CAPA Chairman’s Lounge: Surviving a pandemic - LCCs and Full Service Business Models

Transcript

Peter:

Hello, big, warm, welcome to to our two guests here who are going to talk eloquently, I think, about

what the future successful models and perhaps the unsuccessful models are going to look like as we

gradually emerge from COVID. On the left, and

actually, perhaps these faces aren't quite so well known

everywhere. Alex Cruz, Professor Alex Cruz, I should say, is perhaps best known for more recently for

being CEO and chairman of British Airways. But has a very long established career in aviation sta

rted in

19, just checking my notes now, in 1990 with American Airlines progressed into Sabre, so has a good

technical background as well. And then in 2006, founded Clickair low

-

cost carrier in Spain, which sort of

morphed into Vueling, which he was CEO. An

d Vueling in turn became part of IAG and International

Airlines Group, which was a stepping side for Alex to be hold by Willie Walsh into the CEO and

chairmanship of British Airways. He's now gone to even loftier heights of being professor. So welcome

prof

essor Cruz. Great to see you.

Alex Cruz:

Thank you.

Peter:

Bill Frankie, is I was going to say a shady character. He's not

a shady character, but his face probably isn't

that well known outside the tight knit circle of aviation. Bill has very quietly from the background really

transformed a lot of world aviation, quite frankly. He was, and I'm surprised actually I'd forgotten

, you

were CEO and chairman of America West going back a few years, but also responsible through Indigo

Partners and in your own, right, for establishing Tiger Airways in Singapore, Spirit, Wizz, Frontier in the

US. Volaris and JetSmart in Latin America. A

nd also I think Enerjet coming up in Canada.

Bill is a Managing Partner of Indigo Partners. Bill, welcome to to this conversation. Good to have

you.

Bill F rankie:

Good to be here.

Peter:

Right. As I said, what we're talking about is looking to these two gentlemen with the enormous depth of

knowledge in the

market, and a lot of years of accumulated experience between you, what the shape of

the industry is going to be from an airline perspective. Given that we've come through this dreadful

period of in economic terms, losses, reshaping the industry quite consi

derably, we come out with with

the massive amount of debt. It'll be a lumpy uncertain recovery, particularly as a nationally because

borders are going to open with great uncertainty and irregularity and in very different ways across the

world too. North At

lantic perhaps is going to open up first with Europe, but also some very, very

unpredictable markets elsewhere, which do feed into those two markets and have a big impact on

them.

The pote

ntial substantial loss of business travel particularly in the short term, but probably

enduring for maybe a year or two, even beyond that. The role of lessors, which is greatly increased

because they officially got a sound business model, unlike most airli

nes will that increase, will that help

to shape the nature of the industry? Lessors of course do like to have a narrow body aircraft with simple

configurations because they're easily transferrable if someone happens to default or at the end of the

lease, i

t's easy to move them across. So that's sort of a new influence, been an evolving influence that

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now coincides with the arrival of a lot of very, very effective narrow body aircraft. Particularly the 320

family and the 220 as well. But also the Max now it'

s going to be integral real production and moving out

there.

And then on the on things like the cost side, what's going to happen with fuel as the recovery

continues, how's it going to inf

luence the shape of the industry? But underlying it,, we come out of it for

many airlines with very substantial levels of debt, but not all airlines are in that situation. So maybe if I

could ask Alex to pick up from there and just I'll try and dip out of

the conversation after this long

introduction and and let you two gentlemen fight it out if you would. So Alex, over to you.

Bill F rankie:

Good luck to you Alex.

Alex Cruz:

Don't worry. I'll reel you in one way or the other. Thank you very much, Peter, for the introduction.

Given that I'm probably spending less than an hour, a quarter as a professor, that's quite a claim new

.

And another thing, startups as you know funds, private equity, et cetera. I think that as we move on to

the next stage, there is probably, we've always had two different kinds of airlines, the traditional airlines

and the low

-

cost airlines. Even within t

he low

-

cost airlines, even Bill has led to the ultra low cost

approach to them. But it almost feels like there is the third type of airline emerging, and it's the one that

it's in the middle and it's the worst place to be in at this moment. So let me elabo

rate on that.

