Opportunities In Asia: Different Strategies To Capitalise On Asia’s Expansion

Transcript

Peter Harbison:If I could just welcome my panel up to the stage, if they'd like to come up all together and we'll give them a big hand. From Air China, the VP and General Manager of North Americas, Zhihang Chi, an old friend of ours. Welcome, Chi. All Nippon Airways VP Strategic Planning for the Americas, Tadashi Matsushida.

Zhihang Chi:Hello.

Peter Harbison:Hey, anywhere you like. Hainan Airlines Senior VP Hou Wei, the VP Sales and Marketing for North America John Jackson, Rosemary Vassiliadis, who's already been introduced to you, and last but definitely not least, Ian Heywood, who's VP Product and Marketing at Travelport. Could you give them a big welcome, please?

Zhihang Chi:Thank you. Hi, how are you? Very well.

Peter Harbison:This is where we should have had the music, isn't it? And just have one chair too free. I might stand for a little bit just so you don't get such twisted necks. OK, I mean, I've thrown out a few challenges in that presentation, and I'm sure you've got a lot of views as well. One view I'd like to start with, actually, is I was just I was having a discussion yesterday about our little market in Australia and how influential we think it is anyway. It's certainly something that has been very important to all the Gulf carriers, to— it's 20% of Singapore Airlines' revenue, and Singapore Airlines is quite a sizeable aircraft. In Australia, we have about 70% of Australians have passports. I think in the United States, it's more like 7%. So all of what I've been talking about in this presentation so far has been about getting point-of-sale from foreign countries to tap into that growth. It would seem to me there's actually a hell of a lot of potential outbound growth from the United States if we could just sell a few passports. It's not the same thing as obviously generating inbound tourism, but from an airline point of view, that would seem to be a substantial market. Is that something— I mean, talking about to you as particularly as the foreign carriers coming into the market, is that something you see as your future? Maybe starting with Hou Wei and Hainan. Do you see an ability to sell inbound or outbound from the United States, or is it just too hard?

Hou Wei:Yeah, I think it's a US market point of sales. It's extremely important because everybody's talking about how lucrative It is the corporate market and also inbound tourism, given the fact that only a small fraction of U.S. citizens owns a passport. No doubt, from my point of view, this is very important. We have to balance the sales because it is the fact that now we generate maybe more than 60% of revenue Mm-hmm.

Peter Harbison:So you can't ignore that, obviously. John, do you see it the same way?

John Jackson:Yeah, well, I mean, certainly for, for corporate demand, this is a market that you really want to, to be able to tap into. I do think, thanks to the fact that we have to use passports to go north of the border into Canada and into Mexico now, that number is probably a little bit higher than it would have been 10 years ago. over 20%. I know where you're coming from, but, but there's a good leisure segment I think that, that opens up for us as well.

Peter Harbison:Yeah, because you're— I mean, you're, you're a big 6-freedom operator. I came up on Korean over Seoul from Sydney, and I noticed a very large group of— from Vietnam, from— there was a few Chinese there as well coming on the flight through from from Seoul to Vegas with me. That's obviously— feeding that inbound is the easiest aggregation for you, but tapping into the American market is obviously a lot harder.

John Jackson:Yeah, well, I look at it as 2 different markets really from the American market. There is the corporate market and there's the leisure market. Corporate is hard because you've got to have networks going And you've got to have, you know, strong partners and all that, which we've built up over the last 20 years since we've really started expanding here. The leisure market, though, I think is one where it's a little more difficult. Like you said, I mean, not many Americans have passports. It's also a long way to go if you're just going for a beach holiday, for example. You know, it's easier to get to Hawaii or the Caribbean. So there is a challenge.

Peter Harbison:Yeah, that's what she said.

Tadashi Matsushida:Yes.

Peter Harbison:You see the US outbound market as being an attractive one? You've been in the market a bit longer.

