CAPA Outlook: State of the Industry November 2023

Transcript

Jonathan:Good morning. It's great to be here in Abu Dhabi. I'm celebrating 10 years with CAPA this year, and of all the venues, of all the events and summits that I've been to with CAPA, this, this really ranks right up there with the best of them. I, like Richard Quest, I flew from London with Etihad on the A380. Unlike Richard Quest, I was not in the residence suite. I was in economy, what he calls cattle class, in the middle seat. But I have to say it was very comfortable, very smooth. So thanks to Etihad for getting me here comfortably and safely. António made an interesting comment. He made many interesting comments, but one that really chimed with me, especially being at an event like this. He said that he gets energy from being with people, and the life of an analyst is fairly solitary. So coming to an event like this, seeing so many people from the travel and aviation industries together, Networking, having a good time, and hopefully doing something interesting, learning something. It's great to be here. So with that, let me continue, and I'm going to talk about the state of the industry, and I'm going to do it in 2 parts. I have my first part, which is 15 numbers in 15 minutes. Those of you that have been to CAPA events in the past year or so will have seen me do a version of this before. I can promise you the numbers have been updated. They do update quite rapidly in the aviation industry. And then at the end, I'm going to spend a few minutes— because actually they've given me 20 minutes, so I have a few minutes over at the end— to just talk about the challenges of growth very briefly. So this is a very kind of brief overview, top-down, and hopefully we'll touch on topics which you'll get in more detail as we go through the next couple of days. So 15 numbers in 15 minutes to start off with, and these are some of the topics I'm going to be covering. Looking at a snapshot of where the industry is in its post-pandemic recovery and obviously moving forward from the pandemic. But before that, the 2 most important numbers I'm going to start with: 27 and zero. So we have 27 years for the industry to achieve its net zero target. Quite nice to get there earlier, actually. But those 2 numbers, I think, are very important because they cut across absolutely everything that the industry is doing and everything that we'll be talking about over the next couple of days cannot be considered without— excuse me— without that in mind. Obviously, in terms of demand, in terms of the costs of the industry pricing, and in terms of how to finance the industry, so many challenges come from those 2 numbers. Moving into more of a snapshot of where we are today in the post-pandemic recovery. This is straight from the CAPA fleet database you can access through our website if you're a subscriber. And this is as of last week, so fairly up-to-date set of numbers. If we look at the total number of jets in service with, with airlines globally, it is now in late November 2023 at 104% of the number it was at 4 years previously, so in, in late November 2019. That's the total of jets globally. If we look at the different business models, the 2 leading business models in terms of the number of jets are, of course, full-service carriers. I don't use the term legacy carrier— full-service carriers and low-cost carriers. We can see that low-cost carriers are up at 112% of their pre-pandemic numbers of jets in service, and the, the full-service carriers at 102%, so lagging behind the, the LCCs. If we look at the business models with smaller numbers of aircraft, we've got charter at 119%, cargo at 115%, and regional at 88%. Okay, I put a lot more numbers in that one. The main number there is 104%. That's my first number of the 15. Second number, if we look at seat capacity as of last week globally, it was at 101% of its 2019 level. So slightly lower number than the jets in service. That's primarily because if you look at the split of jets in service, it's much more narrowbodies than widebodies which have come back. So in terms of total seat capacity, not quite as high but still above where it was. And if we look at the different regions of the world, it's led by Africa and Latin America and then the Middle East, with North America, Europe, and Asia-Pacific kind of bringing up the rear and not quite above 100% yet. Looking at traffic, these are the latest data from IATA, so there's a bit more of a lag with monthly traffic data. The most recent is for September. But September 2023, RPK's passenger traffic is at 97% of its 4-year-ago levels. So pretty close. And cargo, 99%. Cargo, of course, has already been above 100% in the past year or 2 and has come back down again as economic growth has maybe eased off a little bit. But very broadly, we can say that we're pretty close to traffic, both cargo and passenger, being where it was before the pandemic. And of course domestic RPKs are already above 100%, whereas international RPKs are slightly below at 93%. Moving on, and this was touched on quite a bit by Richard and António just now in terms of the supply chain problems. This is just one slide trying to touch on that issue. We can see here the combined deliveries annually of Boeing and Airbus going back to 1997. And looking at the expected deliveries for 2023 for the 2 principal OEMs, the total of the 2 of them combined, 1,165, is back to the level of 2012. So 11 years ago, there was