CAPA Canada Aviation Outlook: Opportunity Knocks

Transcript

Peter Harbison:I'm going to say a few words about the overall situation as we see it globally for aviation, also a fair bit about Canada as we see it, and then finish with a little bit about some of the aircraft that are coming in which we think will change change the market for the long term. What I'm going to talk about, and I should say just a couple of things before I start. First of all, I'm going to talk about the metal end of the operation. There are really 2 parts to airline business. One is buying and flying large lumps of very expensive metal. That's a high capital intensive, highly regulated, very difficult thing to do. And traditionally it's generated very, very low returns. Today, last couple of years, we've probably seen the— we have seen the best returns ever. And they're still pretty modest. The other side of the industry is actually selling stuff and increasingly aggregating data on people who fly. That's the really attractive and interesting end. It's not very highly regulated. There are no, for example, no nationality rules about ownership or anything like that. And I think really over the next 5 or 6 years, that is going to be the more important part of the industry. It's going to be transformational in terms of the way we look at the airline business and the way airlines actually think about themselves. Airlines are starting to recognise that the whole process of distribution of— and here Air Canada was one of the first really to see it— frequent flyer programs or loyalty programs, which over the 20-odd years since Air Canada's frequent flyer program was established, the advent of technology, the ability to analyse data much more effectively has also transformed that process. And the whole shift of emphasis is in the airline business is going to change in that respect. Anyway, that's just a sort of little philosophical but also very fundamental change in the way we see things going. So as I promised, I'm going to talk more about the metal end of the business and also particularly though about aviation policy. This is our first Canadian event and we're delighted to be here in Winnipeg and we don't— we have talked about Canada in the past at some of our events as some of you may well have seen, because Canada does have a somewhat different aviation policy from the sort of description the Trade Minister was just doing about your, your general very open trade process. So let's have a look anyway about the outlook. Actually, I think I might have skipped a slide here. The good news and the bad news with oil is that prices have come down off their high. And they are sitting at a relatively comfortable, almost the sort of preferred level for oil at the moment. So that's the good news. The bad news is prices are trending down. And that's because, in fact, demand is softening right across the world for the airline business, that is. This is the way oil prices have gone over the last 10 years or so. And you see in the early part of that the really difficult era for the airline business. Many airlines nearly went to the wall and then we saw a great decrease 2016 which, which was really, really helpful to the airline business. It allowed airlines to, to reduce their fares at the same time as making sensible profits. And then we've just seen the gradual climb back up, and today we're about 20% of the 10-year average in terms of oil prices, which is a reasonably, as I say, a reasonably healthy level to be. But then we, when we start looking at some of the forward indicators, freight has historically been, air freight has historically been a very useful indicator of where the economy generally is going. It's lost a bit of that validity over recent years for a number of reasons, but it's also still very important. And when we see the sort of declines we're seeing, this is just the latest report from IATA of where freight is heading, another decline in July and a weakness across all regions. That's not a good sign, obviously, particularly if it is— if it does have some validity as a forward indicator. This is, again, from IATA. It's just showing on the left side there the negatives. The central line is the— is a zero movement. Only Africa has improved in terms of FTK growth. But Africa only accounts for about 2% of world cargo, so it's not really that important. But where you see the red bars outstripping the blue bars, that means July was worse than June year on year. So it's, it's not a very happy picture if freight is in fact a good indicator. Things have changed. I mean, there's a lot of, a lot of other developments going on which I'll mention in a moment. But these sorts of things where consumer confidence, where business confidence is really diving is, again, obviously that translates directly to, to, to travellers' willingness to fly and to the sort of price they're prepared to fly at. So we have a number of conflicting signals internationally. The trade disruption, the, the China-US dispute, spat, what's going on in the Middle East. A number of things are, are really creating a good deal of uncertainty and we're already seeing airlines starting to cut back a little on capacity, cut back on increases or just cut back on projected stable levels. So in an environment like this, airlines are going to need to review what sort of strategies they'll follow. The key bit, of course, is what passengers are willing to pay and that doesn't give a lot of flexibility in terms of strategy. But it does mean, for example, looking much more towards the non-flying side to