CAPA Aviation Outlook To 2020: Key Issues In The US Domestic And International Aviation Markets

Transcript

Peter Harbison:I'm going to talk a little bit about some of my perspectives on, on what's happening in the world, in the aviation world, particularly as it relates to the US, obviously, because most of you are from the US here. But to try to look at it a little bit from an outsider's eyes, which is what I am, and someone who lives in Asia, on the brink of Asia anyway, and has watched pretty much in awe as things have changed over the last 15, 20 years. It's quite a dramatic transformation. And I don't really have any doubt that things are going to continue in that same vein over the next 15 or 20. Hopefully I'll be around to see them all too. So let's, let's get straight into it. I've got a lot of numbers in this which I'll skip over pretty quickly, but I just wanted to leave them with you in the slides which, which will be available for anybody who wants to, to keep them afterwards to help them get to sleep at night and that sort of thing. So one of the things I wanted to talk about first was last year because it was not a normal year. It was one of those quite remarkable years for a number of reasons that I think will never be repeated. Why was it remarkable? Well, largely because of oil. And what I've got here is some indices based on, on 2011, starting at 100 obviously. That was the price of oil as we got into 2017. And by having an input cost reduced so substantially, and oil or aviation fuel can cost any— can account for anything from 15% to 40% of total operating costs. Therefore, it is quite substantial when you have a reduction in price of some 50% or 60% or even 70%. So what happened with that? Well, it was really very valuable for travellers because airlines managed to share with the travelling public some of the benefits of that lower cost by— in the form of lower fares. So we did have lower fares. We had at the same time, and this was the miraculous nature of last year, at the same time we had a considerable growth in profitability. The best year of profit the industry's ever had. with half of that, more than half of it in fact, coming from the US alone, which in itself is quite a remarkable feature. At that time, we saw a little increase in load factor, which again was positive from the airline's point of view. But what we really— what was really remarkable last year was passenger growth. Now, as I'm sure you know, passenger growth tends to be related to GDP growth. Obviously, it's a factor of the economy, what happens with, with, with passenger expenditures. It tends to be, as you know, something like 1.5 to 2 times GDP. GDP across the world last year wasn't strong, but it was really reasonably consistent. And you would have expected in those terms maybe sort of 4% maximum growth. In fact, we saw anything from 7 to 10%. Wow. growth last year, which is really quite a remarkable outcome. So what we had therefore was, was this fairy tale year where everything was positive. We didn't have any major negative external events, which is something that aviation is very prone to, and as a consequence, I don't think we'll see another one quite like it. At the same time, we had one of the highest years ever for aircraft orders. So pretty much everybody was happy last year. So what's happening with oil? It is important and the world's changed in the last 3 or 4 years, 5 years, as fracking has become a big part of the global oil production out of the US particularly. That said, there's a lot of instability and a lot of uncertainty and on the left there you see the 1-year increase in the price of Brent crude, which is obviously one of the key measures. It differs a little bit from jet fuel prices themselves, but is a pretty good indicator. So what we've seen just in the last week, in fact, is something like a 10% increase in oil prices. That's because of fracking, potentially will be capped at some stage, but then No one ever predicted that we were going to go to $150 oil 10 years ago. So, without sort of wanting to sound any alarms, it is something obviously that has changed the equation, that very successful equation we had last year. OK, so that's the global part of it. Let's break down into the way we're going to address this conference, some of the items that we're going to be going through. to try and set a little bit of the, a little bit of framework for those discussions. If you watch this closely, you'll see that this, this grows from 2008 to 2018, and this is how US-Asia markets have, have grown during that time. Really thickened up on, on the key routes, and because it is such a long-haul route, long-haul market, you do still see the same, fixation with, with thickening of the major routes and a little bit of variety. Let me just go back with that if I can to, to take you through it again. So if you just watch that, we're 2008 and here's where we sort of move through the next decade, 2013, '14, '15 and through to '18. So it is, it's a, It's a pretty solid market. It's grown overall, as you see in the bottom left there, by some 