growth. There was a downturn before COVID because of the MAX problems that Boeing experienced. We then had COVID, and there has been a slight upturn in the number of deliveries. But it's, it's really nowhere near where it might otherwise have been, and there are lots of complex issues behind that. So this is just one slide that's touching on that supply chain problem, and it is a major problem. Trying to look a bit at market structure, if I look at the number of airlines globally in the CAPA databases, back in November 2019, 693. It did dip May 2020, it was at 536, but as of last week, at least 715. So in spite of the biggest crisis that the aviation world has ever seen, there's been a net increase now in the number of airlines compared to pre-pandemic. And then another slide looking at market structure, just to spend a bit more time trying to explain this one. So these, these bars show us the seat share of the top 10 airline groups, not individual airlines, but airline groups, top 10 in each of the big 3 aviation regions globally, the biggest 3 aviation regions globally. So at the, at the top end, North America, this is for the first week of July in 2023 versus, uh, 4 years previously. North America is up at 94%. The top 10 groups have 94% seat share. It's actually very slightly down from where it was 4 years previously because it's already so high. But then we look at the other 2 major regions. Europe, 72%. That's been an increase from the 68% the 4 years previously. And for Asia-Pacific, 51%, an increase from 47%, 46%. So we're seeing some increase in the regions where consolidation is lower, but it's slow, and they're still a long way behind the consolidation level achieved in North America. And it's no coincidence that if you looked at the profitability, North America has typically had a more profitable airline industry over a number of years than other parts of the world because of the higher concentration. Then moving on to just one of the cost items that you'll see in an airline's P&L. The 2 big ones are obviously labor and fuel. So I'm just looking at fuel here. Fuel for the current year is forecast by IATA, at least it was forecast in June. IATA will probably update their forecasts shortly, actually early December usually, but forecast to fall from around 29% last year to 27% this year. So coming down slightly, but compared to the years leading up to the pandemic where it was between 20% and 22%, it's still at quite high levels. Now that fall in fuel cost as a percentage of revenue coincides also with a slowing down in airfare inflation. So this chart is showing us airfare inflation for the European Union and the UK going back to the beginning of 2019, and you'll see that it rose into 2022 and it's been falling through 2023. That being said, we're still in positive airfare inflation territory, and if you look at the prices of air travel in Europe and the UK, the EU and the UK, compared with 4 years previously in September 2023, it was 36% above 4 years ago in the European Union, and it was 56% above 4 years ago in, in the UK. So there's been a huge increase in passenger willingness to pay those fares. It's primarily driven by the fuel price, but it's also driven by the strength of demand, which has been quite phenomenal since the recovery from COVID So looking at IATA's forecasts for industry net profit for the current year, The forecast that they published in June was for $22 billion of net profit for the industry as a whole, which is the same as the average achieved in the 10 years before the pandemic. So 2010 to 2019, the average for those years was $22 billion. So all is well, surely. We're back in positive territory, back to the levels of profitability in the good years before the pandemic. Well, not necessarily so good, actually. There's no point just looking at an absolute profit. What we need to look at is the return on invested capital. If anybody invests in a project or a business, they want to achieve a certain return. So the net profit forecast for this year is equivalent to a 2.9% return on invested capital, which is below where it was in most of the years leading up to the pandemic. Then if we look at where the return on invested capital is compared with the weighted average cost of capital, that of course being the return which investors are actually looking for, investors are looking for somewhere around 8%, roughly speaking. This is data from IATA who used McKinsey consultants as well to do some of the numbers for them. The industry, even in the good years before the pandemic, was not quite achieving its cost of capital. And for the current year, it's going to be significantly short of the cost of capital. So then you translate that difference between the expected returns, so the weighted average cost of capital and the actual return, and you put that into absolute dollars. And in the good years before the pandemic, there was effectively an economic loss on average of $18 billion every single year. So things are going back in the right direction in terms of profitability. but the right direction has never been quite as good as it should be. So there's still a lot more to do in terms of really attracting investors into the industry to deliver a return that is really acceptable. So a recap on the 15 numbers is on the screen. I'm not going to read them all out, but you'll get copies of these slides, and if you want to take a quick photo, please do. They're all there. But I just