generate revenues and that's where many airlines are looking. As an example of where things are going, China's growth in the year to date passenger domestic growth is, it's still a pretty healthy 7%, but it's the lowest it's been in a decade. And that is, again, totally a reflection of what's happening domestically. It's still a healthy growth rate, but it is, it has to be seen in the perspective of where they've come from. Internationally, it's not down as far. That's largely because a lot of new entrants are coming into the market. And stimulating international growth in China. But— and that is a challenge to other airlines perhaps, but it's also, again, a fairly muted level of growth given the nature of that expansion, which I won't go into, but it's mostly sort of local short-haul connectivity with new Chinese carriers coming into the market. Incidentally, there are twice as many carriers, international Chinese carriers in the market as there were 5 years ago. There are nearly 30 Chinese international airlines. To give you some sort of idea of where we're likely to be in a decade or so in this really fast-growing market. Let's look a little bit at Canada. First, I'll talk a little bit about our hosts. It's been doing pretty well, Winnipeg Airport. The entry of ULCCs, Hasn't done too much harm, and there are favourable trends for continued growth. But inevitably, with everybody else, domestic is under some pressure, and Winnipeg is also, and I'm not sure if these numbers are right, they're the ones that we have, but a very significant freight hub, and when I sit having breakfast upstairs, watching those massive great trains rolling through for 20 minutes at a time, You start to realise what an important, almost an axis Winnipeg is in the Canadian transport system. So, and most of the slides you'll see now come from our website. This is the system growth. So we're seeing a relatively healthy 5% in number of seats. in 2018, 2019. Not a bad direction. In terms of the market share, obviously dominated by WestJet and Air Canada. WestJet taking 42% of the market and Air Canada 31%. And there's a little addition there, 6.6% with Swoop. So they've— obviously it's a relatively well-balanced portfolio of airlines, but I'm sure if any other airlines would like to be flying here, Barry will be very happy to talk to them. This is the balance of movements for freight. It's quite interesting seeing that too. The blue bars represent— this is throughout the day, the scheduled arrivals and departures. The blue bars, the blue parts of the bars are departing schedules and the yellow are arriving. So you see at the right-hand end there between 2200 and 2400 or midnight, a lot of flights arriving. That's one of those great advantages of having a 24-hour airport, but that's all freight. Yeah. Talking about where the market is going generally, this, these wiggly lines show through from 2016 annually. The blue line is 2016 and you see them increasing right up to the red line which is 2018 and then 2019 though is the green one and that's where we're starting to see a considerable reduction in capacity in the domestic market in Canada. Admittedly, the summer 2018 was pretty strong relative— so the red relative to the yellow, but even so, it's quite a drop in terms of where we might have been. Internationally too, we're starting to see capacity tracking downwards. Again, we had a strong summer last year. This is again where fares were relatively low and competitive because oil prices were down and generally the economy was trundling along at a pretty healthy rate. As things start to slow, obviously that's reflected directly in terms of where, where the market heads in terms of capacity. Now I want to sort of look a little bit at Canada's aviation policy. and, and the way of the world, the way things are changing. Inevitably, and it's not controversial, the Asian markets are where the growth is. And over the next decade, the next 20 years, 30 years, that's really going to be a massive shift in trade and, and economies as China particularly, but also a number of other large countries in Asia start to to be, to show their weight. And necessarily aviation and trade flows tend to go in lockstep. It's harder serving Asia because it is a very complex market. It's not, we used to get people calling us and saying, what's the capital of Asia? In fact, Asia is a lot of countries and they're very, very different. We tend to think too just about China, But China is only one of some very, very large countries. For example, Indonesia is forecast by IATA to be the 3rd largest market in the world by the end of this decade, next decade. So there is a lot out there. Vietnam too is a booming economy growing very quickly. But as I said before, serving North Asia is, I say complex and competitive, highly competitive, very low yielding, and very difficult to participate in from an airline point of view. So it's going to mean looking for different ways of operating in those markets. They're different and they're different in many ways. So they'll, it'll require some very innovative and creative thinking, I think. and perhaps some changes in aviation policy if we're going to be able to capitalise on that growth. For the time being though, the, the Canadian economy, well, I'm excluding the US here too because it's so, so obviously such a major part, as the Minister said, of, of your trading system. But Europe is, in other words, eastwards looking, is where the, the whole focus of aviation is. And it's interesting too, it's a very seasonal market as you can see from