CAPA Low Cost Long Haul Outlook

Transcript

Peter Harbison:I'm just going to go through a few points, fairly skim through fairly quickly, just to try and set the scene a little bit for what we're going to be talking about over the next couple of days, and a little bit of an outlook, but mostly not. I'm not going to dwell on the economy or the big picture generally because I think that's in such flux and I think some of it's a little bit downbeat as well. I mean, we are obviously running into some headwinds economically and that's something that's always a major concern for the airline industry. Is it sustainable? That's the question everybody asks. Long-haul low-cost doesn't work. I'll talk a bit about that. There's been a lot of growth nonetheless. Who are some of the big players? in the market and how aircraft technology is changing the profile of travel, not just for low cost but for everything, and some of the challenges for the future. So let's start off. A couple of quotes here about low-cost airlines being sustainable. Tim Clark thinks they are. Akbar Al Baker thinks they might work at $30 a barrel for oil, and Willie Walsh says they're a significant part of IAG. I want to, to start off to try to get away from the idea of trying to define what a low-cost airline is, low-cost long-haul airline is too. It's, it's really evolved into something of a, a concept. It's, it's something which is really about being very, very cost-effective and flying long distance. We started once the low-cost short-haul movement really took hold in undermining the feed short-haul routes into long-haul for the legacy carriers. So the, the long-haul routes became the more attractive ones because they didn't have real competition. So it became a bit of a magnet for low-cost carriers. Can they make that work? And obviously a lot of the advantages you have in terms of utilisation, in terms of fast turnarounds really don't translate across to long-haul. So that raised the question, but I think it's much more important to move away from trying to define whether and whatever is long-haul low-cost and whether it's sustainable into just talking about how the development of basically of new airlines either independently or as part of a group, which is another interesting development, on the whole concept of long-haul travel. And inevitably, we can't do any of that without talking about the impact on the environment where the unit cost, the unit emission cost tends typically to be much lower than for full-service operations. Ingredients, well, first of all, we've sort of, we've got to define some facts. operating routes mostly over 4,000 kilometres, but disrupting those markets. I think that's really the fundamental part we're talking about. As I said, groups, and often where a group, a full-service carrier group, will use its low-cost subsidiary is to complement on routes, largely leisure routes, where the full-service carrier can't make it work. But I think, and as I've alluded to before and as we all know, the use of long-haul narrow-body aircraft is really going to start to change the nature of the industry, not just for long-haul low-cost, but for the industry overall. And this is, I mean, very, very simple terms, this is how we've evolved. We started talking about standalone long-haul low-cost, and I remember One of the first in the modern era anyway was AirAsia flying an A340 from Kuala Lumpur to London. Didn't last very long because with 4 engines and high fuel prices, it just wasn't sustainable. But I think part of the proof of the pudding is, is that a lot of full-service carriers decided it was necessary to have a low-cost subsidiary. Both short-haul and long-haul in many cases. And, and that's where I think things started to change. But now, and this is really why I want to look at it as a concept, with the long-haul narrow-body aircraft, and I'll talk a bit more about this later, it means that everybody can join the party of long-haul low-cost. It doesn't have to be a long-haul low-cost airline as such. And to that point, American Airlines was one of the first buyers of the XLR at Paris with 50 orders, I think it was, for the 321XLR. And that's not a low-cost airline, but it's looking at developing some low-cost routes. Fuel is obviously a major ingredient in the whole— this end of the industry. Last year when we did this event, it really did look as if things were pretty grim. Fuel was at— oil was at $85 a barrel 12 months ago, we forget, but it's down around $60 now, which is pretty much acceptable. It doesn't destroy any operation per se. It's certainly a whole lot more attractive than $85 a barrel. Why is that important? This is I think a no-brainer because fuel is a larger ingredient in the total fuel, in the total cost equation for a low-cost carrier. So we see the line getting wider, you can't see the details there I think, but when oil gets to $100 a barrel, then fuel costs represent about almost half of the total cost of the low-cost carrier, which really reduces the advantage it has over the full-service carrier who also has higher yields, of course. Things have grown very fast. This is moving through over the last 10 years how things have grown in, in Asia. These are long-haul low-cost routes. Some changes, some in, some out, but generally the movement is to a much more dense operation. And to illustrate that, for example, where I come from, Australia, Qantas now has 115 orders for narrow-body aircraft, of which more than half are long-haul narrow-bodies. And that means that they can see that development into Asia coming through. Transatlantic started a bit later. and got going really with momentum much later. As you can see, some routes disappear, which is, as you well know, one of the features of a vibrant low-cost industry. But now there is a really dense network and still growing. And I think it is something that we're really going to see massively change over the next 5 years. Top long-haul operations, Norwegian is the biggest, AirAsia Group is right up there. 