Europe - Critical Thinkers - Leading an airline in 2021

Transcript

Jens Flottau:

Hello and welcome to this CAPA Live session. My name is Jens Flottau and I'm the Executive Editor in Commercial Aviation at the Aviation Week Network. Today I want to talk with my two guests about how it is to lead an airline in 2021. And I'm already guessing your answer is, it's not much easier than in 2020. Last year, the challenge was to manage the lockdown's cutbacks and to simply survive. This year, it's more about how to rebuild when all planning assumptions can change in a minute, and historical data has little to no value. With me to discuss this are representatives of two of Europe's largest airlines, Air France-KLM EVP Strategy and Air France Chief Commercial, Angus Clarke, and Ahmet Olmustur, Chief Marketing Officer at Turkish Airlines. Welcome to the programme, gentlemen.

I looked up the latest statistics your two airlines. Air France-KLM combined is currently number two, in terms of daily flights in Europe, and Turkish Airlines is number three. If you counted Air France and KLM separately, then Turkish would be number two. So let's start with where both of you stand in terms of traffic trends. We're well into the summer season. Have your expectations largely been met so far? Ahmet, maybe you can start.

Ahmet Olmustur:

Good afternoon, Istanbul. It's a rainy... Very occasionally, we see in Dubai time, so I'd like to salute my friends and [inaudible 00:03:15] and all the gents. Thank you for this [inaudible 00:03:18]. Jens, regarding your question, let me summarise what we have done so far. We are almost 70% of 2019 [inaudible 00:03:31] our low cost trademark AnadoluJet flights, so we are cautiously optimistic for the rest of the year. As of time, we are flying 109 countries and 194 international destinations and four to three domestic. And in terms of available sea kilometre, we are the second biggest airline in the first half of 2021, in terms of international [inaudible 00:04:05]. Also, in the first half of 2021, Turkish Airlines has been [inaudible 00:04:12] to Europe, in terms of number of flights. So for the rest of 2021, as I said, we are cautiously optimistic and the recovery momentum is going pretty well. I cannot give you the exact numbers but I can tell you we are 0.5 times better than, in terms of number of big reservations, that we'd get in February, comparing in June.

So I can say [inaudible 00:04:43] for the rest of 2021, [inaudible 00:04:47] in June, I mean as long as the vaccination rate is rising every day, especially in the developed countries, such as in Turkey, more than a 57 million people are already vaccinated in Turkey. And also, as long as the quarantine application has been lifting by some of the European countries, such as France, Germany, and other countries, we are seeing a light at the end of the tunnel. So we are optimistic for the rest of 2021.

Jens Flottau:

Angus, the summer season for Air France-KLM, how's it going?

Angus Clarke:

Look, it's lower than our expectations when we set the budget, so that's something where living with. We have been ahead of budget on cost in Q1 and Q2 so, from that point of view, that's positive. But really, in terms of the overall planning, we now need to see the world opening up quite a bit more. In terms of our capacity versus 2019 for July and August, on the European business, we're in the 70-80% range. And Transavia France, for example, is actually at or over a 100% of 2019. So on the LCC side, it's strong, however, issues in Portugal and Spain, which are particularly strong markets for Transavia, are coming under a little bit of pressure with some of the rules there. So, I think, reiterating what Ahmet said, we do need long-term opening up of the borders with ease of travel, at least for vaccinated travellers, for this crisis to end.

On the long-haul side, for the summer, we're looking at about 60% of 2019. So the key features and key markets there, Africa's very strong. I'm sure, Ahmet, you're seeing some good recovery in Africa as well. USA, [inaudible 00:07:06] from the US point of sale into Europe, is also very strong. So they're the key areas of hope. One the Air France side, we have niche markets in the Caribbean and Indian ocean, which are former French territories and they speak obviously a lot of French there. So those markets are very strong, from points of sale on each side, as the restrictions have eased. That's quite a large amount of our capacity. So we have three key areas that are looking good at the moment. North America, the former French overseas territories and Africa. Asia is very quiet for us. It's still very, very low on the expectations. Ahmet, I don't know how your passenger business is going to Asia, but I guess you're doing quite a bit of cargo to Asia to compensate.

