Kenya Airways Keynote

Transcript

Sebastian Mikosz:Good morning still. Good morning. I can't see you properly, but I have 20 minutes, so thank you very much, Peter, for this time. I was asked, and thank you, CAPA, for that, to give a short speech on one of the topics that we work on at KQ, And one of the topics that is really a hot topic for us. What is the thing that we try to understand and make evolve? And so I was thinking that I'm going to share with you quite quickly today what is the— what is the thinking that we have in terms of our positioning as airlines versus what's going on in technology universe. The reason for that is that we live in a continent— Africa is a very highly digitalized continent. Mm-hmm. Almost everyone has a phone, not always a smartphone, but has a phone. People are using quite a number of online services, and it's, it's very easy to measure the reactions when you put your finger into technology and into, into distribution. So let me share maybe a message that is what we observe and also what is, I think, an important element for the— for us as airlines, because I'm positioning myself from, from the airline perspective. And this is why I decided to put a few slides together about why airlines need to operate like tech companies, because when we start doing all types of technology research and investments, there is a certain element of frustration which goes, and I'll give you this, I'll try to share with you this frustration. So technology has created de facto a completely new reality, and it's a very simple diagnosis. You can read about it everywhere. It's— the topic is almost as popular as the problem of sustainability, fleet, all the problems that airline has. But today we have 5 billion worldwide mobile phone subscribers, which, which is equivalent to what IATA is giving as number of passengers. Because tonight, this year, IATA was giving 4.6 billion passengers a year, and you have 5 billion phones. So literally we can assume that each grown-up or adult customer of airline has a mobile phone and actually more have mobile phones worldwide, even though if the statistics is of course just a statistic so it doesn't show the detail, but we have connected, super connected consumers. I remember a few years ago when IATA was announcing officially that there will be no more paper tickets. and that the paper ticket disappears. So today, I mean, in 2018, 50% of the sale of the tickets is done online, which has created a completely new reality for airlines. And statistically as well, but you have 291 airlines which are part of IATA, 493 countries, which means that the choice is absolutely abundant. So abundant information, Everything sold almost— I mean, half sold online with, with an abundant choice of airlines. And that has created a completely, completely new society, a much smarter society. Actually, when you look at all those brands which are, you know, most of them probably created within the last, what, 10 years, 15 years, and they completely dominate our lives today. And actually they dominate our life and then dominate the way we travel, the way we buy, the way we We see reality with one fundamental element is instant access to information at an extremely low price. And this is something we observe in all our markets, but our African market is particular because people really do everything online and check everything online. They do not have, depending on the countries, the smartphone and the latest smartphone, but they are really used to have this instant access to information, even though on African market we still observe it, but we still see people going to buy physically a ticket but checking it online. So this whole environment has created a completely, completely different, different society, particularly in travel. However, however, if you compare it to airlines, this— and these are the valuations. I hope you see the whole slides here. These are the valuations. And we were looking at it a few days ago when preparing this. And I completely lost it because, you know, when you run an airline, you don't check valuations of tech companies every morning. But in the top 10 largest companies in the world, there is no airlines and no travel companies actually. So even though this is the biggest part of the volumes and one of the biggest beneficiaries, travel, if you take those 10 companies, there is nothing that gets closer to And actually, the more we were digging this figure, look at this. The world's top 5 airlines are not even in the list of the 100 most valued companies. And I have a, like, a strong thesis about how we as airlines should react to this. But if you take those figures and just as a reminder, I hope I can come back. Google 9— Apple $961 billion, Alphabet, which is Google, $806 billion. Wow. 63, Alibaba 408, and then you take, you take Delta 38. So actually it's, it's quite shocking, particularly shocking when you do this, uh, you check OTAs. So Ctrip, Expedia— Expedia, who is one of the most known brands in, in the online travel agent environment, $18.5 billion, Ctrip $24 But now let's do this. So you put all those companies