CAPA Outlook: State of the Industry | November 2024

Transcript

Jonathan Wober:It's a pleasure to be here with you all. Good morning. My first time in Belgrade, my first time in Serbia, so thanks to Giri Marak and the Air Serbia team for getting me here yesterday safely and comfortably. I'm going to talk about the state of the industry. I've got 20 minutes, so I'm going to try and be concise. 20 minutes to do it in, and I'm going to start off actually, uh, by talking a little bit, a snapshot of the region in which the conference is taking place before I go on to look at a global snapshot. So just a few bits of data about this, this area, and I've defined this area as the former Yugoslav republics. And just very briefly, we've got here a chart showing the size of the former Yugoslav states in terms of seat capacity in 2024, as is scheduled, as a share of all of Europe's seat capacity. Essentially, I suppose this slide is saying it's quite small, but the next slide is saying it's quite dynamic. In almost every case, the states of the former Yugoslav area are ahead of 2019 capacity in 2024 by a significant amount. In fact, if I show you the next slide, this one shows us the percentage by which they are ahead of their 2019 capacity. Starting there with Kosovo, double capacity of 2019. The 2 largest markets in this region being Serbia and Croatia. Serbia are up 135% and Croatia Up at 121% of its 2019 capacity. The weighted average for the region is 125— sorry, I can't read from here— 130%, whereas Europe as a whole only 102%. We have seen a very strong recovery in this region from the COVID pandemic. Then moving on to just a very busy slide, The 2 biggest markets in this region, namely Serbia and Croatia, I've just listed here the top 10 airlines by seat capacity for last week. This is just a snapshot, but you would get the same 2 major airlines in each of the 2 markets if you did any week or you did the whole year. In Croatia, the leading airline is Croatia Airlines. The number 2 is Ryanair. In Serbia, the leading airline is Air Serbia. The number 2 is Wizz Air, and then after that you've got quite a long tail of airlines with quite a small capacity share. You've got the national airline and a big low-cost or ultra-low-cost carrier in both of these 2 markets. If you look at the bottom of the slide on both sides, I've shown the low-cost carrier seat share for the full year 2024 and what it was back in 2019. In Croatia, there's been a big increase in low-cost carriers. carrier seat share. 2019, it was just under 43%, and in 2024, it's just under 59%. So a big increase here in Serbia. The low-cost carrier seat share has not changed very much— 27.5% in 2019, 28.5% in 2024. Okay, so that's my very brief look at this region, and now moving on to my, uh, snapshot of the global industry. And this is 20 numbers in 20 minutes. Actually, I've got 16 minutes left now, so let's get on with it. These are the topics that I'm going to touch on through the following set of slides. By the way, I should have said you will get a copy of this presentation when the conference is finished. An email will go out with a link to a PDF. If you want to take notes or take photos of the slides, do, but you will get the full presentation when the conference is over. We go on to some other measures of the global recovery from pandemic. This first slide, which is taken straight from the CAPA fleet database, gives us the number of jets in service globally as a percentage, well, in absolute numbers in the chart, but also as a percentage of this time 5 years ago. This is November '24 versus November 2019. Globally, jets in service are at 107% of the 5-year-ago number. Just breaking it down into the different major business models, at the top of the pack, as it were, are the low-cost carriers who are up at 119% in terms of their jets in service. Then we have the cargo and charter carriers, 114%, full-service carriers at 104%, and then lagging a little bit are the regional airlines with 88%, although to be fair to them, they also operate a lot of non-jet aircraft as well. Okay, so then moving on to another measure, seat capacity globally. Last week actually, is it— was it 107% of the 2019 level? There are regional variations. Africa at the top there at 116%, but Latin America, Middle East, and North America are also above 100%, and Europe and Asia-Pacific just very slightly below 100% as of last week. But they have been fluctuating and have been above 100% for a number of weeks and months recently until the last week or two. To all intents and purposes, we can say that capacity and jets in service, the industry has recovered above its 2019 level. It's taken 5 years, but it's back above its 2019 level. Now, if I look at traffic, we've looked at capacity, there's a bit more of a lag with with traffic. We don't have global numbers until IATA publishes them every month, so the most recent traffic figures are for September. And what I've got here is passenger traffic globally defined by revenue passenger kilometers, up at 104% of what it was in September 2019, and cargo traffic defined by cargo ton kilometers, up at 108%. And if you look carefully on the chart, you'll see that domestic RPKs are slightly above and international RPKs are slightly below that global average, but those are the key numbers there. Now, there was some discussion at the airline leader panel chaired by Eamon Brennan earlier on. Sorry, I've got your name wrong. Like you said, everybody gets your name wrong. Eamon Brennan. Brennan. Brennan. Thank you. Airfare inflation. This is just based on the EU, so it's not necessarily globally representative, but I think you'd probably get a flavor of this in other parts of the world. We had this long period recovering initially from the pandemic where there was this pent-up demand that was unleashed. People were prepared to pay, it seemed, almost anything to go back on an aeroplane and travel. There was strong double-digit inflation in airfares, the cost of passenger air transport, both in the EU and in the UK, which is what these 2 lines on the chart are showing. Then for the past several months, that's