerospace, which is a sister company, now overhauls ATR landing gears. So we've taken the turn time down by half. But, you know, you have to take stuff in-house. And a little bit like Tillman said, You know, heavy maintenance which was outsourced to the Far East or the Middle East. You know, if you lose one day on a 737, you're probably looking at the full cost of a C-check in EU 261 compensation. It's a phenomenal cost. So airlines are looking beyond the cost of a C-check now, saying, how sure are we we're going to get that aircraft back on time with this supplier?

William Boulter:Right.

Conor McCarthy:And they're beginning to manage much more intelligently around the supply chain.

William Boulter:I mean, that's an interesting example of sort of innovation or things doing differently. Perhaps, Romero, do you have examples of where you're doing something differently now that you could share with the audience?

Ramiro Sequeira:Yeah, well, fortunately, IAG and Iberia, we found— we set up the foundations for IT and AI now, many years ago, that was called at that time, maybe 10 years ago, Hangar 51, which was a place that startups could come and think different from experience from other sectors and try to innovate and do the things different for our operation across the opcos in the group. So we are already taking that benefit, not only because of the crisis, but we we were already before. Of course, in Iberia also we have our own power to innovation. We have a specific department for the transformation and innovation, and we have more than 100 initiatives across all the areas, commercial operations, et cetera. And for 2025, for instance, We took the benefit from that, around €60 million on our EBIT, which is great in our days. Speaking specifically about the issue of the supply chain and what we are facing, we are now moving forward very strongly with— we're very strong with predictive maintenance.

Conor McCarthy:Aha.

Ramiro Sequeira:So our goal, we have a partnership in order to minimize the AOGs. So try to, it's like the crystal ball, try to understand what parts could be having problems and replace these parts before they create an AOG. Of course, it's not so easy as I'm explaining and has some risks because you are changing a part that—

William Boulter:Earlier.

Ramiro Sequeira:Earlier, which is the part that's still working. But all the tests and what we are doing for the last year is making us very, very happy with that, and we are moving forward on that. And at the end, innovation is important, but people, it's always the main factor. So we're still pushing for career opportunities, training concerning that is not supply chain, but—

Harshavardhan Majeti:People.

Ramiro Sequeira:One of the issues for maintenance is the lack of certifiers on the market. So we have our own school, we are hiring people to get to our own school and to— sorry, to have our own people, to not have problems with supply and people. So we are trying to avoid that. And that's how we're moving forward.

William Boulter:Okay, brilliant. Having encouraged audience participation, I better get to it. Let's go through a couple of these questions. Interesting one here. Lufthansa has invested in Munich's Terminal 2. Is investing in airports an option for more airlines to get some control over the infrastructure? Tillmann?

Tilman Reinshagen:I'm happy to chip in. I think there's 2 sides to this. If you want operational improvement and stability of processes, I think you can just partner up closer and find a way to overcome some of the everlasting trenches between airlines and airports that we always feel bubbling up. And I think that partnership doesn't necessarily need financial involvement. But when you look at profitability, let's be honest, I think major airlines can learn from major airports. And when you look at the margins, I think there's quite a bit to say about Yeah, can we not make the pie bigger for both sides on airport and airline? So I think from these 2 points of view, operational improvement, I think that can just be done in human interface and good collaboration. When it comes to the long term of growing the pie, of together maximizing revenues, I think that's probably definitely an option for the bigger carriers. Right.

William Boulter:Conor, there's always interesting stuff in Ireland between airlines and airports. Do you have any comment on this?

Conor McCarthy:Well, it's interesting. I can see the logic of Lufthansa with a hub in Munich wanting to have really good control over their hub. And if there's anything I know about Lufthansa over the years, they love control. So I think I can see why that is the case. However, I'm not sure it's a good use of shareholder capital.

Ramiro Sequeira:Right.

Conor McCarthy:If you're an airline, it's not your skill set. You're going to have to employ people who understand how airports work, which is a different business to airlines. So suddenly they're going to bolt on a bit of complexity and they're going to use shareholder capital to do that. In Ireland, you know, I worked with Ryanair as ops director for 5 years and spent a long time at Aer Lingus, now with our own airline Emerald. I think your best bet is, as Tillman said, find a way of collaborating with the airport, find a way of creating positive partnerships. It's not always easy, and you do have to have some public spats, but I do think it's a good way of sitting down, communicating, saying, look, this is what we need. Airports sometimes get surprised when an airline tells them these are our basic needs. because they're so used to focusing on retail and all that goes with it. But I think it's best to try and collaborate because you can't own every airport you fly to anyway.

William Boulter:Yeah, indeed. Romero, any comment on that?

Ramiro Sequeira:Well, inevitably, it's not our model. We have a very close relationship with IANA. From the operational standpoint of view, we work with them literally every week. AENA and Madrid-Barajas, which is our hub, they by themselves, they will grow. They have a big project already approved. They will extend the main 2 terminals of T4, and they will increase from the capacity of 60 million—

William Boulter:Yeah.

Ramiro Sequeira:Sorry, to 80 million. And what we are doing is to have the right setup to be close to them and to understand from the operational point of view and from the customer point of view how the airport will operate properly.

William Boulter:Yeah, yeah, great. Let's move on to another question. And Harsha, you can take this one, which is, with the current challenges, would you reduce your investments? into upgrading your IT infrastructure and upgrade your operating systems to manage operations?

