CAPA Global Regulatory Overview: Open Skies And Level Playing Fields

Transcript

Peter Harbison:I'm going to run through a few general thoughts I have and some specific ones, really to look at what I think, what we think we can expect from the next decade ahead of us, not just this year and next year, but It does look like being one of the more— in fact, it looks very much like being the most important decade in terms of really fundamental change in the aviation industry. And I want to try and address a few of those things, and some of them might be reasonably controversial, but mostly I think when you think about it, they're pretty much common sense. Reshaping the international aviation regulatory system in the 2020s. That map you see before you is basically a reflection, in terms of the red, of where the population centres are in the world today. That's important because in aviation, the fundamental transaction in terms of international regulation is about how many people I have compared with how many people you have. In other words, if I have a big population that flies, I have a better transactional position than you do in terms of negotiating access to your market because I can deliver a lot of economic value to your market. So in very simple terms, when you see the red, that means power in terms of aviation negotiation. And it also means presumably over the next decade as that red bit on the right, largely China and Southeast Asia, but also India becomes more economically powerful, then the whole shift of aviation goes in that direction. And that's what I'll talk about. So what I was just talking about really was in terms of the transactional nature. Mercantilism is the fundamental issue when it comes to aviation operations. You have to have bilateral, sometimes multilateral, but bilateral agreements between states which make a judgment on the basis of their own national interest in terms of what is good and in terms of what I should allow to fly into my country. So the basic protection position is I protect my national airline. And that was how it was for many, many years. Obviously, over the last couple of decades, progressively we've looked at the broader socioeconomic benefits that come from having people fly into my country and fly out from my country. which is a different sort of equation. And that's essentially what we talk about when we talk about liberalisation. It's actually being sensible about the broad economic impact rather than the much narrower one of protecting the national airline. Will we see more multilateral agreements in the next decade? Probably not. We've tried very hard over the, over the years. The EU, as we've talked about, has been very, very influential in doing that, extrapolating anyway from its multilateral base and is a very good example of what the benefits can bring if you do have a sensible approach to the holistic activity of aviation. So these are the main points I want to— I'm not going to talk at great length about all of them. First of all, the impact of China. Secondly, Europe and what happens when the UK leaves. Thirdly, the US which has Obviously massive influence but is diminishing somewhat as others become more powerful. Latin America and Africa, followers in that, each have their distinct provisions, features. The Middle East, what happens in the Middle East. The external forces of which we've talked about this morning, there are many, always. The impacts on aviation from, from all sorts of directions that often are quite unexpected but some more predictable ones. I want to talk about the future growth of regional operations as well because there are a lot of aircraft coming into the market that are very, very appropriate for that sort of operation. And finally, the one which comes very much from left field for many of us in the airline business specifically, which is actually where the money comes from, selling tickets and knowing your customer. So, we've got a lot to talk about. I'll move fairly quickly through it. I said the power is with the people. If you have a large market to share with others, you have a lot of power. China has a lot of airlines as well. So just as in many ways the US dominated aviation policy through the 20th century or the latter part of the 20th century, China will come to do that in the next 10, 20 years. There's a more holistic— holistic, I've used the word before, but a broader global strategy behind a lot of where China's aviation policy will follow, which is related much more broadly to trade and much more specifically to trade with very wide national goals, and those include actually selling aircraft into the markets that they want to liberalise. And this is not secret, it's very much a public policy. Already in East Asia, the Chinese operations, the Chinese market, the Chinese travellers are extraordinarily influential. Those markets are pretty liberal already and therefore access has been probably easier than it might have been in other countries, in other regions. And there are 30 Chinese airlines operating internationally. That's far more than the US. And these are airlines which are growing very fast, to some extent fuelled by the domestic position that they have with very large markets domestically. This is what I was talking about when I talked about the broader interest, the Belt and Road or BRI that China is pushing, rolling out. These are all the, The little red dots on that, which look a bit like measles, are where China has financed projects, and these are generally very strategically focused. They're about encouraging local political interests, but also the ability for Chinese investments there in terms of ensuring agricultural produce for the future of a massive country, a whole array of different things. Fundamentally very strategic in many cases. And with those investments, the Belt and Road actually has, and this is much more strategically focused in terms of physical presence, when we talk about Sri Lanka, for example, a port there which is very much a key port in