Of course, on one side, we've got all those airlines, they've got a lot of state backing one way or

the other. The care's package or be that European governments or nation g

overnments that have

provided support in many different kinds of ways is very difficult to see some of those large brands

disappearing. Mostly because they're so aligned with the mission of their countries, of course, Middle

East, et cetera. Success is a d

ifferent thing, but survival, which is the first step, I think it's nearly

guaranteed.

On the other side, we've got the super lean, very, very high variable costs airlines, the ultra low

-

cost carriers. The majority of them Indigo Partners Airlines, or many of them anyways, and Ryanair, not

so far away. And these guys have been able to just drive through. They're beginning to grow more and

more. They feel confident. Any sort of communicatio

n that comes out of them, there's a certain tone of

positiveness or feistiness which carries a certain promise underneath. What I'm worried about are the

ones in the middle. And the ones in the middle are fairly easy to define. Are those that have a cost b

ase,

which is 20, 30, 50, 100% bigger than an ultra low cost carrier. And or they simply don't have that kind of

natural support that they may get from their home country or countries.

An

d there are a number of those airlines around in the world, and I think they are under severe

threat at the moment. Most of them are short

-

haul operators. Most of them have costs that have

unfortunately not gone in the right direction, because costs hardly

ever go in the right direction. But let's

just say they haven't been able to keep their costs down. And I think they are the ones that are fully

challenged and there's much to be done. But Bill, are you not in a pole position yourself with your

airlines t

o precisely give a really hard time to those that are in the middle?

Bill F rankie:

Yeah, no, I agree 100%. I mean, we refer to them as tweeners, in betweeners, and I think that's a

difficu

lt business model. I mean, you have to come to grips with the fact that the long haul full service

carriers have their market and the ultra low cost shorter haul market represents the other option. And

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to your point, we don't want to end up in the middle i

n that environment. And so we focus on efficiency

and cost structure and delivering obviously a safe product, just as you do, to the consumer. And the

pandemic has put emphasis to that approach. The ultra low cost carriers have been able, without much

stat

e aid, particularly outside the United States without much state aid, have been able to persevere

and survive in the environment. And so as we go forward, you'll see us focused entirely on the ultra low

cost model. And we expect to see, Alex, people like y

ou performing the service required for long haul

travel.

Alex Cruz:

Yeah, I'm no longer formally associated with with BA, but the fact that I started a very, very low cost

carrier, and then

I ended up being in BA has given me access to quite a very wide range of issues all

along. Now, let me tell you what my position was when I was running BA, because I was competing with

some of these significantly lower cost carriers, certainly in proporti

on to BA costs. I think that there's a

number of plays that they will try to use against those that simply don't have the same sort of assets.

The long haul networks, there are premium, as you were saying before Peter, their premium product on

a low whole

basis and their frequent flyer platforms which are completely underdeveloped. There's

maybe one or two platforms in the world that is slightly more advanced than the others, but it is

something that is completely just about completely missing, and please c

orrect me if I'm wrong, Bill.

From your portfolio of airlines, your portfolio of airlines have these subscription type services

for which you get discounts afterwards. One of your employee

CEOs told me many years ago, "Alex my

loyalty programme is my price of my ticket and I don't need a loyalty system." But in reality, when we

see in society coming out of a very digital world, post pandemic, we've all ordered stuff online more

than before,

it feels like the full service carriers are going to leverage their loyalty platforms to really

give a hard time to those that are very, very price competitive. Don't you feel that you've got to do

something in that space, Bill, in your airlines?

Bill F rankie:

Well, we have some form of that in terms of an opportunity by repeat customers to join a club, if you

will, and get discounted opportunities across the system of the airline. But a

full service frequent flyer

programme, as you have is an unlikely event. I think it just doesn't fit the model. So I think the biggest

single issue, Alex, as you and I and others look forward is what's going to be the relationship between

the ultra low cos

t carrier and the full service premium carrier over time. There've been a lot of

discussion over the last year or two about, is there some opportunity for the two models to integrate in

some form, whether it's a code share or an arrangement of some kind. A

nd I think that will be a major

discussion item for leadership in the airline sector over the course of the next couple of years.