46% during that decade. Breaking that down, US-China is obviously the biggest growth market, almost trebled, or more than trebled during that time. US-Japan's interesting because it's actually decreased over that period. For a variety of reasons that we'll talk about later on. And Korea at the same time has increased. And the data, the numbers for that are in the box down the right-hand side there. Dominated largely as you would expect by the US airlines and Korean gets in there at third, in third place. One of the points I do want to address in each of these different regional markets that I look at is the proportionate shift in premium seats. Now the red numbers on the right in that big box there, which are 2018, the top box is 2008. The red numbers are the proportional difference in the number of premium seats. of premium seats on each of those routings. Singapore is a bit of an aberration because they had a nonstop through to New York which was pulled out and it's actually quite a small market too obviously because it's such a long haul. Most of the routes are North Pacific being a little bit closer. But the point being that We are seeing a shift away from— and this isn't really rocket science to, to most of you, but just to illustrate with the numbers— the reduction in that proportion of premium seating. And that has implications as we go further down. And it's a theme that we'll see repeated in, in each of the other markets. Again, here's Europe moving over that 2008-2018 period. shifting through a lot of thickening up on the major routes but also you'll notice that little spray from up in the far north there from Iceland as some of the new carriers come through there with the— particularly with narrow-body short— narrow-body long-haul operations creating new routes and that's— I'll come back to that slide later on in this presentation. So Europe over this period is up 27%. France is up about 20%. Interesting picture, that one, of the Paris centricity of the French market. And it does strongly suggest that you're going to see the potential with the narrow-body long-haul aircraft for some new routes which will go deeper into the heart of France. The next 2 slides, which are Germany and the UK, will show much greater connectivity with the US. Part of the reason for the French not having such a large connection with the US is that a lot of their leisure traffic, of course, goes to the French possessions in the Caribbean. So while they do have a lot of transatlantic traffic, a lot of it's not coming to the US. So Germany, you see far more gateways there and there's a lot more leisure traffic particularly into the— the southern parts, but also across the West Coast. The Germans are prolific travellers and unlike the French tend to go to genuinely foreign destinations which aren't related to Germany. But again, what are we seeing there? We're seeing a slight reduction in the U.S.-Germany market, again for reasons we'll talk about later. Just keep you in suspense with a little, a few of these things just to find out why, but I'm sure you've got some ideas yourselves. US-UK meanwhile, for a small country, you've got a lot of direct connectivity with gateways in the UK across to the US and fairly substantial increase in traffic over that period. Here is a market obviously where the, So the joint ventures based on the global alliances are very, very active and interestingly each of those JVs has pretty much the same number of seats this year across the Atlantic. Premium seating, again, the same equation. Not major drops but drops in the proportion of premium seating on those aircraft. on those routes. Latin America, again, going through the same process, rolling through from 2008 through 2018. Not a lot of new route openings on that— on those markets. Sorry, let me just go back to LATAM overall. But a very strong growth. during that 10 years, nearly 50%, and, and very much in the short-haul markets into the Caribbean and Mexico and Central America. That's an area that I suspect will change, and we've got a panel directly devoted to talking about that. Mexico, necessarily, with the, the rise and rise of low-cost airlines, but also the proximity to the US and with the, the close impact of NAFTA and tighter trade links, greater open skies, has really meant a very significant growth in both in the number of airlines, the number of routes, and of course in the variety of fares that are offered in that market. So it's grown pretty strongly. Puerto Rico, just looking at the highest growth markets, Unfortunately, for reasons that you'll all be aware of, a fairly substantial reduction just in the last couple of years. I'm going to highlight the— you'll see the reduction just in the last— where are we? Yeah, the last couple of years after fairly strong growth, a fall there. Dominican Republic, much stronger growth and still still maintaining that, that growth rate. And the top 6 airlines, predictably. One of the interesting ones there is, is the role of JetBlue, how that's increased over the last decade in terms of, of accessing obviously mostly the, the markets which