Tadashi Matsushida:It's actually probably a few years ago we've shifted— we actually shifted the gear to focus on the traffic between Asia and North America. So this huge demand potential is our future. Actually, and so the you talked about the potential of Asian market. Asian market actually created several new opportunities for ANA. One is obviously from from Japanese perspective, there's between between our home country Japan and the rest of Asia, we're seeing a huge increase of foreign visitors traveling into Japan inbound, especially from China and Southeast Asia. That's great, but actually the potential is in between North America and Asia, and we've been adding—

Peter Harbison:You see that as bigger than Europe? The potential? You see the US potential bigger than Europe for you?

Tadashi Matsushida:For us, definitely. Because for Europe market, from— as a Japanese airline, it's actually— there will be— the connectivity will be an issue. So it's a local market.

Zhihang Chi:Yeah.

Tadashi Matsushida:And actually, the demand is almost on the Japanese side. So 70% of our demand is created in Japan. And that's the same for the European carriers. So we're focusing on Japanese travellers travelling to Europe when it comes to Europe, European operations. But for the US, it's a different matter, different story.

Peter Harbison:Interesting. And I'll come back to you later because you're the one carrier that's got the JV on the Pacific too, which is interesting to get a bit of experience on that. Zhi, you've been in the United States for quite a long time. How many years? Air China been here?

Zhihang Chi:We inaugurated our service to the United States on January 7th, 1981. Think about it. So 30— we're not in Vegas yet.

Rosemary Vassiliadis:Yet.

Peter Harbison:That'll be next. Yeah.

Zhihang Chi:30—

Peter Harbison:so it's time. Yeah.

Zhihang Chi:35 years.

Peter Harbison:So 35 years. That's quite a way for Asia.

Tadashi Matsushida:Yeah.

Peter Harbison:I guess the only one from your part of the world who was there before that would be Cathay Pacific.

Zhihang Chi:I'm sorry?

Peter Harbison:The only carrier would be Cathay Pacific who was there before.

Zhihang Chi:Yeah, I'm not sure who's been here longer, Cathay Pacific or us, but—

Peter Harbison:So how do you see the US market now? How's it changed in, say, in the last 5 years? You've got a close relationship through the Star Alliance with United. Well, it hasn't been all that close, but it's supposedly getting closer, is it?

Zhihang Chi:Well, you know, we see the need to be— to get closer. If you look at the competitive landscape, you see our competitors getting closer together, and also the— I think on the other side, our U.S. partners see a need to be working closer, more closely with us, because your point that the— The passenger mix has been shifting. Now, when I first took over at Air China, the mix was about— get this— 80% US, 20%, not even, China.

Peter Harbison:Really?

Zhihang Chi:And there were a number of reasons. Number one, few people can afford to travel out of China internationally. That's number one. Number two, China was still a developing country. Still is, but—

Peter Harbison:We all are, aren't we?

Zhihang Chi:And so the, the, the, in the old days, I had a much more important job. I mean, I worry about my job today because the mix has shifted. Point-of-sale mix has shifted from, you know, 80% US US, 20% China to about 60% US, 40% China. Now it's about even. It's continuing to shift towards China. So to that extent, the—

Peter Harbison:but at the same time, the market is growing, of course. It's not just a—

Zhihang Chi:well, but if you look at the numbers, traffic originating from the United States to China surprisingly has been holding steady, in fact declining a little bit.

Peter Harbison:Really?

Ian Heywood:Yes.

Zhihang Chi:And to Matsushita-san's point, we're also starting to focus more on U.S.-Asia instead of U.S.-China. So in other words, we're playing the 6th freedom game a lot more than we used to, than we wanted. You see, when you were talking about yield, we see a tremendous, tremendous pressure on yield. It's been plummeting.

Peter Harbison:Yeah, because of the directional shift largely?

Zhihang Chi:Well, absolutely. Well, again, when you— when you— when the market is flooded with capacity, then your point-to-point has hit— I wouldn't say a ceiling, but a threshold, shall we say— then You got to do something about capacity, that we all compete, we all play a similar game of grabbing seats, freedom traffic, which is very interesting.