It requires some modification of point of view by both sid

es and some integration of where you

fly when you fly, what services provided on the flight, all of that has to come to riff, but the low cost

model will be reluctant to give up its ground around its model. And the premium service will be

reluctant to give

up the premium service it affords its passengers. So it's not an easy path, but I happen

to believe that as a strategic matter, you will see more relationship between the full service and the

ultra low cost carriers over the course of the next couple of y

ears.

Alex Cruz:

It's a clash of cultures. I have to tell you, Bill when I was running Clickair and we were turning into

Vueling, we were quite religious, I want to believe around most cost

items. And we had a fairly simple

Jed bluish type model running at that time. But we saw that there was an opportunity to uplift revenues

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within the network that we had. The first step that we took was to do connecting traffic. Now we did it

very, very ca

utiously, but ultimately it turned out into a very, very significant piece of additional

revenues. Now, of course at that time, we had nearly 150 destinations from Barcelona airport and

natural flow and a lot of protection from a handling perspective. So w

e were able to do that. But when

we began to do our first Interline which was with American Airlines, we were trying to get rich

Americans go from Ibiza to Barcelona and from Barcelona to Miami, this was where the big clash of

cultures came through. Becaus

e of course we did not want to have any liability whatsoever over a late

flight where a business class passenger would miss their flight on American Airlines, as you can imagine.

Our sector is half an hour to the islands and we don't want that liability.

And it took us a long time to come up with a structure that was a hundred percent acceptable to

us. And ultimately we did have that interline and eventually we did a code sharing that we c

ode shared

with a couple of other airlines. And we also had to do revenue accounting in the background, which was

very natural to us because we were all obviously open skies and the new skies Navitair babies and

revenue accounting was an oxymoron almost in

the way that the simplicity of the systems in the

background. But once we began to work with other airlines, we actually took the time to define a super

simple way to do revenue accounting with them. But there is a clash of cultures. I think the business

need is there, you, of course would have heard about Ryanair speaking with [Lingus 00:15:34] and

others over the years, but nothing really happened. And then there's these kind of, I wouldn't call them

failed experiments, but not fully developed experiment

s between EasyJet and Norwegian or EasyJet and

Virgin Atlantic using a third party in the middle in order to maintain liability under control.

So I agree with the direction of your coming

from a business perspective. From an

implementation perspective, there are some significant hurdles underpinned by completely different

culture bringing the two business models together.

Peter:

Can I just, I mean, Bill to pick up particularly the Wizz Abu Dhabi model, which is presumably going to

rely quite a lot on connectivity.

Bill F rankie:

Yeah, sure. I mean, at the en

d of the day, obviously those low

-

cost model has a different network and a

different delivery of the passenger than of the full service carriers. But at the end of the day just to be

candid about it, the full service carriers have a more difficult time com

peting on short haul segments on

a cost basis with than the ultra low cost carrier. And so just as a logical matter, how do we get the

passenger from New York to London and from London to Budapest, right? And that's a difficult issue. As

Alex correctly poi

nts out, there's a cultural issue. There's just the mechanics of transferring the

passenger and the passenger's bags. And there is a difference in the interior service model between the

two carriers. But you'd be shocked how willing the passenger is. If th

e passenger is motivated to get the

Budapest on a timely schedule and is willing to deal with the the issues associated with the transfer,

there's an opportunity.

I'm not here today to te

ll you that there's a clear path for that, I think Alex is exactly right, but at

the end of the day, just economic logic tells me that's going to be a step that will be considered by the

industry.

Peter:

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Just, sorry, just on that point though, Bill, is that not the model for Wizz Air Abu Dhabi, that it used to

kind of rely on connecting South Asian traffic across to Europe?

Bill F rankie:

Well, not completely, but you're right as to a significant part of the passenger traffic. That's exactly right.

And I mean, Wizz Air Abu Dhabi, the government in Abu Dhabi is interested in the opportunity

considering it's full service premie

r cabin, that it has in Etihad, is interested in finding an alternative to

deliver more passengers at a lower cost. Considering it's customer profile across parts of Africa, Asia

into central and Eastern Europe. And that is a step along that path.