9 of the 10 long-haul low-cost routes are in Asia and 7 of those are operated by AirAsia X, a major force in the region. It's talked about coming back to Europe, It, um, is more really thinking in terms of 8-hour sectors, uh, which don't really lend themselves very well to that. And that's part of the evolutionary process that they've found that's pretty much their niche for long haul. In Europe, obviously Norwegian leads the way. Um, top route is JFK to, to Gatwick. Um, and that's, that's changing constantly as, new airlines come in and as market competition changes. The profile though is really the interesting thing. In Asia, these bubbles represent the number of aircraft orders in place. This is as of today. Almost half of the world's narrow-body orders are going into Asia. I mean, if you want any evidence of A shift that, that I think speaks volumes for it. And of those narrow-body aircraft, 80% of them are going to low-cost carriers: Vietjet, Lion Air, AirAsia, and IndiGo in India, all independents. 80% of all those aircraft are going to low-cost carriers. It really does suggest significant changes in, certainly in that market. Typically in the past, it's been wide-body long-haul operations because they have the economics. And they were the only aircraft which really could fly genuine long distances. But the narrow bodies are going to change network planning. There's no doubt about it. We've— so we've gone through originally the 330s or the 340s as I talked about with AirAsia X. The neo, I'm talking widebody, 787, which is the core of Norwegian's operation, 350s, and who knows, the 797, which will be a slightly smaller version once it hits the market. But, and long-haul narrowbody, now that the technology's available, we're looking at the MAX, which hopefully will be back flying in the next 4 or 5 months at least, the 321LR, which has been around for a year or two, the XLR which was announced at, at Paris with a capability of I think 8,700 kilometres which is genuinely long haul, and the A220 more recently, the C-Series. And you've probably heard that David Neeleman is looking at a longer haul version of the A220 which I understand will Is looking at something like up, up to 300, 3,400 nautical miles in terms of range, which again is, is quite remarkable for an aircraft that's got a little bit more than 100 seats. I, I'm going to focus a little bit on the Gulf here because this is where really things can change. Oh, sorry, before I do that, Norwegian too. is, is also in, in investing in the narrow-body long-haul. You can see that from our fleet database. They've got 190— 189 aircraft on order. Of them, a great proportion are— in fact, all of them— are long-haul low-cost carri— lo— long-haul low-cost operation— narrow-body operations. So that— their model is going to shift a little bit too, away from the wide-bodies. Yes. But I want to talk about the Middle East really because that's where, I mean, we've seen the Gulf carriers, the big 3 Gulf carriers change the world system. Now we're going to start seeing the narrow-body long-haul low-cost carriers start to change the system because with the range that these aircraft have, even with FlyDubai's existing NGs, you can see the sort of network they're capable of. Yeah. Once you get to the— and just looking at its network, this is a real-time positioning of the aircraft. You can see them basically hubbing in around Dubai at a certain time in the morning, of the afternoon rather, and then flying out to Europe and beyond in an easterly direction too. It's got 250 MAXs on order, and, and you can see how this, this is likely to start creating a, a very, very high connectivity ratio, particularly as this is a half-sister company of Emirates Airline. So that Dubai is not yet dead. Flyadeal too has, has had some MAXs on order, they're now A320s, and We'll be, I'm sure, looking— we'll be hearing something about its plans over the next couple of days. Flyadeal will, as a subsidiary of Saudia, almost certainly, I would suspect, be looking at some form of connectivity eventually, if not in the near term, with its parent. Air Arabia too is part of this market. It's been operating for over 15 years now in— across the region, but also with them— it's a bit tougher being independent because you can't go out and order 250 aircraft just like that, but I think there are probably some expansion plans that again we may hear of very, very shortly. Where it's really important, and okay, we're, you know, in the aviation business. Where it's really important though is in the potential development of regional economies because these aircraft can fly— because they're smaller and they can fly long distances, the permutations for linking cities are so vast that it's actually mind-blowing. You can link almost any 2 cities from the eastern coast of Asia to the western coast of Europe or going the other way to the US on almost any permutation you want because these aircraft are so small, can fly such long distances with a very low unit cost. It is transformative. It won't happen tomorrow, but it's going to happen over the next decade and will very much shift the way we look at aviation. Particularly true in Europe. Because with congested hubs, something has to change. They're not going to be able to grow, particularly given the environmental movement. They're going to have to find some other way of distributing traffic. And it does produce the opportunity for some of the smaller airports even to become mini hubs with this sort of operation. Just as a sort of graphic indicator, From Hamburg, you can reach all the way across to Dallas and beyond and anywhere in between with a narrow-body aircraft. That opens up so many US airports and vice versa coming the other direction to operations which previously were just not economical. And that's one of the things that Americans said when they ordered the XLRs, very much the opportunity to open new US gateways. The same aircraft can almost reach Tokyo going east— well, easterly, and almost all parts of China. I hope I'm not overstating this for our friends in Airbus. Well, I'm sure you won't mind if I do, but it is quite phenomenal. It's a remarkable change. The