Peter Harbison:Rosemary, you're obviously far more interested in inbound than outbound. I mean, look, and to ask you a different question for that reason, how have you seen the Asian market growth particularly? And how has it compared with the other regions? I mean, are you— is your focus largely on Asia now, just as a matter of interest, as an airport and as an operation generally?

Rosemary Vassiliadis:Well, certainly as a destination, we're very interested in Asia. We do know that Asians from, from, you know, all the countries and so many different cities do come to Las Vegas, as an example, but just not nonstop. You know, the one thing that you did say is that the passenger prefers ease nonstop, and, and we absolutely agree with that, which is why we love the yet word. But, you know, I think we could talk to our partners with Corinne, and, you know, there's just great competitive pricing that, that an airline can do more with nonstop than through their codeshares and, and one or two stops. So, you know, as a destination airport, you know, which there are several in the United States. You know, we're one of them, and of course we want our lion's share of it all. But it's something that yield— we know that yield is, is the weighted factor for airlines. So as an airport, we really look at that and we, we keep that in the mix to try to attract that nonstop. Because again, you know, nonstop is the preference. Nonstop is the biggest benefit. We love being Las Vegas. loves being a gateway to the whole Southwest region, and we want them to start here.

Zhihang Chi:Sure.

Peter Harbison:Yeah, appreciate that. And I made the point, not entirely without you guys in mind, about airports as partners. That is, I mean, you're one of a handful, I guess, who've perfected that art. What are the key ingredients in getting airlines and helping them stick?

Rosemary Vassiliadis:Well, you know, I think that we do have a great story to tell with the airport and the Las Vegas Convention and Visitors Authority being partners around the world.

Peter Harbison:Having a go-to role.

Rosemary Vassiliadis:Yeah, not only airlines, but with travel groups, conventions, etc. And what our job is, you know, as much as we want, love for them to come through McCarran, they're coming to Las Vegas. So we just, we don't want to be an obstruction. We don't want to be a point of debate. So low cost, number one. How do we make it as efficient as possible? How do we make sure that we have gate availability, that, that, you know, we have the services that all the different airlines need?

Zhihang Chi:Mm-hmm.

Rosemary Vassiliadis:And so, you know, and then that goes through the terminal as well. What does the passenger want? What does that customer want? So we try to match, and we survey heavily to see what type of shopping do they want, what type of eateries do they want, you know, what's that— you know, we're an airport, what's that impulse purchase? And so, again, I think our job is that we're not an obstruction, we're a very seamless part of that decision-making.

Peter Harbison:Good, good. I'm sure everybody likes to hear that. Ian, I mean, you know everything about who's buying tickets and where. What are you seeing in that? I'm going to come to partnerships in a minute, but just in terms of that directional flow, the opportunities in both directions right now and in the future?

Ian Heywood:Well, I can answer it with a Travelport hat on. I can also answer it with my previous hat on when I was based out in Asia selling. It's, you know, every time you do a presentation, I thought yours was spot on. I sort of agreed with everything you were saying today. And you've been saying for ages that, you know, everything is based around Asia, and it is. And there's got to be a realization about that. And so, you know, airlines throughout the globe, not just in America, have got to put together their Asia strategy. And it is, you know, I was very pleased that you put up their patience.

Hou Wei:Yeah.