slowed down and even been negative in some months. The most recent month that we have is for September '24, and in the EU, the increase was only 0.9% year-on-year in terms of the cost of passenger air transport. In the UK, it was -5%, so significant slowing down. I was interested that Eamon asked the panel earlier on, what's the outlook for fares into next summer? Most of them said flat to up. Most of them put a number on it, but— Yes. It does seem that the prospect of significant fare increases is fading away compared to how it had been for a couple of years before. Even though the inflation year on year is now slowing down, though, if you look at the bottom right of the slide, I've put a couple of figures there. If you look at prices in September '24 and you calculate the increase relative to September 2019, in the EU, people are still paying 34% more than they were 5 years ago, and in the UK, they're paying 55% more than they were 5 years ago. The rate of annual increase is slowing, but people are still paying a lot more than they were. To some extent, that's been driven by costs going up, but also, of course, it has signified the strength of demand since the pandemic faded away. Now, moving on, there are— and I'm trying to touch on in some of these slides some of the panel discussions that are coming up in the rest of the event. There is a discussion on business models. This is one version of looking at business models. Low-cost carrier share globally in 2024 is scheduled to be 34%. This is of seats globally, and that compares with 30% back in 2019 and 28% 10 years ago. The 2 lines there also show you international and domestic, and so the same story in both cases. Low-cost carrier share has gone up, but it seems to have accelerated post-pandemic in the 5 years since 2019 relative to the 5 years leading up to that. Then the next slide I've got here, which is also another version of looking at business models, there's a lot of discussion and there's going to be a panel discussion about the convergence, the way in which low-cost carriers have taken features of full-service carriers and vice versa. Of course, that's an important development. If you do a scatter plot of unit cost, cost per available seat kilometer against average trip length, you can still see a very clear segmentation between full-service carriers, low-cost carriers, and even ultra-low-cost carriers. This scatter plot illustrates Europe. You would get slightly different variations of this story in different parts of the world, so I'm not going to claim this is identical everywhere in the world, but I think you can still see The numbers do separate out the different business models by unit cost. The illustration I've got here at the top of the slide is that a low-cost carrier with a similar stage length has a 33% lower unit cost than a full-service carrier in Europe and an ultra-low-cost carrier 54% lower than a full-service carrier here in Europe. Moving on to the global profit cycle for the airline industry. These are IATA numbers. IATA usually forecasts profitability for the year with 2 updates, one in June and one in December. They're likely to update this in the next few days, I guess, next couple of weeks. The forecast that they put out in June was for a net profit for the global airline industry of $30.5 billion. In absolute terms, that's That's similar to the net profit that was being achieved in the 5 years leading up to 2019 and including 2019, after, of course, this huge plunge to very negative numbers during the COVID years, more negative than had ever been seen before. There's always been a cycle, profitability going up and down. You could say, okay, that's great. It's all recovered. It's all back to where it was. Well, not necessarily, because if you actually look at return on invested capital, it's not just about the absolute level of US dollar profit, it's the return on invested capital. Investors are only going to invest in a particular sector if they can achieve their required rate of return on the capital that they've put into it. Otherwise, they'll invest somewhere else. This slide, the pale blue line at the top, shows us the weighted average cost of capital for the airline industry, and the darker blue line below it, notably below it, is always— has always been below. It briefly sort of went close to the cost of capital in the few years before the pandemic, but historically has always been below. And even in the good years, the few years leading up to the pandemic where profitability was positive, The average economic loss, which is the extent by which the return doesn't meet the cost of capital, averaged $18 billion every single year. That hasn't really changed. Now, moving forward, there are a number of constraints and challenges which the industry will be facing. In no particular order, but the first one I've tried to illustrate here, and I've only got one slide to try and illustrate huge, huge challenges and issues, but this one is looking at the challenge of recruiting people into the industry. A lot of people went out of the industry during the pandemic, and with the growth returning, there's a need to get people back. These are numbers put out by both Airbus and Boeing for the next 20 years, and they both agree very closely that something like 2.3 million new jobs will be needed to be filled over the next 20 years. This is covering cabin crew, technicians, and pilots. Huge numbers of people need to be brought in and trained into the industry. The next slide I've got here, another constraint, and it was touched on again by Eamon's panel earlier on. This is again just one number to illustrate this problem in Europe. If you look at the air traffic flow management delays, For the 3 peak months of the summer of 2024, they were 48% up on the summer of 2019 and 41% up on the summer of last year. There's a lot of issues behind that, and I'm not going to try and go into them all, but this is just one illustration of the extent of that challenge. Moving on then to another constraint in the supply chain, which has also been mentioned and will be mentioned again, I'm sure, over the next