together and they are still 6 times smaller than Amazon. So actually it's interesting because the assets that those companies own— United, Delta, American, Southwest— are probably much higher than what Amazon owns today, but the valuation and what market appreciates has completely moved. And, and, you know, Expedia is, is really the tech company and the, the one of the most innovative tech companies, but still altogether it's 5.7, um, 5.7 times smaller, um, than, than Amazon, who is of course the, the symbol now. And that comes in the world where travel contributes to $8.3 billion— trillion, sorry— dollars to the global economy. And these last raises of funds showed that when you start a tech company, it's very easy. I mean, it's not very easy because it's never easy. I should not say it's very easy because for many entrepreneurs it's not easy. But look at the tickets people are raising to do tech company, $47 million for a startup, travel startup. Masabi, $20 million. For a chat, to build a chatbot, $10 million. So there is an ecosystem of startups which have a really easy way— maybe not easy, but that have funds accessible. despite those very, I would say, low valuations. Now, why is that? And why nobody invests this money in airlines? And actually, here I would like to defend the airlines a little because I was thinking about how unfair this is. And somehow it's unfair, but also airlines do not react. Starting a low-cost— sorry, starting a tech company actually is not that expensive. Starting an airline is extremely expensive. And this is the first difference. You cannot start an airline with $1 million or $2 million. It's literally impossible, even if you assume that you lease and you outsource everything. Right. Just because the highly regulated and bureaucratic environment. And you cannot operate between countries you decide if you don't go on bilateral agreements, if you don't follow the local regulations. Why, if you start a tech company, you have literally unlimited access to all markets. You have a situation in which most of the airlines are expected to be extremely, extremely bureaucratic and hierarchical. You cannot have an AOC in most of the countries if you don't have the post holders. So immediately you start— when you want to run an airline, you start by having a lot of bureaucratic demands, on opposite of a tech company which, which can do whatever they want. And we as airlines are super highly regulated. So whatever you, you know, I never heard about the tech company who needs to approve the operations director, the technical director. You have someone who can tell you who could— can you not recruit. So of course that creates a heaviness and a perception of airlines as a very heavy environment, which is the true opposite to tech companies who always, who always look as agile, very light, very light companies. But now on the other side, And this is the unfairness and also the lack of maybe courage or boldness from airlines to notice that at the very end, we as airlines own the most difficult part, which is the assets. Because just— we were discussing this with my team— just imagine if there was no cars or no people owning cars, what would Uber do? What if people were not investing in hotels, in big facilities like this? Which are very heavy asset driven, when you need to put millions of dollars in a building, operate it, then what would Booking distribute? They have the cherry of the cake. And what would Airbnb do if people were not putting their apartments, which cost millions of dollars to rent? And actually, what would Expedia distribute if there was no airlines or if nobody would take the risk of having a plane? And the answer is obvious. We are naive as airline operators because we take the most difficult part on us. Why? By our heaviness, lack of quick moves into technology, we let the others take what is the biggest added value, which is the data-driven distribution, while we have to why we have to carry the very difficult part. I was— I have— I can be more controversial, but I think that it's much more difficult to run a proper airline operation like a big operation center with all the multiple conditions than to create a mobile app. It requires much less risk and technical involvement while you just create an app and it functions. Now, just for those who are from airlines, and I live it quite frequently, entering an operations center when you have an issue, it's really impressive, yeah, because people need to take tons of decisions, manage it in a proper way, have passengers on the other side. While when an app is not functioning, it's a different level of risk, yes? So we should be, as airlines, having a different mindset valuation and a different mindset of what we do ourselves. Yeah, so sorry, I already said it. The airlines, we have the metal, we have the assets, so technology company needs that. So what could be, what should we do? Because okay, we can complain, we can say, yeah, they are more agile than us, they are better than us, They are better perceived, etc., etc., and all these complaints. There are answers and there are a few answers who