Jens Flottau:

Yeah. I mean, I guess Air France and KLM are a lot more dependent on transatlantic reopening, not just one side, but also the other way where, with Turkish Airlines, you obviously have the very dense, also narrow-body, network into Asia, which is different scenario. Can you talk about those two regions, and also from the transatlantic, when do you expect it to finally reopen, in earnest? Angus?

Angus Clarke:

Well, if we start with Asia, KLM is quite dependent on Asia for a portion of its overall business first to Air France. Air France, proportionately, has the smaller footprint in Asia than KLM does. So that's something we've got to think about. If we turn to the North Atlantic, in terms of it opening for Europeans travelling there, probably you read a variety of different reports. It seems the outside date might be early September, but we're really hoping something before the end of July to open that up, but it's gone a bit quiet. So it would be nice to have that open up again.

I guess, with the Delta variant spreading quite rapidly, the question is, will it just spread rapidly everywhere? So everyone's in the same situation. Obviously the UK has got some issues, in India first, but UK second. The big question is, will the rest of Europe catch up and then will the US catch up in terms of proliferation of the Delta variant? You could say if the playing fields level, there's no reason not to open up if vaccination rates are high. But it's hard to say, but we're waiting for this. That's the next pillar to unlock additional capacity on the Atlantic, is arrivals from Europe opening up.

Jens Flottau:

Yeah. So Ahmet, your long-haul network, can you talk a bit about that? What are the regions that are doing reasonably well, and which are the ones that are suffering?

Ahmet Olmustur:

The Asian market is so important for Turkish Airlines, but because the regulations still continue, that's why we switched the capacity from mostly from Asian market to United States. So we're flying more than we used to fly to United States, if you compare before the pandemic. That is the one strategic movement that we did in the last month. And for the Europe market, which is so important for Turkish Airlines, because we are a part of it, there are two dimensions. The first one is inbound, local traffic. Turkey is the most visited, sixth, country in the world. The inbound local traffic is getting pretty well after that regulations are lifting, such as the France, German and the Russian market, is open for the citizens of those countries. When they go back, they will not be subject to a quarantine.

And the other thing is, which is important for Turkish Airlines, is the outgoing local traffic boat, Turkish. Some of the European countries are still not accepting Turkish citizens, even if they're double vaccinated. But some of them are starting to, such as Germany, Hungary, Spain and some other countries. So it's a good signal for us. As long as these situations continue, we believe we are going to catch a demand, not only from inbound local traffic to Turkey, but also outgoing traffic will be great for us.

Jens Flottau:

Mm-hmm (affirmative). For this recovery to campaign into the fall and the winter, you need corporate travel to come back, right? I mean, yes, tourism leisure is good for the summer, but at some point, kids will be back in school, people will be back at work. What's your expectation, Angus?

Angus Clarke:

We're a bit guarded about corporate traffic. The signals are not amazing in terms of what we're hearing from our sales force. You may see semi-permanent's too strong, but certainly a one to two year period where corporates do travel less and they use more video conferencing to do that. So again, on the Air France side, we do have some protection in there, in that already 40-50% of our business class traffic was the unaligned non-corporate, so higher end leisure. So we are fortunately seeing high load factors in premium cabins on our North American services at the moment. We never had particularly high load factors in premium cabins on Africa anyway. So from that point of view, I think we're cautiously optimistic that if it doesn't come back, as it was in 2019, that we will at least backfill it albeit at a lower yield with other higher end leisure.

So we're still in expanding our business footprint at the moment where we're a little bit more focused on the more leisure sector. We're flying more aircraft that do have a leisure orientation. But again, coming out of this, when we go back to a hundred percent of capacity, we do need the corporates to come back. I don't think it's going to be the end of the world, but it will certainly hurt a little bit. But anything's better than 2020. So we're, I wouldn't say relaxed, but we'll deal with it. We've got some flexibility.

Jens Flottau:

Yeah. So for Turkish, same idea? More focus on leisure rather than corporates for the time being?