the Indian Ocean. And there you see with those lines, which are more surface-based, but actually do to some extent give you an indication of where China is, is going to be pushing both the sales of its aircraft, which we've talked about a little bit, but also air services and the air policies, aviation policies that will be pursued. So we may well see a very different situation evolving from that given the power that the Chinese market has. EU will inevitably remain, well, Europe, will inevitably remain highly influential. Consolidation has occurred largely by exit to some extent, and as that consolidation occurs, I think new entry will probably become more difficult as those— and that's probably not a bad thing in many ways. Entry has always been a lot easier— sorry, exit has always been a lot easier than entry anyway in the airline business, and that hasn't already been— always been for the good. Again, as Hendrik's talked about, the inter-regional international multilateral agreements are very much a force for good in terms of liberalization. To what extent will the UK leaving the EU impact on that policy? That's something that maybe Hendrik would like to elaborate on a little bit later on, but that is, they have been a very, very liberalizing force. within the European Union and it may not be a good thing that they depart. They will again take their own course. And to a large extent, we're seeing all the, a lot of the environmental movement coming out of the UK and that will influence policy. Probably not always favourable to aviation because aviation is such a nice big target which is very, very, vividly obvious and of great attraction to politicians and demonstrators. And the European Commission and the EU has sort of moved along this track already with a taxonomy of permissible green investments and is moving very quickly to something— and this is really holding the blood flow of the industry. And not just the aviation industry, but actually directing capital flows and proposing capital flows where there is sustainable investment, to be in sustainable investment, to achieve the sort of growth that is not negative towards the environment. And recently, just last— later last year, announced that they'd ban all investment in coal in 10 years' time, within 10 years. So that's not a bad thing as far as you're looking at from an environmental point of view, but it does suggest some risk that investment in the airline industry and the aviation industry generally will be perhaps put at risk. And given that we have a climate emergency recognised, that's Not a, probably not an unreasonable possibility. Sorry, I've lost my click. The US, to some extent, as the progenitor of liberalisation through open skies agreements, has through its consolidation process become much more insular. Insular in the US, but also focusing a lot more on Latin America where it's always been very powerful. But there seems to be little likelihood that the US will revert to being a leader in world liberalisation given the airline pressures and the influence of the big US carriers. The role in the US and in Latin America will, I expect, continue with US airline acquisitions and some very, very tight joint ventures. with some of the major carriers. We saw, as I mentioned before, the Delta-LATAM move, but also very close relationships and equity investments in some of the other carriers in Latin America. And in terms of the meeting points between China and the US, Latin America is also going to be a very strategically important broadly geographic zone, but also for aviation. So we can see some potential there. North Atlantic looks as if it may well be very much still a haven for US, Canada, and European airlines because it is essentially a point-to-point market. Where the differences occur are obviously in the conflicts that the European carriers have with the Gulf carriers. in terms of servicing the US and in terms of the, the 6-freedom hub roles that some of those carriers have. So that will continue to be a competitive market both in terms of point-to-point and in terms of the longer-haul 6-freedom operations. We've talked about external impacts on regulatory policy, sustainability, global warming, public health controls with Things like the coronavirus, oil prices, and aircraft technology. Sustainability is really— I don't want to dwell on this because I don't have a lot of time and we have talked about it a fair bit, but one point I would make is that the government, the UK government particularly, and this is obviously one of the drivers within Europe, has a committee on climate change and That had a report submitted to it late last year from Imperial College London which proposed things like banning frequent flyer programmes which are becoming a very large revenue source for airlines, having an escalating air miles levy, the more you fly the more you pay into a levy. And we are now seeing also customer-facing websites that do prioritise the cleanest operators so that the customer starts to have a choice and that can be very powerful too. in terms of investment generally. The— we talked again about this earlier this morning, external influences on regulatory policy in terms of public health issues, they come and go, and hopefully if we're better prepared in future, both in terms of initial disclosure and in terms of reaction, but also in terms of reasoned and reasonable responses by foreign carriers and governments to what goes on. This was— this came out of the 2003 SARS report. I don't know if you can read that, but it essentially says that it— there was a very important role played by aviation and that the world was ill-prepared to mitigate the diffusion of it by air transport. I think we've improved that situation somewhat, but there's still obviously a long way to go, and it is a continuing risk. Oil is down now, Brent crude is down around mid-$50s a barrel, which is pretty much a sweet spot for aviation. And really, given all the different factors that go into determining that, doesn't look