that. The, you probably can't see at the back, but the different colours in this very colourful graph are the different airlines. And you can see Air Canada has a, the largest share in the, in the Europe to Canada market. Yeah. In fact, Canadian carriers have nearly 70% of the market if you include the Star Alliance partner Lufthansa and highly dominant in that market. It's very difficult to service markets that are so highly seasonal as that from an airline point of view anyway. And you can see in that When we get to the troughs, Air Canada's share increases to over 50% of the market. So it's a very key player in anything that goes transatlantic. And this is going back to my point that Canada's aviation necessarily, inevitably is focused on Europe. This is, these are real-time, actually 10 o'clock London time taken a few days ago. of where Air Canada's aircraft are. And you can see that great focus on London in terms of international as well as some operations down to Central Southern Asia, Central and Northern Asia. These are out of London, mostly, largely out of London and and the western part of Western Europe. They're both end-to-end services and a lot of partner connecting operations going that way. But relative to, to looking west, it's considerably larger and more, necessarily more influential in the whole strategy. WestJet 2 internationally. Has a much greater focus on Europe but with a much smaller market share. But this, going back to these very colourful slides, this is the period between 2017 and 2020 because our schedules go a little bit predictive. There's been no growth in that market over this period. That's a bit of a worry. 'Cause that market has grown by about 20% internally over that period. If you really look to the future, this, this has to change, obviously. You can't stay stagnant. And if we go back, sorry, let's, let's just look at Japan too. Japan is actually down a bit, and that's not, for any, I think really any policy reasons. It's just because the market has not grown very much. The demand hasn't been there. And despite the Star Alliance relationship between All Nippon and Air Canada, it hasn't been possible to grow that much. It's not driven by policy but by demand. Again though, a really important market from both a trade point of view and from a travel point of view. Canada-China also has not grown during that period. Very stagnant, and if you're not growing in that market, you obviously are missing out on quite a lot. I want to dwell a little bit more on that because this is a market that is capped, and some of you who come to our conferences around the world will have seen me talk about this before. In this market, Air Canada, because it's capped through the bilateral, Air Canada has about a third market share, the blue at the top there. And as I said before, we've, from Australia, we have a very different approach, but we've always over the years until about 20 years ago worked very much with Canada in terms of liberalising the market. We've had very— we've got very similar countries, very similar sizes. Australia's a lot smaller, well, 50% smaller, but still, you know, very much in the, in the same sort of category. We're also very large. Our markets are dotted along the perimeter and we are relatively remote. The big difference is you have a large brother to the south. Yes. or sister. This is China again looking back to 2013. So you see it did grow quite considerably over that period up to 2017 until we hit the cap. So there's presumably some growth in there that's actually being restrained because there is no further access for foreign carriers. This is the contrast between Australia and Canada They look rather similar except for the peaking. They're not in fact because the Australian scale is about twice that of Canada. So where the top level of Canada is about 30,000, in Australia it's about 60,000. And a lot of that additional, I mean it's higher right across the year, but a lot of that additional is in the peaks. And that's because we have an open skies agreement. Anybody who wants to fly can fly. Qantas has less than 10% market share or capacity share in that market. They basically relinquished it because the balance between aviation and tourism policy is rather different and Chinese tourists are very valuable, the most valuable tourists in the world, in fact. Thank you. In fact, they spend probably twice as much as anybody else per day. So our government took the approach that we'd like to have more tourists. I'm going to have to hurry this up a bit, I'm running a bit behind. So we have about twice as many tourists as Canada. The tourism value of that is about $2.5 billion a year, just in that single market. The suggestion is that there may be some upside with a different policy towards China. Canadian flag carriers do have a high international market share, nearly 60%. That compares with about 40%, for example, with the US and about a bit over 30% for Australia. Even Germany, which is pretty centralised, the Lufthansa Group market share is down below about 40%. So it's quite a high market share. It comes with a bit of a price because international fares in the Canadian market tend to be between a third and a half more expensive compared with those from the US. These are figures taken from Skyscanner about 2 weeks ago and we're using the same period looking ahead for the dates of going out on 24 September, back on 12 October. From YYZ to London, about $775 Canadian. From New York to London, about $500 Canadian. And the Finnair one, even ignoring Norwegian, which is the red bar, Finnair, which