Ahmet Olmustur:

Yes. Before the pandemic, the corporate travel income for Turkish was almost 10% of Turkish income. It's a very highly segmented area. And also, there's no doubt that the corporate travel [inaudible 00:14:28] negatively most affected segment in the pandemic, but we are [inaudible 00:14:33] of course. It is not comparable, comparing to the pandemic, before the pandemic season, but we see some signals. Which signals? Because the regulations are getting lighter, I believe people who start to travel [inaudible 00:14:53] keep the regulations closed with their counterpart.

Jens Flottau:

Mm-hmm (affirmative). Both of you have changed your networks dramatically. You've reduced frequencies, dropped destinations, potentially added some more where there was still demand. How much of that will be permanent and how much that will be rolled back to the old days where we once were [inaudible 00:15:16]? Angus?

Angus Clarke:

I think, other than trying, other than efficiency gains we're seeing maybe a little bit depeaking in the hub that we're considering, I think we'll largely go back to what it was like before. What we'll probably change, which we're thinking about doing anyway, is we will be a bit more opportunistic around point-to-point short and medium haul flights. Now if that results in a little bit of dehubbing having to carry more local. We'll probably do that. And in big, dense, long-haul markets, we'll probably focus a little bit more on local as well. That's probably what we're going to do coming out of the crisis. But generally, and what does that really mean? It means high frequency in the markets like Germany in summer will be redeployed into markets in the Mediterranean to carry either local point-to-point leisure or carry long-haul connecting leisure, high-yielding connecting leisure out of US, as opposed to, no one wants to go to Germany from Paris in August. That's probably what we're going to change.

Jens Flottau:

Yes. Ahmet, Turkish, just because of the geographic location of Istanbul, of the hub, you can fly a lot of long-haul connections using narrow-bodies. And you're going from Europe into Istanbul, and then onto destinations in Asia. Is that turning out to be a big advantage, particularly now that, obviously, long ones are [inaudible 00:16:44]? What does it mean for your future fleet? I mean, would you be even less reliant on wide-bodies than you've been in the past?

Ahmet Olmustur:

You're right, Jens, because of Istanbul's [inaudible 00:16:59] geographical position, we can reach most of the European countries by narrow-bodies. Also, we are fine to [inaudible 00:17:10], even with narrow-bodies, and also we can catch up to [inaudible 00:17:16] eastern market. Also, some north African markets. That is giving us a huge advantage in these [inaudible 00:17:26] times. So we can feed up a bit, our flights, with narrow bodies and by using new generation long-hauls, which has a capacity of almost 300 and 330. We are just building great synergic network and great network synergy, especially in long-hauls, such as, I can give an example, maybe the Bogota is a great example.

We are one of the first airlines in flying back to Bogota, Colombia. How could we do that? Because, we have a new generation long-haul machine. And also, we are using the advantage of Istanbul hub so we can feed our long-hauls by short-hauls and vice versa. And we had already positive results at the end of the day, if you look back, in almost one year.

Jens Flottau:

Yeah. And then I guess on the Air France side, you've made a lot of decisions already. You've decided to retire the A380s and long-haul. You're going for smaller sizes in the European network. The big news is the new arrival of the A220 in due course. I mean, in hindsight, this must've been the best decision in a long time on the fleet side, going for a smaller aircraft, right?

Angus Clarke:

Yeah. I mean, I can't sit here and say, we saw the crisis coming, but the reality is the A380, I felt, was challenged before the crisis so we made a swift decision to get rid of that. And A220, personally, I think the A220's got very similar unit costs to the 737, 800, or 8 MAX, or the, when you include [inaudible 00:19:17] and all the maintenance costs, and the A320neo. Why fly the 180-to-200-seat aircraft when you can fly a 150-seat aircraft in our environment where we want to go for yield purely rather than volume. So I think from that point of view on the Air France side, it's really the aircraft.

It's a bit different on the KLM side. Your aircraft like 737 seven, 900, 9 MAX, A321 could be good for KLM because they are a lower cost producer than Air France and they do pump a lot of volume through Schiphol and to the international [inaudible 00:19:52]. So slightly bigger narrow-bodies are probably an interesting proposition for KLM, and the 220's a very interesting proposition for Air France. Quite different businesses in that regards, to be honest with you, but yeah, we're very happy. We can't wait. We cannot get the A220 fast enough, I would say, even in the current context.

