CAPA Overview Of The Disruptive Forces At Work, In The Regulatory And Big Data Areas

Transcript

Peter Harbison:Talking of the, the quite remarkable Irish contingent in the aviation industry, I was talking to Alan Joyce last week and he asked me to convey his apologies for not being here. He was here last year, for those of you who remember, to say he was very sorry he couldn't join us. I think after what happened to him yesterday, he's probably even sorrier that he couldn't join us here. Thank you. If you haven't seen the video, ask someone next to you. Now, we have a, I think, a fairly interesting program. It's based around a thesis that was set out in this Airline Leader back in, at the end of last year. And it's about disruption of the airline industry, what else? We're taking a, I think, a slightly different approach to it and somewhat contentious. But hopefully it'll be one that will attract your attention and interest and that you, as I say, you'll be able to participate in and throw some of your ideas in. I'm going to just give an overview of where we're going for the next couple of days and also some of the principles that we've espoused in this document, Airline Leader. If you haven't got a copy yourselves, we do have a few here and I think— We'll pass them around. Somewhere in your, in your packages, but it's also online at airlineleader.com if you want to go and read it. It is coming faster and bigger than you think. It's quite remarkable, particularly on the IT side, but also insidiously, or not insidiously, almost invisibly under the surface in, in some of the regulatory areas, and it's not all bad news. The 2 main areas of disruption that we're talking about are one, the fundamental one that controls the way international services operate, and that is the restrictions imposed by the fairly nebulous ownership and control provisions of almost every bilateral agreement globally. There are, there has been some evolution of that, but essentially that's what controls the way airlines are and how they operate internationally. Why is it still there? Well, really because it's very, very sticky, because some people want it there, but most people really probably don't. And our question to you is just how much longer will it hold back industry evolution? The second part of the discussion is about who owns the traveller. This is an old, hoary old discussion, but what, what we're arguing is happening now is quite different from what's happened in the past, and this will really accelerate the process of evolution, if not revolution, in the industry. So what we're going to do for day 1, we have our first debate and discussion, which is why the table's set up here, and we'll be welcoming royalty to oversee that process. This will then be followed on day 2 by the second part of that. if there are in fact changes occurring in this area, what should airlines be doing today? So it's not all about, wow, things are going to change. It's about, right, here is the scope that we see of change, and then tomorrow we're going to look at what airlines can and should be doing to make sure they're well positioned for the, for the medium and longer term. The second session after the coffee— after lunch rather this afternoon, will be this one about the ownership of the traveller, and that takes a fairly detailed look with some excellent presentations to lead it off on where we're going with that. And again, tomorrow morning we'll look at devising airline strategies to cope with particularly issues like big data that— and the powerful forces outside who are perhaps going to change the industry. Why should the airline industry not be disrupted? We've watched sometimes in horror as things have been disrupted in other industries over recent years, particularly in this century. But hotels, for example, were a long— have had a long evolution of moving away from owning hotels. Hotel chains don't own real estate anymore in most cases. They're marketing and selling operations. And they're also consolidating, something that is very elusive in the airline industry. And then in the next step in that is Airbnb, which is now the largest, depending on how it's counted, but operates with the largest number of rooms of any hotel conglomerate in the world. Then, then there's telecoms. We all remember, or some of us remember going back a few years, how much it cost to call internationally, how difficult it was to call. The, the whole process of flexibility in telecoms was pretty much like flag carriers in the airline industry were until a couple of decades ago. Nationalistically regulated, quite often without good reason. Now they've just more or less become pipes, those national operations, where other renters of that space are able to compete with them quite actively. Taxi companies, of course. There's a host of others following Uber along that track in disrupting, again, a heavily regulated industry that really had no good reason and wasn't responding to consumer interests very effectively. Media. Hardly a day goes by without one of the traditional media announcing that they've got layoffs, that they're cutting back, they're changing direction. And the impact of direct electronic production and selling has just spread power in the market so much more widely that that original powerful individual voice no longer exists. Music, That has changed dramatically. The recording companies, again, very powerful players in the industry. And it's the power of the people really who've forced that change. Internet and particularly, of course, always millennials who are quite demanding. Most of us are quite demanding, but they tend to be demanding in different ways. And then retailing generally. Amazon in particular is a behemoth who's forcing change, not just in the retailing sector, and that's, that's in the sort of commercial retail sector, but also in its, in the way it uses big data. And that's a very important part of what we're talking about here. So some of the factors that are causing that to occur, particularly in markets which are heavily regulated, The advent of the internet globally with widespread usage, the transparency that comes from that, the process, the regulatory process, the trade regulatory process of globalisation and opening up markets has created expectations and essentially made people aware of what is possible. They want it therefore. Millennials with their different attitudes, And the, the transparency which leads to much greater market intelligence, but, but also the ability to collect, aggregate, and analyse that data in ways that, that really penetrate right into the heart of who owns the customer. And then we have, and this shouldn't be understated as a force in this as well, the new markets like Asia which are really thrusting