Ian Heywood:Because it is a market that doesn't necessarily move at the speeds that you think. It does require relationships. It's very, very heavy relationship-based, and it's also doing things differently. I mean, you didn't go into too much detail today about, say, someone like Singapore Airlines that's got 4 subsidiaries of completely different types underneath it, which is just broken all the molds in, in the way that airlines operate. And so you've got to be open to new ideas. You have got to be open to the Asian market. So you've got to have, you know, cabin crew on board, foreign, you know, local-based, you know, Asian cabin crew. You've got to have Asian meals on board, as you just talked about, you know, through the airports. What do people feel comfortable eating? in-flight entertainment systems. You know, you've got to make your package for there. And, and it's that market. Yes, you've got a very big market in America. It will continue to grow, but it is still quite static on every, you know, statistic that you look. It's quite a static market. And so if you're going to build into the growth, you've got to do it, you know, starting at the Asian end. And you mentioned it, but one thing that when you're selling is really, really important is your frequent flyer program. And that drives the traffic for the American carriers in America, but their frequent flyer program is basically useless in Asia unless you can partner with someone and unless you can, you know, be one part of one of the big ventures where you can swap the mileage and everything like that. So, you know, You need to really build in, in Asia. The good news for the American carriers is that they will have brand recognition, and brand is very, very important. What I don't know, and you alluded to it, is what does that brand stand for in Asian eyes? And is— you may have the recognition, but are you actually presenting yourself with the products that the Asians want to buy? Or have you got to upgrade your products?

Peter Harbison:So in other words, you can, you can get brand recognition, but in fact, in some cases, you'd probably prefer that it wasn't recognized, to be blunt.

Ian Heywood:Yeah, to be blunt. I know, I don't, I don't know. I don't know how the American airlines are viewed in, in Asia, but there is a difference between brand recognition. Oh yes, we know about Delta, we know about American, and We know about United, but what does that brand stand for? And is that the sort of brand that the Asians are desiring? I don't know the answer. It's quite easy to find out, to do some research, but that is very, very important. And if it isn't standing for the right values, then you need to do quite a lot of work in trying to change those perceptions.

Peter Harbison:You know, I talked a lot about risk and we've talked about I talked a lot about low yields already. The next one is really about partnerships. What are the ins and outs of partnerships with US carriers? What are the secrets for success? Which are the best partners looking at it from outside? I talked a lot about low-cost carriers, for example. We're not just talking about partnering with the big 3, Delta, American, and United, which talking about other carriers in the US. Let's start again with Hainan. What— I mean, you're relatively new in the marketplace. You've been fairly aggressive and you're coming into some new routes. What— how do you see the partnership potential and what's the best way to go about it from Hainan's point of view?

Hou Wei:I think the part of success for a sound partnership is extremely important in this market because first of all, US passengers are used to what has been offered for many years— loyalty program, mileage program, and connection products, blah blah blah, a lot of things. And so to tap into this market, you must have, you know, and many— secondly, many of the traffic generated from China, the final destination is actually elsewhere in the United States. So it's a very successful story. For many years, the US has been using its gateways to be able to connect passengers throughout the US and even the rest of the world. So I think it's important. But from our— experience that really a sound, viable partnership is better than, you know, a big party that you truly are not recognized as a small potato. So I don't know what about, what about the other guests on the podium, but from us, we are very, very happy. We're still pushing forward on the current strategy to work with the relatively non-big alliances partners in the US market. It's important to answer your question straightforward.

Peter Harbison:Yeah, because you're the only— you're, as an independent, you're the only airline sitting here who's not part of one of the major global alliances and you don't have a partner with one of the big 3. Did you think in some ways that gives you an advantage because you have more diversity in terms of your options?

Hou Wei:I wouldn't say it's an advantage, but what I'm saying is that we are— we have some good stories to tell in terms of how we tap into this market to work with the local partners. And of course, we wish to achieve more, you know, on a more comprehensive basis and to To have a better coverage of both East Coast and West Coast.

Peter Harbison:So you see that feed as essential beyond your gateways.

Zhihang Chi:That's right.

Peter Harbison:Just to remind the audience, what points do you operate to and what are you planning?

Hou Wei:We have right now 6 destinations in the States: Seattle, Boston, Chicago, San Jose, LAX. I probably will have more.

Peter Harbison:And this is only in the last couple of years, really.

Hou Wei:Last couple of years, since 2008, I think.