couple of days is the delivery of aircraft. This is just the Boeing and Airbus deliveries that I've got on this slide going back to 1996, the lighter blue being the Airbus deliveries and the darker blue being the Boeing deliveries since 1996. With an estimate of the number of deliveries they might make in 2024, in the case of Airbus, 770 is their own guidance. In the case of Boeing, they haven't given guidance, so it's a bit of a stab in the dark, but in round number terms, let's say something in the region of 400 deliveries, give or take. Add those 2 numbers together, and between them, that's fewer than 1,200 deliveries, which is the level they were delivering together back in 2012. There's been a slump and something of a recovery and a bit of a slump again with Boeing's numbers never really picking up. In fact, Boeing's numbers, would be back to where they were between 2008 and 2009, which is 15 or 16 years of lost deliveries, if you like, whereas Airbus's numbers will be back to 2017, 2018 levels. What's that, 6 or 7 years? Looking at this same question from a slightly different angle, this next slide shows us the year-end backlog in terms of global aircraft, not just Boeing and Airbus. Commercial passenger aircraft. Based on assumptions about what the backlog will be at the end of this year, which is only another 6 weeks away, it looks like we could have 14 years' worth of production in the global backlog based on the number of aircraft in the order book, but also the lower rates of production that we are seeing this year. Of course, if production rates go up again, that number of years of production reduces. The data are what they are at the moment. It was just under 13 years a year ago, and it looks like it's going up to more than 14 years this time at the end of this year, which is a record apart from the COVID years where it spiked because production obviously went even lower. This is as high as it's ever been in terms of number of years of production in the backlog. Now, another supply chain number here. This is very briefly touching on a panel discussion that I'm going to be moderating, the one after the next one, which is— this is touching on leasing. I'm going to be talking to a panel on finance. More than half of aircraft globally are leased, and that does vary by business model. Low-cost carriers, a higher proportion. Full-service carriers at the other end of the chart there, a lower proportion. A further, I guess, supply chain This chart here is just— and there will be a panel discussion on airports, is it later today or tomorrow? This is from a CAPA report published in June this year. Investor-owned airport companies in 2023 accounted for a third, nearly a third of global airport revenue, whereas in 2019, they had accounted for 27%. There's this concentration of airport groups controlling more of the airports. And I guess if you're an airport, that— if you're one of these groups, that might be a good thing. If you're an airline, that might be a challenge. I've tried to also illustrate the session that's coming up later in the, in the event on technology and artificial intelligence. And according to a survey that was carried out earlier this year by Alumni Global, a recruitment and organizational consultancy, who surveyed senior leaders in the airline industry. 82% of CEOs, COOs, and chief people officers that they surveyed see a key role for artificial intelligence. You kind of wonder why it's only 82%, but anyway, a very large majority. But only 30% of their respondents have AI on the boardroom agenda, and only 48% have it on the agenda for management meetings. And a quote from the survey, the people that compiled it said that AI is a hot potato that lacks a specific owner. I'll be interested to see how that discussion later on picks up some of those issues. Then moving on, this slide here shows us fuel cost as a percentage of revenue. These are from IATA numbers for the global airline industry going back to 2003. If you just ignore the 2050 number for the moment, In recent years, for about a decade or so, fuel cost has varied between 20% and 30% of airline revenues over the past decade or so. 29% is the forecast from IATA in 2024, but IATA put out this number a week or so ago, which I've reinterpreted and put on the end of the chart for 2050 based on funding SAF primarily, but also other fuels, including hydrogen, but primarily funding SAF to 2050, all other things being equal, the fuel cost as a percentage of revenue could go from 29% to nearly 61% of revenue, so more than doubling. There isn't a sufficient margin that airlines make to get anywhere near reclaiming that additional cost through revenues. IATA was appealing to governments to give support, policy support to try and close that revenue gap. I'll be interested in opinions when I do my finance panel a bit later on, on how that gets funded. Then I've done 20 numbers, but I'm going to give you 2 more, which you all know, and I know there was discussion in the panel earlier on also on this subject, and there'll be more later on. I don't think you can get away from the fact that there is only 26 years left to get to net zero. I think that is still very important. Just to recap, there's all the numbers in one slide. I don't expect you to read all of these now, but I suppose what I would say in summary is that the industry has recovered. It's back above its pre-COVID levels. There are some additional gains in share from low-cost carriers. The industry is making a profit again, similar levels to pre-COVID, but return on invested capital still doesn't meet the cost of capital. There are significant supply chain constraints, personnel, aircraft, airspace, etc., and AI and fuel costs are a huge challenge, and funding the green transition is a massive challenge going forward as well. I'm going to leave it at that. I'm now literally down to zero. That's genius. Isn't that genius? I'm not going to claim it's genius, but thank you very much for listening, and I look forward to seeing you all again in a couple of sessions' time. Thank you. Thank you.

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