is actually flown by American Airlines, is about $520. Business class, $8,500. London, New York-London, about $5,500, $6,500. Sydney-Los Angeles, I won't dwell on that one. But you see a considerable difference in— and this is— these are just some random samples, but it is pretty much applicable across the board. Yes. Moving back to the domestic market, this is one of the interesting questions we want to be addressing over the next couple of days. We really do see some changes coming in the market, or do we? Let's hope for their sake that something will happen. Internationally though, if we, if we're looking at a policy which starts to recognise that we, we're shifting away from an eastern-looking focus to a western-looking focus. In other words, going to the Far East, to, to Asia. Maybe remove the caps in the peak periods, but certainly look in terms of having a different aviation policy towards Asia and for western Canada, because there is going to be a need to, to grow that market. And another thing that, and we'll talk about this a bit later, but we have in Australia, for example, open, unilaterally permitted open skies to any regional cities. In other words, beyond the capital, between the major state capitals in Australia. So outside any of those 4 major capitals, any foreign carrier can operate any capacity they want. subject obviously to operational constraints. That would have a relatively minimal impact on the major Canadian cities because you've got such a lot of 6th freedom traffic moving over US cities, but it also stimulates regional development. Finally, a bit about aircraft. What's happening with these new aircraft, the NEOs and the and the MAX, when the MAX does get back in the air, will have a massive impact on the way particularly smaller airports like Winnipeg and some of the central Canadian airports will experience. The MAX, first of all, obviously we know what's going on there. It's been pretty unfortunate, not just in Canada but particularly in Canada, and we're not likely to see much activity there for the next 4 or 5 months despite Boeing's continued scepticism— optimism about it. Air Canada, this is from our fleet database. Air Canada has a total of about 50, what are we talking, 60, 60-plus MAXs in the system both in operation or grounded at the moment. and on order. So it makes a massive impact in terms of effectiveness and, and in terms of influencing strategy going ahead. It's not just a current cost to Air Canada and the market, but it actually has a massive impact on their long-term planning. It has, however, given a bit of oxygen to those LCCs. WestJet, Unfortunately, that's— that bar has slipped a little bit, but it should show 13 and 9 orders. Again, for a smaller fleet, also a fairly important impact. But looking at the NEOs and the extra-long range, the A321XLR, for example, which I'll talk about in a minute, these are real game changers. Because with a much smaller aircraft, with very high efficiency, you can fly between much smaller cities. You're not going to fly a 747, a 777, or even a 787 between Winnipeg and a relatively small town in the US, for example, or in Canada. But you can with these aircraft because— Yeah. 2 or 3 flights a week with a 200-seater aircraft which can fly 8, 9, 10 hours is a very, very different proposition from an airline's point of view and it offers the opportunity to open up so many more smaller cities, particularly in North America. Airbus is saying that it can fly up to about 8,700 kilometres. That's, this is still a a paper aircraft at the moment, but it, it will come out at somewhere around that. So for example, Seoul to Vancouver is about 8,000, well within that range, making it for a smaller port something which may well be possible, certainly operationally anyway. And the connections can be made almost to anywhere in Western Europe. with an aircraft of that size. The point being, they can do it commercially. I'll just mention Vietjet because we do have a representative of Vietjet here. They have 300 of these aircraft on order of various types, the Airbus and Boeings, and that's going to transform connectivity in Asia. They can fly one stop between almost any 2 points in Asia and Australasia, into Australia and New Zealand. Massive, massive impact on the way we're going to go over the next decade. So, in conclusion, the markets are slowing. There's no doubt about that. Will it be a big downturn? We don't know. Nobody knows. As long as the market, stock market's going up because interest rates are so low, we have an unusual situation. And nobody really knows where that heads, but overall I think there's a fair bit of pessimism in the market, certainly from a consumer point of view. From a policy point of view, Canada inevitably still looks eastward, which is where obviously the big market is at the moment, but it's got to start looking much more towards the west and to Asia. With all the considerations in that of being a very difficult market to serve. But it will require some sort of policy refinement if policy is an inhibitor on the growth in that market. And then finally, these new generation narrow-body aircraft will transform the market over the next decade in ways that many smaller airports will be very, very happy to see and of course many smaller communities. albeit direct access to markets they could only have dreamed of years ago. That, that ends my presentation. Thank you very much for that, for listening, and I thoroughly hope you enjoy the next couple of days. Thank you, Peter.

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