through almost like mushrooms thrusting through cement and through concrete and, and creating a whole array of new values and, and the way the market's balanced. I'm particularly thinking of China, which is, is really entering the news, the, the aviation industry for the first time over the last 15 to 20 years and really entering a system that wasn't, you in which it wasn't part of the core value of it. So there's a lot of attitude there which does necessarily, naturally seek change. There's a book called From Zero to One: Notes on Startups. And it talked about, and this is just going to the responses of companies in these processes. We saw it particularly in media. That the, the whole idea of, of change really was basically incremental. There was very little acceptance that we needed fundamental change because things were coming around the corner. It was, it's easy in retrospect to say that they were wrong to do that. But I think where we are wrong is that, I mean, in many cases businesses and companies are continuing to, to think the same way. Yeah. We've changed something, we've gone from 1 to N where we really need to be going from 0 to 1. That process of self-disruption is a, is a really important part of that. There has been some disruption over the past 50 years, which you'd expect probably in an industry that's global, that is highly technological, that penetrates most households in the world. And I've just picked up a few here. They are outlined in, in this Airline Leader. in more detail, but I'll just skip through them fairly quickly. The first one was the disruption caused by 6th freedom operations. The second one, really an extension of the first, but in a way which was again highly disruptive in slightly different ways. And then the impact of LCCs, low-cost carriers coming into the market with a whole different attitude to the way air services should be operated. will argue the next phase, which is where we have China becoming a much more powerful voice, the role of partnerships as, as airlines seek some form of ability to, to go across borders. The constraints of ownership and control force them increasingly into partnerships, and there'll be a lot of discussion about that this morning. And then of course big data and analytics in which I think probably when we talk about things happening bigger and faster than we expect, that really will happen not just in the next 10 years but even in the next couple of years. So just looking at that very quickly. 6 freedom disruption. Until the late 1970s, till probably 19— almost 1980, the concept of 6 freedom operations was not permitted. That is, intermediate points on an international network, being allowed to pick up traffic from one country, carry it through their home state to a third country, so-called 6 freedoms. One of the many reasons why this archaic industry doesn't make sense. Why it should be 6 freedoms, who knows? But I was, I was in IATA back in the 1970s and just to give you a feel for how important 6 freedoms was, My boss, the Director General of IATA, I think it was 1978, 1978, '79, was in Singapore and he called Singapore Airlines a parasite on the international industry because of their 6-freedom operations. He subsequently said, oh, there was an issue with translation there, forgetting I think that Singaporeans speak English. But that was the way 6-freedom operations were considered back in those days. And so it was a, and my government worked very hard to prevent intermediate airlines carrying traffic from Australia to third points. So that was the first phase and that really had made some changes. And of course by the time we come to what I'm talking about, the second stage, the idea of parasitism of airlines carrying 6-3-M traffic had become much more widespread. That in fact the big 3 carriers in Europe were all heavily reliant on 6-freedom traffic in fact. So when the Gulf carriers came along, the disruption here is really for 3 reasons, well, 2 reasons in particular. One, the technological advance that allowed long-haul aircraft to travel virtually to any point in the world from the Gulf. And secondly, the process of liberalisation. in which John Biley here had a, a great part to play, but, but generally part of the world's evolution in, in trade thinking. That, that was a, a big next step and I think whether it's the second phase, Barry, I don't know. It's a, but it's, it certainly was a major step and, and created a lot of changes. Certainly created a lot of disruption. Even continuing quite aggressively today in the United States with with the big 3 US carriers fighting actively against the Gulf carriers. And then thirdly, as I mentioned before, LCC disruption. This was in many ways initially the most painful for those airlines who were confronted by low-cost carriers. There was really no way of getting from here to where we needed to be to compete on the shorter spokes of our long-haul network, of our international networks. And, and that's created consternation which continues today for many airlines as they try to adapt and then to refocus their model to work in a different way. So there has been some disruption, but again, is it more than incrementalism? That's, that's the question. Do we need to do more? I think the 4th phase that we're looking at will, will involve a lot of influence from Asia, particularly on the regulatory side. The, and the impact of big data and the external players, the third-party players who are no real part of the aviation industry at the moment, will start to have a much greater impact. And that is probably the real disruption that we're looking at and which we think will probably occur well before 2025. That's not so far off when 2020 used to be a long way off and it's only in fact a couple of years now. Looking at our first point, so evolving the ownership and control rules, there are some issues which, which will be discussed in much more detail in our debate coming up, but the things which we would argue have, have started to erode the basic principles. The cross-border joint ventures that we see so much in Asia with the low-cost carriers particularly. The European group structures of different, different natures. But where interestingly enough most other countries who, who might in the past have rejected the operation of foreign airlines from Europe who aren't clearly substantially owned and effectively controlled in their home state, the fact that they are prepared to accept that happen is, is, is I think quite, quite important in, in where we might head in future. Cross-border equity investments, obviously the most outstanding, certainly the most dramatic example of that is Etihad, but many other airlines have moved in that direction to, for one reason or another, which will be again be