Peter:

So Alex, did you get enough response on the frequent flyer programme or loyalty programme? I mean,

these are more than just loyalty, aren't they? Direct with self standing money making prod

ucts in their

own right, using frequent flyer points with credit cards, with all sorts of other suppliers.

Alex Cruz:

I think it's one of the lines of defence of traditional areas. I expect

them that they will use that line of

defence because they don't have access to other lines of defence altogether. Now you, and in your

home national airline Qantas, they've done a fantastic job over the years in creating an ecosystem

around the frequent f

lyer programme that goes beyond just being a frequent flyer programme. And

that's really what I mean, when I see Tony building a super app and I'm not a huge fan of distracting the

airline. The airline needs to be absolutely focused on what it does, but To

ny is Tony himself of course.

He builds a super app that is going to try to answer many questions in the daily life of consumers. Oh, by

the way, when they fly, they will fly AirAsia, because it makes sense because the AirAsia is part of that

ecosystem.

And I think that we're being trained as consumers to have these things in our minds. We're

being trained by Amazon, by Uber, by all these different people in the set of relationships that we

're

going to have. So now I suspect that there will be significant investment coming in because it is one of

the fewer lines of defence. Bill, when you make reference to the real challenge of traditional airlines and

their short

-

haul feed, this has been on

going forever. And as you know, very few around the world have

been able to get sufficiently competitive cost base. I'm very proud to have been part of a group, more

than that, I was part of the project initially with Clickair and eventually with Iberia Ex

press fantastic cross

base, but delivering a product is more than enough to be able to feed the Madrid hub, but that's an

exception. There's not many of those around the world.

I think tho

se traditional airlines because of the labour situation, their aircraft commitments,

many other reasons they will not let those narrow bodies go. There will really fight tooth and nail to

definitely not consider feed certainly in their home hubs from low

-

c

ost carriers, maybe in some outer

hubs and such. I think it's going to take a long time. Again, it's a clash of cultures. I've been there. I've

been there in both. I think it would be really tough.

Bill F rankie:

I certainly agree with the culture.

Peter:

Is it US market different Bill?

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Bill F rankie:

Actual

ly Europe is set the stage for the balance of the world around the ultra low cost model between

Ryanair and now Wizz. They have established in the minds of the consumer that if you're travelling three

to four hours on a flight inside, you want schedule and

you want price, right? And you want safety of

course. And it has been a very successful model in Europe. The US has trailed in the ultra low cost

penetration to market, although it is now rapidly gaining acceptance. And so, if you went back four or

five,

seven, eight years ago, the ultra low

-

cost model had something like three or 4% of the US market, is

now something in the eight to 10% of the US market and growing rapidly, as the consumer gets trained

up to the benefits of the model.

And my point is simply as I was trying to make at the outset of this comment, or these

comments is look there is a place for both models in the marketplace, and it's probably not a place for

both models in al

l of the marketplace. And so how do rational people decide to manage that difference?

How do we get into the day the passengers I said from New York to London to Budapest? How do we do

that in a logical way? And I agree with Alex 100%. I mean, historically

, and the airline industry is famous

for the mentality that this is the way you do it, we do things the same way over and over and over and

so it's not an easy path that I'm suggesting. But I think from a consumer and economic perspective,

recognising what

the pandemic has brought to fore around financial issues at airlines, there will be a

need to have this conversation.

Peter:

Just going back to when we went into this. Explain to me Bill a

nd Alex, why most of the low cost carriers,

the major low

-

cost carriers were actually in a much better financial position than most of the full service

carriers in terms of cash reserves.

Bill F rankie:

I can only speak to our five lines, but at the end of the day this is the airline business and so you have to

recognise it. It has its cycles and it has its issues, whether it's 9/11 or the pandemic, and you have to be

cautious around the ma

nagement of the balance sheet. People forget that. Management teams forget

that in the good times when they're making a lot of cash and money is flowing through the coffers. And

at the end of the day, all of our lines went into the pandemic with unusually

clean balance sheets and

significant cash reserves. Was I prescient in any way in that regard? No. I simply observed the fact that

the industry over cycle tends to over leverage itself against what they believe to be, they hope to be an

eternal profitabili

ty pattern. And that's not the way the world turns.