want to spend a few minutes that are left to me Talking about aviation and the challenges to growth as I see them. So historically, the industry has delivered very, very reliable, steady, long-term growth in passenger traffic. So this chart shows us global RPKs going all the way back to 1970. From 1970 to 2019, that period, the average RPK growth rate was around 6% per annum. In the 10 years before the pandemic, it had slowed to 5% per annum. But there are many industries around the world that would be very happy to rely on 5 or 6% or even 4% steady growth. Only 3 years in that period before the pandemic was there a very small negative growth in RBKs. So very, very steady. Of course, we had COVID. In 2020, it was down 65%, and it's recovering. And as I said, In the September traffic figures from IATA, it was back to 97% of the September 2019 level. And for the year as a whole, it's expected to be around 88%. But we're looking forward. The chances are next year and beyond, we're gonna be back above 100%. So then we've seen very strong return of consumer demand post-COVID. And it seems that people getting on a plane, they seem to innately understand the benefits of aviation, and I don't really need to go through them in a room full of people like yourselves in the aviation world, but just to remind you, aviation of course connects people. It connects families, friends, businesses, colleagues. There are significant benefits in cultural and social exchanges that result from it, and of course it facilitates international understanding and, and stimulates the global economy. So all of these things, even if people that have been getting on planes in large numbers in the past year or so have not been thinking it consciously, they understand that. That being said, they also seem to have a slightly ambivalent attitude. It's everybody's guilty secret, aviation. Everybody likes to get on a plane, but no one really likes to admit it these days. I think the expression was used by Richard earlier on, he flies too much. I wonder why he thinks it's too much. Is he feeling a bit guilty about it in some way? Certainly opinion polls and consumer surveys suggest that Public opinion has moved further against aviation since the pandemic. It had already started before the pandemic and it seems to be continuing. And more importantly, in some ways, government action against aviation appears to be on the increase with introductions or increases in passenger taxes in a number of countries around the world, particularly in Europe. So it cannot necessarily be taken for granted that the industry will just automatically return to growth as it used to in the past. The challenges to growth are many, and I'm really— I don't have a lot of time, I'm just touching on issues, and I hope we can discuss more as the conference wears on. But the environment, which cuts across everything as I've already mentioned, infrastructure, which obviously includes airport capacity but also surface access capacity. I would also put in there air traffic control capacity, as well as all the operational air traffic control issues and often the labour-related issues in air traffic control. I put labour issues in here as well, all to do with infrastructure. Thirdly, protectionism, whether we're specifically talking about the aviation industry where control restrictions on ownership and control, foreign ownership and control, there are still limits in most of the world. That is a form of protectionism which limits efficiency in the industry. There's also protectionism in a broader sense where you have limits or reductions in free trade globally, which doesn't do the industry any good either. And then additionally, additional government-imposed burdens, which I would include things like consumer protection legislation, for example, and I'm sure you can all think of many others. Now, the solutions to these challenges to a greater or lesser extent, all involve government policy and regulatory change. I'm not saying that we need to just totally sit back and rely on governments to sort things out. There are, of course, market solutions as well, but they all do require government involvement, and government collaboration between nations in many cases is also required. So then, an observation. So regulatory change requires government policy change. In democracies, government policy is set by elected politicians, and politicians of course are elected by the public. But as we've said, the public often has a slightly ambivalent attitude towards aviation. So it really starts with getting the message to the public to express what they already seem to know. As I said earlier on, they're all getting back on planes, they understand the benefits of aviation. So really, the industry I think needs to take responsibility for its own future and not blame governments or regulators for constraining growth. And I suppose the final line then is that aviation just needs to be a lot more confident about expressing the benefits of aviation globally so that the public will, will internalize that much more and get the politicians to do what's needed. Okay, I'm going to leave it at that. If you have any questions, find me in a break. And if there are any numbers I missed off that you're interested in during the 15 minutes and you're talking in another panel, bring up some numbers. We always like to see numbers. Thank you very much. Thank you.

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