explored during this morning. And then the impact of antitrust immunised joint ventures. Again, trying to get around the constraints that ownership and control issues apply. So with all those features, effectively a confluence of interest in the process of change. Many, many, many airlines, many, many governments actually do want that change to occur, but the cobweb of the network of inertia basically is preventing that from happening. Some of the airlines which do have, have tried to cement partnerships with equity, they're quite diverse and the process of investing in equity has accelerated quite considerably over the last, even the last 5 years. We've seen some remarkable changes and you sort of think, well, if we extrapolate that, where will that lead us? On the ownership of the customer, our second issue, This gets a little bit off the screen from— oh yeah, I think you can probably see it. But the point here is there's a lot of internal within the airline industry squabbling about who's right, who's wrong, how we should, how we should change things. Meanwhile, outside the tent, there is some real activity and those with, with powerful big data capabilities are waiting to swoop. Thank you. Just, just to look at some of the bigger ones here. Amazon has a market cap of $454 billion. In, in this, which was done in October, when we, when we wrote this in October, I think their market cap was, from memory, about $380 billion. In the space of 6 months, its market cap has increased by $75 billion. Wow. That's an indicator of just what power that particular entity has and really if it wants to sit somewhere it's going to sit somewhere. Facebook, a humble $433 billion. This is as of yesterday. Google up there with $648 billion. Who knows where they're going and we're going to talk about that this afternoon a little bit. And then we come down to some of the smaller ones. Priceline, the owner of Booking.com, which I'm sure many of you use, a humble $90 billion worth. Very big in big data. They know a lot about what your habits are, where you travel, where you fly, where you stay, what you like when you get there. Uber, not listed, But around about $70 billion according to estimates based on the investments that have been made in it. Airbnb, this is a little app that's been around for 7 or 8 years, estimated to be worth about $35 billion at the moment. Now these seem like big numbers. Let's put it in context in the airline business. The biggest market cap for any airline in the world is Delta. which just manages to outrank Airbnb at $37 billion. And they're way ahead of any of the other airlines in the world. United with United Continental with $24 billion. IAG, one of the biggest flag carriers outside the US, with $13 billion. Qantas, interestingly, up there with $9 billion. Lufthansa, $8 billion. And Ryanair, of course, in Europe, one of the biggest with £16 billion. That's, that's pounds, not dollars, so we're looking at something in the 20s there. But still, compared with those big bears we saw before that, these are very, very small numbers. And these are airlines, these are companies who are focused on just about everything else but looking after their customers. They're focused on flying, they're focused on safety, they're focused on regulatory issues. It's an incredibly complicated business and they don't have either the time or the resources to be investing in big data analytics that the other data gatherers have. Amazon has thousands of engineers working on cloud technology and analytics. Thousands. I would probably imagine that the most active airline in this area would have maybe dozens, if that, working on these things. And certainly they don't have the ability to spend as Amazon is spending something like $10 billion a year just on these activities. So just to sort of bring those points together, the coalition of forces, as it were, for disruption on the ownership side and the consumer and data aggregator sides are, hopefully you can see that, but on the green side, on the ownership and control, the cross-border JVs, ownership and control equity changes, and the, the rise of the Chinese influence. On the other side, online sales, obviously, which penetrated the whole process of the established processes for retailing, the empowerment of consumers, This little thing I hold in my hand gets me a lot of power and even in the not too distant future, I won't even need to hold it in my hand because robots will be doing the business for me. And the big— the final point there, the disruption by big data analytics, third-party data. So arguably, Over the next decade, we'll be looking at allowing foreign ownership of national airlines internationally and retail, which arguably is controlled by third parties. The 2 activities of airlines, flying aeroplanes and selling tickets, will have changed dramatically and with, with massive impacts on the existing carriers. Really just summarising in the regulatory area, China will be a big disruptor, essentially coming with 2 things. When we look back at the disruptive forces, particularly the first 2 I was talking about, the airlines who were disrupting there were the ones in the international industry who were considered not to have the currency of bilaterals. The currency of bilaterals was when we're negotiating a bilateral agreement, I own my residence, you own your residence, and I'll trade how many of my residents you're allowed to pick up in return for how many of yours I can pick up. It's that old, ugly old bilateral. In China's case, they are not. They are participants in that market. The Singapore Airlines, the Gulf carriers did not own that traffic in that disruptive process. But where China owns that traffic and where it can say, I'm going to transform your economy by bringing a million passengers every month to spend money. We're big spenders. You want these airlines flying there. Do you really have a major concern about who owns the aeroplanes who are flying in all these massive dollars? That's the argument in terms of that big disruption. The impact of airlines seeking partners, much closer partners that they can rely on, that don't have the risk of just investing hundreds of millions of dollars in equity that doesn't actually tie them in. The impact of technology and again back to my third parties. So in short, I think it will happen sooner than we expect but we're going to find out about that in the next couple of days and again hopefully you'll come away from here at least with some different views on, on where things are at and even perhaps with some solutions to that. So I hope you— do hope you enjoy the next 2 days and the more you participate, I'm sure the more you'll enjoy it. Thank you. Thank you, Peter.

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