Jens Flottau:

When is the first one arriving?

Angus Clarke:

Mid to late September. We're taking six before 31 December this year, and we're taking up to 14 or 15 next year. So coming quite quickly.

Jens Flottau:

Question for both of you, are you believers in long-haul narrow-bodies? Looking at your network, they just seem to be perfect, right? So you could slide deeper into Asia, deeper into Africa without the risk of having to fly a wide-body. Is that something that you're looking at?

Ahmet Olmustur:

Rather than speak about the narrow-body long-hauls, I can give you an example from our perspective. After the terminal relieved in 2016, there was a huge demand drop, especially for the inbound, local traffic for Turkey. We understand and we always keep the fleet optimization on the [inaudible 00:21:10] one of our hottest topics throughout the country. We understand that in order to minimise the effect of demand fluctuations you should have the right fleets first. So my perspective is, maybe it's a little bit different, but as long as you have long-haul, new generation machines, and if you can make a feasible long-haul routes, your short-hauls benefit from this event so I cannot make comment on the aircraft type parts.

What we have experienced so far is, the new generation long-hauls aircraft are facilitating our job. And if you look at our big [inaudible 00:22:02] especially, they didn't try to catch even the breakeven point with the bigger aircraft, especially for the long-hauls. So they couldn't make operation for a long time, but we did. So we appreciate all that and we understand that as long as you are just optimising your fleet and taking on the demand fluctuations, the long-haul aircraft are more important.

Jens Flottau:

Angus, are there long-haul narrow-bodies [inaudible 00:22:39] between the two to reduce risk while [inaudible 00:22:41]?

Angus Clarke:

For us, certainly on the Air France side, it's not so obvious. We can probably up frequency into some African markets, but there's also a strong baggage and cargo bias in Africa. So the wide-body helps a little bit with that. Emphasis on the baggage. There's quite high baggage demand. So yes, there could be five or six we can put into Africa to get the frequency up to daily, stop triangulation of markets. But some of the triangulations are based on safety as well, so in terms of crew safety, so that's something we consider. Could we add some points in Eastern Canada? Probably. Could we look at Philadelphia? Yes.

There aren't too many destinations. I don't see more than four or five in North America that we probably want to add with that type of plane. Four or five in Africa. Then you're into the Pakistan and Iran. It has been historically, I guess, the potential for Iran, but what I also found in different airlines I've been at, North Atlantic flows out of Pakistan, India and Iran are not ultra high yield, so we're not the lowest cost producer in the industry. So it's a mixed bag for us. But again, we could probably look at two or three in central Asia, getting towards Pakistan with a little four or five, Africa, four or five, and North America. So it's not a proposition with more than 15 aircraft for us at this point.

Jens Flottau:

Mm-hmm (affirmative). Just going back to yield, this summer and the operations currently, IATA has warned that if vaccinate certificates aren't digitalized, then we'll end up with a big mess at the airport, long delays, untenable situations. What's your experience so far, Ahmet, starting with you? Has it been that bad or are you coping?

Ahmet Olmustur:

I totally agree that the vaccination books, in other words, the document check, should be in digital format to lower the risk of fake reports and increasing the customer experience in the check-in process. So, as Turkish Airlines, we have been cooperating with IATA for IATA Travel Pass, and also airlines. The product name is Health Data Exchange Platform and for the last two weeks we have been using IATA Travel Pass now in Chicago and JFK roofs as well. Normally, our expectation is lowering the time of controlling documents in the check-in process from one minute to 20 seconds. So of course [inaudible 00:25:41] integration should be done before, but the critical thing is about this application is, it is more and highly accepted and used by airlines in airports globally, the more it will help us.

Jens Flottau:

Angus?