And so when we went into the pandemic, fortunately airlines had adequate cash reserves and

have not had to engage

in the rescue financings that you've seen some of the world's larger carriers

have to engage in. I mean, in the US we did some work when we took Frontier public recently that

indicated that the US carriers, the large US carriers, top four carriers are goi

ng to have to add something

over $100 per ticket to pay for the debt that they've incurred here in the last two years versus the low

-

cost model, which has not had to leverage the balance sheet. That number will be something less than

$10 a ticket. And so t

here has been a dramatic shift in what happens to cashflow here over, the course

of the next few years.

Alex Cruz:

I would also highlight Bill, determined disadvantage of having high variab

le costs, because even during

the last year or year and a half with the ups and the downs and another wave and traffic op

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momentarily and back, et cetera, having that flexibility of having that high proportion of variable costs

has actually preserved that

a cash position significantly better than those airlines that have taken huge

loans and have been having those huge... What do we have at British Airways? I think we were burning

through 20 million pounds a day at one point without flying or taking in hard

ly any revenues.

So just the general construct of the ultra low

-

cost carriers just puts them in a huge position of

advantage from a cash management perspective and certainly going through

almost any shape of the

recovery. It's not simple logistically, I know, but you're in a significantly much better position. Again, the

word of caution to those in the middle. And what is it that they're going to do about it, other than

issuing more equity

rights and raising more money internally and externally? I think the winter is going

to be a long dark winter for many, many airlines.

Peter:

If they [crosstalk 00:27:08]

Bill F rankie:

I was just going to say [crosstalk 00:27:12]

Peter:

Yeah, sorry Bill, yeah.

Alex Cruz:

So Peter, you were talking earlier before out [inaudible 00:27:22] and the situation of the aeroplanes .

And I'll give you my opinion and I'm super interested in what Bill thinks. I think ultimately, when I started

an airli

ne, my first 100 aeroplanes , I should say, 99 aeroplanes in Vueling, they were leased and our

first aeroplane was the 100. That was the first one we actually began to own. And we were very pleased

with having that flexibility. Being part of British Airwa

ys and looking at the track record of the company,

managing a more balanced approach towards owning and leasing, and certainly having seen the sort of

financing agreements that were done over 20, 25 years, I could also see a lot of advantages behind

striki

ng that balance.

So absolutely what's happened, particularly to the traditional carriers, is that they sold well, in

my case, I sold everything I could sell that I was not going to use. Bu

ildings, art, everything that I could.

And again, I sold a few things and leased them back, including buildings and aircraft. But I think

ultimately most airlines will seek to have whatever balance they thought was right for them prior to the

pandemic. Tha

t means a lot of transactions from an aircraft perspective, and I think it will take a long

time. It's very difficult to undo this when you sign up new contracts that are five, six, seven, eight, nine,

10 years of age over a loan.

So there will be a desire to go back to the previous mixes, whichever those were for the

different airlines, but I think the ultimate role of Dela source, it's empowered at the moment despite the

actual prices of

some of the leasings. Bill, is that your experience or how are you living that whole

world?

Bill F rankie:

Yeah. So just as a matter of strategy, when you have a younger airline and you're

trying to manage

cashflow against a growth model, we lease aircraft. It's not a good use in our minds to use the cash that

the company's development to buy an asset that has a decreasing value over time. And so if you look

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back across our portfolio, we ha

ve been major consumers of leased aircraft over the years. Now the

airline as it matures and gains about the balance sheet strength and has a market maturity, you can, for

tax reasons, obviously consider acquiring buying aircraft and using the depreciation

through the tax

account. But we have been major lessees across the last 10 or 15 years.