are leisure-based and generating some fairly substantial increases in those. So it actually tops Puerto Rico and Dominican Republic traffic flows. Just to reiterate too, that same slide showing the impact of reduction in— or to put it another way, the continuing trend towards leisure traffic becoming a large part of the profile. And that was one of the points out of that very first slide I showed you. that during 2017, with that reduction in fares, that significant reduction in fares, what we were doing was tapping a much larger proportion of the price-sensitive markets. And that's something that's important in the longer term because when you do tap into very price-sensitive markets, getting fares back up if your costs start to go up is one of them, as you— those in the airline business here, know very well, is one of the more difficult things to do. Expectations are created for low fares and you can very quickly slow down the growth if you start pushing fares up. And once you've got a lower proportion of premium seating, it is very hard to get the yield mix increased to, to count— to counter the impact at the leisure end. Thank you. Very quickly about US airports, and we are talking about some of those during this conversation over the next couple of days. Some losers and winners in the whole process of consolidation. Obviously, the bigger losers in that process have been Cincinnati, Cleveland, Memphis, the ones marked in red there. But there have been winners as well, and not necessarily because of the— Yeah. the impact of consolidation for various other reasons as markets have evolved and because airports have taken different strategies to developing their traffic flows. A lot of the growth in those airports and the ones that have grown post-consolidation has been with low-cost operations. And I've— we've just pulled out here the airports that do have the largest proportion of low-cost operations. Obviously Vegas is right up there, Fort Lauderdale, Orlando in the domestic markets, and Denver too. So talking about international LCCs and in the U.S. context with the exception of of Central America and Mexico, we're talking largely long haul. This next slide shows you how the North Atlantic has fared over the last 10 years. This is going through from 2008 through to 2018, and very quickly this market thickens up with a whole lot of new routes and obviously a lot of new capacity. The gross numbers are considerably lower than the total numbers on that route, but a lot of that traffic, as you can see from that, is generated by Norwegian in its various shapes and forms from the different markets. But a really remarkable increase, and a lot of that is due to the new aircraft that are available in the market. Particularly the 7-8, 350, the 7-8s which Norwegian uses particularly. But also starting to— we're starting to see the impact of the narrowbody, sort of 757 replacement, narrowbody long-haul aircraft. And if and when engines are available for them, we're going to see a real surge in that process on the basis of the orders that we know about. A real transformation of the North Atlantic. And what it does is, is also add a lot of new city pairs, not just traffic, but new city pairs, which goes right to the heart of economic growth of, of the different countries. And that's why I think what happened last week when IAG, British Airways-Iberian team, made effectively a bid to buy Norwegian. It's the first time you've seen a really significant plan for consolidation between a major full-service group and a very large, if not totally profitable at the moment, a very large network of low-cost operations. Putting the two together for me was a real indicator of where the market's going internationally. Going back to that theme of having price-sensitive travellers, that is the growth market. And for the full-service carriers themselves to adjust to be able to provide adequate low-cost operations— low cost as opposed to low price— to be able to cost their product at a sufficiently low level to be in that market to simulate that traffic, is going to be increasingly harder. And that's something that Willie Walsh recognized very well. They've already got, in the IAG Group, 3 low-cost carriers in Vueling, which they acquired, and Iberia Express, which is a network feeder into Iberia. So it's a— it is really, I think, Quite a remarkable shift in terms of strategy for global airlines and one that I think will gradually filter through. Whether or not it happens, the fact that British Airways IAG, Willie Walsh, saw that this was the way of the future, I think for me was— for somebody who's as strategic as he is, was a very important development for me. Thank you. Now I just want to finish before I summarize with a little case study. What's this about? It's one of the most black and white contrasts I've ever seen in open skies. It's about the fact that last year— this goes back to my home country— last year was something we called Australia-China Tourism Year. The idea was to have a focus on that year, and these are things that happen quite often, to put a particular