Peter Harbison:Yeah, yeah, very fast growth. John, you've, as a, as a SkyTeam member, you've had a sometimes warm relationship with Delta, not always warm. And obviously this is interesting too from a, from a 6-freedom carrier position. And naturally the US carriers are looking at going direct into China now as opposed as opposed to using the Korean gateway in your case. How is that affecting your partnership and, you know, how do you see the partnership evolution with the US carriers?

John Jackson:Well, it's important to have partners here and I'll just give you our own experience.

Rosemary Vassiliadis:It's—

John Jackson:I don't know if everybody realizes we're the largest transpacific airline when it comes to number of nonstop gateways served from the Americas to Asia. We've been able to do that because of our partnerships with U.S., Canadian, Mexican, Brazilian, and so on airlines. And it's helped us in a couple of ways. You know, going back to our focus, which really is so we don't have to get— you know, I think our yield has been impacted probably less than some of our competitors.

Peter Harbison:We—

John Jackson:no doubt we see an impact. But one of the reasons why is because we're doing so well in the corporate part of the, of the market. And our partnerships have helped us with that in 2 ways. One, excuse me, is it's allowed us to reach some of the companies who are not in the major gateway cities, you know, Procter Gamble or somebody like that, General Electric, you know. By having strong partnerships here and able to connect those, those business travelers to our gate, one of our gateways, It's allowed us to succeed there. Another way it's done is it's given us the ability to serve more gateways, to have more frequency, which are important to those companies as well.

Peter Harbison:And how do you see that going in the future? I mean, is that being challenged now? Is that becoming more difficult?

John Jackson:What's that?

Peter Harbison:Oh, the whole process of aggregation and being able to No, I think—

John Jackson:I mean, obviously we've slowed down from, from where we were a few years ago. I think the last new, new route that we started was Houston back in 2014, but there's still some others I think that potentially could be served. And, and you'll see it with, with Chinese airlines. You'll see it, you know, with the joint ventures with the Japanese carriers as well.

Peter Harbison:Yeah, I think this is one of the exciting things, isn't it, about the market? We have seen a lot of not quite hub to hub, but large city to large city. And we're now starting to see the potential with some of the smaller aircraft coming into the market for a lot more of that penetration behind the major gateways. ANA is obviously talking partnerships. You've got an immunised joint venture, haven't you?

Hou Wei:Yeah.

Peter Harbison:With United. How does that— how effective has that been so far?

Tadashi Matsushida:So, you know, first of all, we became the Star Alliance member, and that— we actually learned many things apart from, you know, having better connectivity and increase of our passenger base. And we've— we actually moved on and became— and we actually get immunized antitrust immunity and, and, and have a joint venture with United Airlines. In Europe, we are having the same kind of arrangement with Lufthansa. So in the past 5 years since we've done joint venture with United, the passenger connecting passengers between United and ANA have, have grown more than double. And ANA itself, our traffic itself has increased by more than double as well. So it has a huge impact.

Peter Harbison:And sorry, when I showed that slide, the Emirates-Qantas deal, one of the points that Qantas made was it also had improved their yield. Have you seen that in yours?

Tadashi Matsushida:Yes, definitely. Yes, yes, because of connectivity. Our product and services actually, I think, was finally accepted by the U.S. market, I guess.

John Jackson:Mm-hmm.

Tadashi Matsushida:And so, definitely, it had a positive impact. And if we're talking about, you know, joint ventures or any kind of partnership, Focusing on Asia, we have had some progress on the Asian side as well.

Zhihang Chi:Mm-hmm.

Tadashi Matsushida:So I think in Asia, the part— thinking about our partnership strategy is very important in Asia especially, I think, because if global aviation trend is any indication, I think eventually, eventually there will be a consolidation of major airlines in Asia in the future, and it depends on the scope, the maturity level, or competitive environment, or future opportunity for new routes for each country. But the And one of the key focuses is to increase the size of the network assets. And ANA, it is very important for ANA to choose the right partner in Asia. And so we have— we're the Star Alliance members, so we partner with the Star Alliance members, but also outside of traditional alliances.