Harshavardhan Majeti:It's actually a fairly good question. Contrary to belief, airlines don't reduce— at least it's been our observation— airlines don't reduce capital investment on innovation. And during these difficult times, actually, they relook at how to accelerate innovation, to handle supply chain impact or any other system shock. For example, if you look at the thesis of supply chain-driven impact and what airlines need to plan for, whether incorporating it from an AI perspective, you talked about predictive maintenance. All of this is driven through investment into the IT infrastructure, into the operations platform, and I believe that will continue to happen. especially given the challenges with supply chain scenario planning, I think it's only going to accelerate coupled with the AI transformation. And that is what we have been seeing, and hopefully you gentlemen can comment on it as well.

William Boulter:Roman, a view?

Tilman Reinshagen:Yeah, I would second that. And I think also there we've learned the hard way, if in times of crisis you pull the plug on some basic pillars of your business, you will pay double in the months afterwards. I think with the seismic shift of new AI opportunities, many of us, including us at TUI, were considering, can we leapfrog some developments rather than the past where some monopolists would launch new versions and new versions? Maybe we can go to a different level of it, which is built on the new incredible powers of AI. So I think this is the window that opens for some of us.

Ramiro Sequeira:Yeah.

William Boulter:Right.

Tilman Reinshagen:Any other?

Conor McCarthy:Well, the only thing I'd say there is I don't think with our growing reliance on AI and making better decisions and faster decisions, you've actually got to double down on your IT infrastructure because the whole cyberattack scenario is a real threat, not just to airlines but to global economics. And, you know, the cybercrime world has become very sophisticated. And it's always a step ahead. So you can't afford to underspend on IT infrastructure even in the middle of a crisis. You've got to keep your systems protected because otherwise it could put you on the ground for weeks.

William Boulter:Yeah, yeah. I mean, I guess what was behind the question is that, you know, airline operating in terms of flight operation systems or integrated ops control and so on is relatively underinvested compared with AI and distribution and stuff on that side. I mean, what's your view on it, Ramon?

Ramiro Sequeira:Well, exactly with this question, I believe we need to keep investing in both. It's what we are doing. Because even if the crisis gets worse, you need to have your infrastructure, like you're saying, to protect your system, but also From the operational standpoint of view, you need to keep operate. And also for all the company, you need to start to keep investing because maybe you need to reduce people if the crisis is very, very difficult, no? So technology will help you on that. Depends where you are, you can reduce more or less people depending where you are in the crisis and where you are in systems. Any other questions?

William Boulter:Sorry. No, no, that's absolutely fine. There is a question about whether Iberia should buy TAP, but I'll skip over that one because I think you've already said— IAG has said they're not interested. But let's end where we started with a question again from the audience. What are your main concerns for the next 6 to 8 months? High jet fuel price, shortage of jet fuel, or slowdown in demand? Gentlemen, Tillmann, would you start?

Tilman Reinshagen:Yeah, in that terrible triangle, I'll admit I have faith in political leaders, so I think that crisis will pass. So if there is a shortage, it'll be temporary. And I don't think that the game has changed completely. So I do have faith that this will solve. Prices, I think we have good tools, hedging, to level that out and make demand more predictable. Yeah, and slowdown in demand, I said it earlier, I think in nowadays' world with the social media echoing things and kind of expanding bubbles of small news and blowing them up, I think we should send a message of confidence. that air travel is there to stay. We guys have— we have good plans. Even if it happens on the short term, we've shown a million times that we can recover and that we can get people where they want to go. So I do have some concerns, but I think when it comes to the crisis or many other ones that we've seen, this one is one that we can overcome with the one caveat that we are not inside of the heads of some of the political actors, which may still again shock us.

William Boulter:Okay. Conor, do you want to?

Conor McCarthy:Yeah, we've been looking at this obviously like every other airline. Our view is that even if the crisis is resolved in the next few weeks, we think we're going to be looking at best case $800, $850 per tonne fuel, jet fuel, out to the end of this year, which is about $200 more than last year. So that's a significant lift in costs. And our current challenge is probably the last one then, is demand is fairly well balanced. Economies, UK economy, we rely a lot on that, that's fairly fragile. The US economy, we're not quite convinced about its strength. It does seem to confound us every month, but we're worried about the consumer demand side more than the other 2.

Harshavardhan Majeti:Right.

Conor McCarthy:Particularly if we have to price up to $850 And at the moment, spot prices at $1,500 a ton would, for anyone who's not hedged, are a real challenge.

William Boulter:Right, right. Understood. Romero, do you want to comment on that?

Ramiro Sequeira:Well, I believe the— if we don't think so right now, but if the demands decrease severely, of course, it's more difficult to manage that than the jet fuel. I mean, the jet fuel is true, it's, it's not a problem. It's difficult to manage, but you need to work on costs, operational costs, company costs, and by that you can compensate if you still have the right revenue and the right demand. If the demand drops, it's easier— it's worse to manage.

William Boulter:Yeah, uncertain times. Harsha, I'll leave the last word to you.

Harshavardhan Majeti:Oh, thank you. I think I'll support what Ramiro said. I think it's more about the passenger and the demand side that will cause everything else. I think as a group, we can find a way to solve. But if the passenger doesn't show up or the demand to buy a ticket and travel somewhere goes down because we broke the confidence, that would be a harder one because of the inflation that is coming in.

William Boulter:Indeed, it's going to affect everything. Everyone. Ladies and gentlemen, thank you very much for your attention. Please give my brilliant panel a round of applause.

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