And in the current environment Alex, you would be familiar with this, you're seeing a lot of

aircr

aft that were purchased by the leasing companies pre COVID now coming to the delivery stream

and the leasing company is trying to find a path to get those delivered to credit worthy airlines. And so I

don't know how long this lasts, but in the current envi

ronment, you can find very attractive lease rates

for the aircraft. And we have historically had large purchase orders and we then do sale leasebacks with

the lessors, and that's been a successful strategy for us. How that changes in light of production is

sues at

both Airbus and Boeing remains to be seen. But in the current environment, there are aircraft being

delivered to lessors that have to make their way to the market.

Alex Cruz:

I had

an opportunity to interview or I'm going to have an opportunity to interview five low

-

cost startups

in a few minutes, and the underlying premise for many of them is aircraft are cheap. And that's what is

enabling us to actually either make it work now, or

I'm going to make it work in my region. It's still risky,

because ultimately the aircraft will go up in value and there's other things other than aircraft, although

always you got to start with aircraft, but I think those dynamics are going to be in place

for quite a long

time still. The recovery is not coming back very, very quickly. I don't think.

Bill F rankie:

Yeah, well [crosstalk 00:31:31]

Peter:

Yeah, I think it has to be right, isn't it? To take the other side of that coin, a lot of the rapid growth in

Asia, particularly one particular carrier has come from the ability it's almost sort of pyramid approach of

silent le

ase back, getting a large number of orders in and then selling lease back. To what extent does

that provide a buffer for anybody? Is there any owned aircraft that hasn't been sold and leased back if

the airlines got in a difficult position, particularly th

inking of the tweeners that we were talking about?

Alex Cruz:

Well, I did quite a few of them before I left BA, sorry, Bill I interrupted. I did quite a few selling lease

backs. It was what

we had to do. We did not sell lease backs the whole fleet, or certainly before I left

that didn't happen, we still wanted to keep a few aircraft in our own books. It is one way to raise money,

there's absolutely no doubt. And it was a no brainer to immedi

ately take a look at the collection of

assets and which ones would make sense to monetize most and in the sort of term. So I cannot neglect

the value that doing those operations provided in raising cash to be able to make it through last year

and earlier t

his year. But of course you've run out of those assets eventually.

So there are so many sales on lease backs that you do, and ultimately if you have had a balance

of owned and leased, you

probably want to try to see if you can hold on and not get rid of all of the

aircraft. That that would be my approach. Sorry, Bill.

Bill F rankie:

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Yeah. Well, in our portfolio, we have for

a variety of reasons involving efficiency and fuel consumption

and carbon emissions, and simply maintenance related, we have very young fleets. Average fleet age

across our portfolio is under 10 years, probably under five years for most. And that necessar

ily involves

a revolving door around sale at leasebacks of aircraft through your portfolio. When you own the aircraft,

you have a longer hold of the aircraft as a general rule. I mean, there's no hard rule in that regard, but

that certainly has been the pa

ttern over years with the full service carriers they buy and hold aircraft

once they put them on the balance sheet.

And as we've seen improvements in efficiency in aircraft through

the for example, the A320

model over the last 10 years, we have felt it to our advantage to have young revolving fleets. And that

requires us to approach the aircraft leasing market on a regular basis.

Peter:

We don't have as much time as I'd like to address all the issues, but Bill, that does lead into the impact of

environmental pressures, which are greatly magnified in the last year. Clearly young fleets are very

important in that. But g

oing back to Alex's point of sort of looking at which of the different models is

going to be in the best position, is there anything other than just having a young aircraft that's going to

be necessary to navigate the difficulties of responding to the envi

ronmental pressures?

Bill F rankie:

Well, I'd start by saying, Alex, and I am sure would agree that this is not a passing fancy. This is a

commitment that airlines have to make to ESG and p

articularly to carbon emission. You see the efforts

in the EU and in the US to deal with that and placing requirements on carbon emissions against the

timeline, all of that plays a role, and we would be foolish to not pay attention to it and try to stay in

front of the power curve. And we do. Frontier is has the lowest carbon emission per passenger seat in

the US. Wizz has the lowest carbon emission pattern of an airline in Europe. And those are high priorities

for our airlines. Now what's going to happen w

ith alternative fuels, with alternative propulsion systems,

I'm not smart enough to say, but all of those things have to be paid attention to as we try to deal with

carbon emission. And it's not a matter of choice, you need to do it.