Hou Wei:We've—

Tadashi Matsushida:engaged in partnership with Philippine Airlines, Garuda Indonesia—

Peter Harbison:Outside the alliance.

Tadashi Matsushida:Yeah, yeah, and taking minority stake in Vietnam Air as well to have code-sharing and also partnership in mileage program as well.

Peter Harbison:And these are essential, I think, because the mileage programs, obviously you don't have to worry about ownership and control issues. You can you can have much more flexibility in partnering in that respect if you want to. Consolidation is a big call. I mean, who would you consolidate with, Gel? Or maybe maybe Star Alliance partner Air China.

Tadashi Matsushida:I mean, yeah, I mean, it's very hard to predict, but I think in the future we can't we we can't ignore that. That might happen in the future, and we have to think forward and be prepared, I think. So that's why we're trying to think outside of the box, and not only— of course, the Star Alliance relationship or joint venture is core, essential for our partnership strategy. strategy, but outside of that traditional alliance, we're actually making progress as well.

Peter Harbison:Yeah, well, good, good to hear. Air China, I mean, I know Beijing has this strategy that everybody has 3 major carriers, each of the regions has 3 major carriers. In Europe you have the big 3, in the United States you have the big 3 now. I'm really not a subscriber to that because I think that's a temporary development. And you've also got the big 2 in Europe, of course, Ryanair, which is by far the biggest. And you're obviously getting more carriers in China who are going to grow because you are such a big country and you've got such, such potential.

Zhihang Chi:Do you—

Peter Harbison:I mean, you're in the position now obviously where you're the dominant carrier internationally. How much do you need partners?

Zhihang Chi:Do you—

Peter Harbison:can you go it alone?

Zhihang Chi:Do we— Do we get along?

Peter Harbison:No, no, how much do you— no, sorry, I wasn't being controversial at all. But how much— you're quite a big operator, well, you will be a little bit. But how much do you— just theoretically, how much do you actually need a partner? What's the thinking process through that?

Zhihang Chi:Partners, pure and simple, are simply vital. There's not a question about it. Look, if we want to fly to the United States, States, whether it's inbound or outbound, we stop at the gateways and we need somebody to flow that traffic for us. And it's that simple.

Hou Wei:Yeah.

Zhihang Chi:And it so happens that, that a lot of our, our network matches very well with United Airlines network. And so they're, they're a natural partner and they are vital to us. And for that matter, Any partnership in the United States is going to be very helpful. So I don't think there's any question whether we need partners or not.

Peter Harbison:Do you see an immunized joint venture like All Nippon's got with United? There'd be a bit of controversy there, wouldn't there?

Zhihang Chi:I think it'd be very helpful because Especially for countries like China or for people in China, they have a very hard time understanding the kind of partnership we have with our U.S. competitors. So we say we're partners, but then, but then first and foremost we're competitors, and if we don't compete, we go to jail. And, and they go, what kind of partners are you? You know, why do you even call yourself partners? We had that very, very interesting discussion when I was at Northwest, and we kept telling our Air China colleagues, hey guys, you know, we got to be very careful what we talk about. So when you have 2 different bottom lines, you're going to have to compete. There's no question about it.

Peter Harbison:Mm-hmm.

Zhihang Chi:That's a very delicate song and dance. So I think JV, at least in a— on a regional basis, if we can have some, I would say, harmony in terms of—

Peter Harbison:Some?

Zhihang Chi:Harmony.

Peter Harbison:Harmony, yeah.

Zhihang Chi:I think it will be helpful. Today we compete. We compete intensely.

Peter Harbison:Yes.

Zhihang Chi:And the number one thing we compete on is we all want to grab corporate traffic. Number 2, we all want the transpacific routes, and you provide flow for me. And it goes both ways. And I think in a more harmonized way, that kind of behavior probably will be mitigated. although it will probably not completely go away.

Peter Harbison:But you've got to— basically, though, you've got to be pragmatic in your partnerships. I mean, we're talking about partners outside the Star Alliance.