already started being implemented in many countries. We have to start thinking like digital retailers. Alibaba in China was able to sell $1 billion worth of products in the first 1.25 minutes on one day. That shows you that given that tickets are goods which are, let's say, priced much more than a t-shirt that you can, or a book, but so there is a capacity of selling. But what is really worrying and where we should be coming, we should be becoming Amazons and Alibabas and all other retailers. Look at what's happening in India now, because this is the example from I think two or three weeks ago. Actually, Amazon in India, in the list I cannot show in the list of products, is selling tickets. So airline tickets becomes one of the products that Amazon is selling. What does it mean? That it's not. It's Amazon who starts to adding to its offering airline travel by de facto. So given their volume and given the size and given the speed and given all the advantages, they will start being an online travel agent. They might quicker than we think become an airline. Actually, I have the— this is the really good example because as you may know, Amazon is building its own airport. in Ohio, and they are building their own fleet capacity. Of course, not for passengers, but for cargo. So actually, they are so big that they can start owning what it's even worth for them owning the heavy part of the asset, including, including an airport. So very quickly, we— and with their valuation, access to money, I'm wondering who's gonna be the biggest airline in 5 years. Yeah. 5, 10 years, is it still going to be the old legacy brand that we know, or maybe Amazon will be very soon the biggest airline? So Google Trips, yeah, that's another example. Personalized tour guide in your pocket that adds new features every day. Now imagine these guys distributing hotel reservations, air tickets, And a guide. So I remember when we were buying Lonely Planets and were very excited to go through the book and you were carrying in your backpack all the Lonely Planets. Now you are carrying a phone in which you have the books, the booking hotel, the capacity of changing it. Airbnb does the same. They do suggestions on what can you visit and air distribution fares. So actually We as airlines are becoming one of the subcontracted parties of what the world values really, which is this type of product when each one of us can have it instantly with Wi-Fi access which becomes accessible throughout. And these features and this type of products owns the customer, not us. All the loyalty programs become totally irrelevant because if If then they do a frequent flyer or they do a frequent customer, they will own the data and they will own the loyalty. People will go there, they will stop completely going to see us. So in other words, if we do not adopt an online travel, a full business model like an online travel agent business model, we will become as airlines those companies' subdivisions because they will need that only to to take the burden of carrying the passenger. They will just need that, just the guy who operates the planes, who takes all the insurance risk, all the formal risk. And of course, when there is a problem, you say, it's not me, it's him. So I take the cherry or even the cherry and part of the cake and I leave him a big, a very, very small part of the cake. I remember 2 years ago, Actually, this model was already started being adopted by the largest European carrier now, which is Ryanair, which was for a long time underestimated. And their CIO, when asked about the strategy of the future, he says, we want to turn Ryanair into an online travel agent. It happens with an airline attached to it. And we are, we are talking about an airline which currently is carrying around 120 million passengers a year in Europe and which still doesn't have the long haul. So the moment— and they already pointed it out, given that they distribute everything online and they quickly understood where the margins are and how the airline becomes completely dependent on their OTA approach. So to make fun, We did news from the future. If we don't change, you will have Amazon merges American and United into these transport subdivisions. Yes, that's gonna be news. Because if you see the valuation, actually, if Amazon wanted to buy 2, 3 airlines, that wouldn't be an effort for them. And basically, they could afford most of the airlines through stock exchange very, very easily. as their own subsidiaries. I think the only reason why they don't do it is because it's not practical. It's much better to have the problem outside and take the margin for yourself. So as my time is up, don't let the cheetah defeat the lion. I'm living in Kenya, so I have quite a number of lions and cheetah available in national parks quite close around me. And I always think about ourselves like of a lion because because cheetah is much lighter and moves much faster, but it's still the lion who runs the show. And so let's be the lion and let's not be defeated by cheetahs. Thank you very much. Thank you, Sebastian.

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