focus on a market and to stimulate that traffic growth. This year, 2018, is China-Canada Tourism Year. And Australia has a pretty liberal aviation policy. I know. Before we got into the Australia-China Tourism Year, we established open skies with China. The impact of that has been, not just of that, but of the evolution of the market, has been that the Australian carriers have about a 10% market share in China. Definitely not reciprocal. No reciprocity on good old-fashioned bilateral terms. But, The nature of Australia's aviation policy was that we want to stimulate traffic flows because it's in the national interest. And Qantas, the largest carrier in that market, has adapted accordingly with trying to get partnerships to establish different ways of addressing the China market. And as a result of that, we've seen this very substantial increase in Australian seats or seats between Australia and China in the last 3 years. There's now a 29% difference between Australia and Canada compared with almost equality 10 years ago, really largely due to the impact of Australia's aviation policy compared with Canada's which is considerably more controlled, shall we say. The result of that is readily countable. Chinese tourists tend to spend more than any other tourists in the market. They don't like spending on airfares, as many of you know, but they do like to spend when they get to the market. So in Australia last year, we had 10 Chinese airlines operating, depending on season, up to 12. 10 fly just into Sydney alone. We had 1.2 million tourists coming from China. And give or take a bit, it's probably more than $5 billion, but about $5 billion in expenditure— excuse me— in expenditure as a result of that. Pretty large amount for a country that only has about 8 or 9 million tourists. In contrast with Canada, where there are bilateral limits and where the Canadian carriers have about 40% market share, is that there were half that number of tourists. So the cost of a bilateral controlled regime compared with open skies to the national economy has been about $2.5 billion for one route group for one year. That to me, as I say, is one of the more black and white examples I've seen of the contrast. Australia and Canada are very similar countries in terms of population, in terms of propensity to travel, and in terms of the relationship with China as well. We've both been fairly close to China financially, economically, trade-wise. So, I'll leave you to make your own conclusions. In summary, going back to the start, I don't think there'll be another year quite like 2017. There might be more profitable years, but to have that confluence of all the positive factors is really rare. Inevitably, fuel prices are starting to impact on the, the bottom line of airlines, um, both in terms of thinking on prices and in terms of profitability. There's a lot of competition in the market still and a lot more coming, but— which is obviously an ingredient in that process too, but, uh, fuel is going to hurt. The bias towards price-sensitive travellers is growing. Again, this is not rocket science, but I think putting it all together in a package is quite important to seeing the big picture and to projecting where we're going to be heading in the future. And the point I made before, it's harder to raise yields when you have a diminution of the percentage proportion of premium seating. The North Atlantic has just started to see the impact of narrow-body long-haul, and as more of those aircraft come into the market, it's not just the North Atlantic, globally we're going to see some very, very large changes in airline network planning because you can service even 2 small city— 2 small cities as well as a lot of large city to small city pairs that weren't served before. And the, the IAG Norwegian example, the fact that there is this thinking now that we need to have some sort of ability to tap that low— that lower end of the market. And I think in almost every large airline now, outside the US, you are seeing the development of groups, airline groups. So you've got a full-service carrier at the head which has quite probably got a low-cost carrier, a short-haul low-cost carrier, a long-haul low-cost carrier, and maybe one other in that group in order to be able to attack the different segments given their different price, the different cost profiles and the different target markets they're going after. And despite the clear economic benefits, open skies are being challenged in many cases. I won't go into details on that, but particularly some of the carriers in the US have been quite vocal about open skies, somewhat selectively, and I throw that out for the challenge. I know some will disagree with that, but it is, I think, a very important point to be, to be considering. Open skies has been tremendous for the airline business. It's been tremendous for tourism, for national economies, and to wind that back, I think, would be a really retrograde step. That's my intro, and I think we'll perhaps go straight into our panels. Thank you, Peter.

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