like growing an awful lot. From an economics point of view, airlines are actually in a good position to be profitable from that point of view and to some extent perhaps the incentive to reduce fuel consumption diminishes. At the same time, the very fact that there are so many new aircraft being delivered means that those aircraft are much more fuel efficient and so hopefully can improve on profitability. Aircraft technology has always been a key part and it's something that we overlook a lot in terms of policy. The changes, for example, with the large wide-body aircraft which were fuel efficient, could fly very long range, really combined with liberalisation meant that it was possible to have what we have in the Gulf here now, 3 major carriers who can fly long-haul internationally and connect pretty much any 2 points in the world given where they sit. So geography, technology, and liberalisation were key to that. We are now looking at a whole new generation of narrow-body aircraft— Excuse me. That have that similar fuel economy, fuel-efficient operation with much, much smaller aircraft. And this comes at a time when And we talked, not in the panels, but the point's been raised quite often about slots at major airports. There are a few major airports that are likely to be built in the next 10 years, and a lot of smaller airports which are not very well served would very much welcome smaller aircraft. So to some extent, in this, in these terms, there's a much better future for regional points. The small long-range narrowbodies will be able to operate between, at both ends, although they won't initially probably, at both ends smaller airports because when you get down to an A220 which can operate for 6 or 7 hours, not necessarily a desirable thought in a narrow body to fly but a very, very attractive commercial proposition, it, that aircraft can fly with 100 seats between 2 small regional points. And if you think about it more broadly, the whole issue of populism, which is, is really becoming a global phenomenon, means that in many cases governments have to be responding to regional, local regional issues, and this does tend to tie in with that, and we see it in the UK at the moment. Regional development is important in every country. Politicians talk about it, they don't know how to do it generally. And so there is potentially a much, much greater role for these smaller aircraft now that it's been technologically— we've achieved a position where we can operate at very low unit seat cost for long-range operations. Thank you. And the sort of— this isn't unique, but the sort of announcement recently from the Russian aviation policy for St. Petersburg to develop that regional market, have a different and much more liberal aviation policy which doesn't affect the major gateway, but at the same time encourages travel to some of the smaller gateways in the country. In this case, St. Petersburg. The big one I think that we really don't know about but is bigger than any of the things I've talked about is selling tickets in crude terms, the distribution companies, the distribution of product, and the role that potentially some of the major aggregators of data about you and me will play in the next decade. There have been a lot of hints of what, what is to come. Data is obviously a very, very key factor that didn't really exist 10 years ago because it couldn't be processed. Now we have a lot of social media companies, companies who deal in all sorts of retailing, not only in travel but also in every consumer product we all buy. online, have accumulated massive databanks which are now, thanks to AI and other technological advances, able to be very, in a very granular way, isolated and applied to your and my interests. And they have a lot more information about them, about you and me, than any airline does. So, These are the companies I'm talking about, these sorts of companies, and the ones who'll emerge in the next decade. They are customer-facing, they know all about us, and they have the potential, if they want to, to disrupt the airline industry in a very profound way if they want to, if that's where they see their interests. It's, it's a part of the industry that's pretty much unregulated, selling tickets. Okay, you have travel agency requirements and that sort of thing, but it's also very easy to sell online and it doesn't create a whole— doesn't need a whole lot of imagination to find ways of being able to do that which, which are quite different from the ones we're talking about at the moment. NDC, okay, is, is an important move in that direction. That's very much airline-focused. So if these third parties come to control the distribution process, you have a situation where national designation of airlines really just becomes a, and that's what we're talking about when we talk about liberalisation, that becomes really a formality. And if I can sell directly to you and basically pay an airline to fly you, on their behalf, on your behalf, that becomes a whole different equation. The regulation of the airline itself in terms of operations is really a nominal feature in it. And when that demand from those operators and the technology coincide, they do have the potential to control the distribution. That then means they control the revenue, they call the shots. Yeah. Whether and how long or how extensively this phenomenon does occur, we don't know, but the potential is there for a very, very significant change, shift in the way the airlines are financed and the way that they actually operate. It's a fairly difficult concept to conceive of at the moment, but it is something that's happening very much beneath the surface and is As I say, something which is very, very difficult to interpret in terms of its, its real validity, but it does seem that there is a major chance of a major change. So that's, that's just a summary of the points I made. Thank you very much for that, and I'm right out of time. Thank you. Thank you, Peter.

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