Alex Cruz:

I would agree with Bill entirely. I've seen a change over my years in aviation from being, I wouldn't call it

an inconvenience, in fact it was very convenient that reducing fuel burn was very, very al

igned with

environmental matters. So generally, you could show that you are doing so many different things at any

given time to reduce fuel burn. but I think that we have evolved from that. And I'm always struck by the

when I was in BA the change by the te

am that was tracking all this initiatives change from measuring the

benefit in pounds, in financial gain, to actually in terms of CO2 being measured, which opened it up to

even more initiatives internally. Which to me was a sign that there was a culture ch

ange that was taking

place, that was positive enough to be looking at it from a much more holistic kind of point of view.

I think that's what matters, but we need to be very, very aware th

at all those that are outside of

aviation, who are also being trained to get quick answers are not going to get them in aviation. Yes,

we're going to use a sustainable aviation fuels. Yes, they're going to be very, very small electric

aeroplanes flying he

re and there, and things like that, but we're not going to be able to get somebody

from London to New York or from London to Budapest under two hours with a different propulsion

engine for quite a really long time. So part of our job in aviation is to make

sure that we strike the right

balance between absolutely taking seriously and doing many things around the efficiency of our

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operations, field burn and other activities to try to make up for CO2 with the actual comms job that it's

coming associated with t

he challenge of no real significant change.

So a 50% gain or efficiency improvement, that's not going to happen for a really long time. And I

think that that's the struggle that most airl

ines will go through. What we're seeing is many airlines

making very, very visible announcements about small investments here and there. They're all

contribute. Absolutely they are all contribute, but that's mostly because we cannot make huge scale

gains i

n a short period of time. So we have a long way ahead of us to make those big changes that most

consumers and many legislators expect from us quickly.

Peter:

Alex, you're talking about [ina

udible 00:38:36] overall industry. I mean, going back to our discussion

right at the beginning, which ones is it going to hurt most?

Alex Cruz:

Which ones of what, of programmes or?

Peter:

[inaudible 00:38:50] the pressures from environmental to reduce carbon emissions. Which ones are

going to be hurt worst by this from a financial point of view?

Alex Cruz:

All right, financial point of view. Financial point of view then it means things like core CI and ETS and any

kind of scheme that actually has money that has to be changed and accounted for, and have people

internally to run data analytics and drives processes, and a lot of the stuff, those sort of programmes will

drive costs and there'll be a little bit distracting. I think ultimately the role of the leaders in this airlines is

to balance that. Put that in t

he right box and then do many other things and be a believer that we have a

role to play in this industry and that there are many other things that we could be doing and

-

or

investigating and, or partnering with others in order to continue driving improveme

nts in sustainability.

But yes, there will be indeed pressure coming in financially through some of these programmes.

These programmes were conceived by people less close to aviation, less

familiar with how we

work how fares work, how consumers work. Let's see one last point, I'm still not sure that consumers

are going to react in the same way that those that are putting pressure into us believe. I'm still seeing a

lot of people not really

paying a lot of attention to air as a big consideration at the time of travel. I think

people will still travel by air. They will still take an aeroplane. They may make a choice and go on Wizz

because it has three

-

year

-

old aeroplanes versus somebody else,

but I think that will continue to travel.

Peter:

Thanks Alex. Bill, we got one minute. Last word.

Bill F rankie:

I agree

with what Alex said. I think at the end of the day, people oversimplify this problem and they

want to find an easy solution and announce the solution. It's not going to be that way. We're all going to

have to stay constantly tuned to ways we can improve.

to ways we can lower carbon emission and it's

not just what fuel we burn. And so let's stay tuned here, this is a major issue for the industry going

forward.

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Peter:

Gentlemen, thank you ver

y much. Lots of other issues I'd love to have talked about, but I think we've

covered a lot of ground there anyway, and been certainly very, very interesting. Bill, great to see you

again. Thanks very much. Enjoy it up there in Montana.

Bill F rankie:

Thank you.

Peter:

And Alex. Great to see you. Look forward to that beer sometime soon. Thank you very much gentlemen.

Alex Cruz:

Thank you Bill.

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