Angus Clarke:

My recent travel experiences have been largely between the UK and France, and then recently the UK Greece. What I would say, the UK and Greece was pretty seamless. Greece accepted vaccinated travellers on arrival without PCR tests. So I would say it was routine at the airport, like they check the bags. So no additional time; that was all verified at check-in. There was one last quick check during the boarding process. So pretty quick. Same coming out of Greece. No issues there.

France, going to the UK has been time consuming. Also, entering the UK back from Greece was pretty quick as well. Very few document checks. Probably the nature of the market was almost 100% UK point-of-sale on the plane, so that's probably driving it. But that was with the NHS app, which the the medical system in the UK, and it clearly indicated your batch number of the dose for the vaccine. So I think that's pretty straightforward. And I guess that's going to be an app universally accepted globally at some point.

I don't have that much experience with the IATA app. That said, France departing is the biggest issue. Arriving in France is actually okay. No issues there. But departing France, certainly to the UK, has got quite a heavy burden on documentation checks because you've got to have the UK travel form, you've got to have a PCR test booked, and you've got to have the PCR test for departure. The vaccine app doesn't have any relevance on arrival to the UK yet, which is a shame. Given they've vaccinated so many people, they really should hurry up on that product.

Jens Flottau:

But it seems to me, from what we both say, that the problem, at least at this stage, is not as bad as people may fear. Will that change once you get to higher volumes and closer to 19 levels? Ahmet?

Ahmet Olmustur:

Yeah, I believe so. As I said before, as long as it is widely accepted and used by people, airlines and airports, the more it will help us. Just my perspective.

Jens Flottau:

Yeah.

Angus Clarke:

I think we've got to solve the problem by a technology. I think airlines probably need to lobby governments across their network to accept various apps from their largest [inaudible 00:28:46] country. I'll give you an example. The Uber app right now makes you potentially take a picture to show you're wearing a face mask and that gets uploaded as a verification item. So we could, certainly for people that want to have a check-in online, on the app, no baggage, go straight to the gate. You could potentially let... Our apps could take a shot of the QR code from the vaccination certificate and that could mean you're verified and that could feed into our reservation system to say, 'Clear to board.' And then, again, we don't want too much burden on the airline, but I think the airlines are going to have to solve the problem. It's probably the path of least resistance if we try and solve the problem with the government.

Jens Flottau:

Before I let you go, the times of crises seem to also be times of innovation. Lots of new ideas with business models. We've seen several airlines and leasing companies ordering eVTOls for taxi services that probably connect the airports to cities. United has even created a conditional order for supersonic aircraft. Are you both looking at any of this? What do you make of it? Maybe Angus can start.

Angus Clarke:

We're not looking at supersonic. I think, certainly, the environmental pressures in Europe are realistically stronger than what they are in North America. So from that point of view, unless there's some great breakthrough in fuel technology that doesn't make it too expensive or environmentally unfriendly, we're probably not going to look at that. The eVTOL market absolutely is a fringe. We've seen a few presentations. It's not core, to be honest with you. I mean, we're really good at a 100 seats and above typically. So could we partner with someone to deliver customers to Charles de Gaulle integrated into our sales network? Absolutely. And just our operations network? Absolutely. Is it going to be us operating it? I don't think so, but I think we'll watch it. It's not going to be huge amount of revenue compared to flying wide bodies on the long-haul network. So it's an interesting development, but it's not top our priority. Making money, turning cashflow positive is our top priority.

Jens Flottau:

And Ahmet, connections from downtown Istanbul to the airport by an eVTOL? Air taxi, is that something you find attractive?

Ahmet Olmustur:

I agree with Angus. My personal view is first airlines have to stabilise very commercially. After this pandemic, which is seen once over 100 years, stabilising is much more important than futuristic ideas. Maybe that day will come, but I'm not sure it is close. So we should focus on how to be reopen the borders and satisfy the people's needs for travel. And also, there's a huge [inaudible 00:32:06] laying over there and you should focus on how to trigger the demand.

Jens Flottau:

Okay. Thank you both very much. That's all we have time for. Thanks for joining, Angus. Thanks for joining, Ahmet. To the viewers, thanks for watching this. And with that, I will hand back to my colleagues at CAPA (voguish techno music).

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