key thing in this though is that we must continue to have a liberal system, a liberal market access system. If things revert to the old protectionist days, this sort of growth is not going to occur. We're going to lose the regional development opportunity, all the new routes, and at a time when really the whole industry should be changing in terms of openness. And— By definition, these aircraft and these operations are on a unit basis more environmentally friendly than their larger competitors. This is something that Ryanair has picked up on very strongly and I think this is rather controversial the way they've done it but they're making the point that their average unit emission is 67 grams of CO2 per passenger kilometre. That's not so bad as far as it goes. It goes further though. It then contrasts it with its other high-fare competitors. I'm not sure that's really good for the industry as a whole because it doesn't actually speak for the whole industry. It actually creates a challenge to the way things operate. and whatever it is, we're going to have to do something about it. And that's on their website. It really is sort of pushing the note very strongly. It's not only the Ryanairs of the world too. I was looking at catching a train, we went up to Lübeck the other day, and on the website, on the Deutsche Bahn website, it actually has a comparison between going this route by train, by car, or not in this case by flight. I couldn't actually find one which showed the flight, but actually just getting into that contrast comparison is a very powerful tool, and it's one that typically isn't intended to make aviation look good despite the fact that it's at the heart of most, most of our economies. I was talking to German television this morning about the impact of flight shaming, and I think one of the key points for Europe is that if there are taxes, and it looks like there will be taxes on fuel, they will damage the European airlines much more than anybody else because European airlines, all of their flights are to and from or within Europe, and so every flight will be taxed. That is going to damage them in global terms. That's true. There's no two ways about it. And probably in terms of benefits, will it actually generate substantial economic benefits, environmental benefits? That's not all that certain. It will push prices up a bit, maybe slow growth a little bit, but I think there are less blunt-edged weapons to be able to be used there. It will mean as the environmental movement spreads that investors become more reluctant, perhaps through shareholder pressure, to be investing in airlines or even the aviation industry overall. But it's— one of the things it doesn't recognise, of course, is that the aviation industry does provide such a massive economic underpinning throughout the world. Something like, for Thailand, for example, something like half of the employment in Thailand relates to its tourism business. Which is almost entirely by air. And the— these environmental flight-shaming movements are based to some extent on the luxury you have in Europe of being able to travel by surface modes, by great train system and by road as well. In most of the rest of the world, you can't do that, and certainly in Asia, the concept of flight-shaming I think has a long, long way to go. before it actually makes inroads or has any sort of impact. And then just finally to, to look at how we do enhance the long-haul low-cost operation. One of the reasons I was talking about it as a concept is because once you get— long-haul low-cost as a concept is because once you go long-haul, you almost inevitably have to start changing the shape of the operation. It can't just be point-to-point, it needs traffic feed, so you start to look more legacy. It also typically needs at least some potential for more generous seating, if not a business class, but some differentiation so that you can improve your yield on certain seats and in certain ways. So fuel is always going to be critical. And it's going to be a disadvantage to low-cost operators. You need to hybridise. Ancillary innovation, I think we haven't really, in a lot of ways, really scratched the surface on ancillary generation. It's particularly Wi-Fi now, the— on many aircraft, the potential for retail in flight gets— becomes that much greater. But a whole array of sort of more innovative solutions will become available. One of the things that low-cost carriers need to do short and long haul is to invest much more in the corporate market. That obviously is a higher yielding market. It tends to be more stable than, than the very, very price-sensitive low-cost leisure market. But still low-cost operators have a long way to go before they understand and provide for the needs of corporate travellers. And therefore can't access in a solid way that, that high-yielding traffic. They also need to work more and will need to work more, particularly where they're not part of a full-service group, on partnerships and the ability to attract, for example, feed at the other end of the route where they need to fill up the long-haul sector. And of course, maintain the low-cost mentality and do things quickly and effectively. I was talking to somebody yesterday about network planning with these new aircraft, the new short-haul— sorry, new long-haul narrowbodies. It's almost impossible to really to assess the permutations that that will work economically. And therefore, there's going to be a lot of trial and error, I think. There are some plum routes that really make themselves much more obvious, but because there is such a variety of other city pairs, then I think we will see lots of experimentation. This can be good and bad, but it's also lots and lots of opportunities for airports, particularly to, to generate Lots of opportunities, lots of opportunities at least. So with that, I'll conclude. Thank you very much for listening, and I hope it's provided a bit of food for thought and created a few issues that we might be discussing later on during the summit. Thank you, Peter.

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