Rosemary Vassiliadis:Very, very.

Zhihang Chi:Yeah, we work with— you know, we strictly obey Star Alliance rules. There's no question about it. And we love our friends at United. When we see each other, we always have a great time. On the other hand, we do run businesses, and so we need to do— we need to drive benefits foremost for our shareholders, so.

Peter Harbison:Rosemary, you'll excuse me if I skip you this one, but Ian, I mean, looking at it particularly from a distribution point of view, partnerships are an interesting concept. In terms of compatibility in the process. But obviously, in terms of going back to the point we were talking about before, the understanding of the point that the home market, the ability to use your local partner to help you penetrate the market. I mean, how— what's the role of distribution in that process? And how do partners handle that sort of issue?

Tadashi Matsushida:I'm—

Peter Harbison:Given that they're competitors. Of course.

Ian Heywood:Yeah, they are, but that's where you get down to codeshare and interline, and the, and the distribution systems are all built around facilitating that. And, you know, that's why everyone is keen to get into a codeshare or an interline agreement, because then on the distribution systems, you know, you put in 2 points and, and up come the, the carriers as if it was one carrier. So they are The distribution systems are absolutely designed to deal with that situation, which is why, you know, you're having a network at either end of the hub is absolutely crucial. The thing that I think is interesting is we've been talking about the growth in Asia and the lack of growth from the American side. And so there's likely to be more and more Asian carriers wanting to come in. They've got the growth in the aircraft orders. I'm not sure how interested or even able the American carriers will be to match that growth. So then do you end up with a situation different but similar to what you've got with the Gulf carriers? That the American carriers then feel threatened, and then do they, like, withdraw their network on the back as a protectionist mechanism? I don't know, but you can see that happening unless the American carriers can move into a more productive way forward. Now, you've already got the basis of that starting with some of the joint ventures and in-rise joint ventures. with Japan. But I think unless you can move forward in that, in that productive way, then the American carriers could be threatened by the amount of volume that's going to be coming in.

Peter Harbison:I made a big point in my presentation about the— I mean, we've all talked about partners, but all the partners we've talked about pretty much have been— well, not all of them— have been pretty much the other full-service carriers, particularly parts of Alliance. I made a big point about the the growth of low-cost carriers and how carriers like Jetstar are doing code-sharing, interlining with 30-odd carriers. I mean, that obviously is a complex one for US airlines to get involved in Asia, but from my point of view, and I don't know if you agree with it, it would seem to me something inevitable if you really want to penetrate the market, if you go across those boundaries from full-service carriers.

Ian Heywood:And that's happening more and more, and we as a technology company and our competitors, we're having to learn to deal with that and to bring in those connections into line codeshares, at least transfers. And the airports are working in, in Asia as well to facilitate those, those transfers. And that's something that you can see happening. And I'm not sure that there's the opportunity in the US to— for an Asian carrier to come in and then partner with the, the big 3 without the big 3. Whereas in Asia, you can see the American carriers being able to go into Asia and partner without the traditional, you know, flagship carriers and work with low-cost. There's a lot more carriers to work with to give you that network. So if you do want to go into a lot more detailed work, doesn't it, with Yeah, there is, there is, but it could enable you to break away from your partnerships and then really compete on the Pacific with you still having a network at the end and taking away the network for the Asian carriers in the US.

Hou Wei:Yeah.

Peter Harbison:What I'd like to do now, I'd like actually to, to do one question if we could. The question is, will US airlines need to ignore the traditional alliances if they want to forge successful partnerships in Asia? And you've got a simple question there. No, they should rely— or simple answers. No, they should rely on their tested and longer-standing partners, or yes, because there'll be many new entrants and you've really got to be very pragmatic if you want to exploit those markets. How do we go with that? No, they should rely, 25%. So the majority is pragmatism so far. It's steady— yeah, I'll finish this first. Seems to be very strongly the vote is for pragmatism, which is interesting when you come from the perspective of the global alliances particularly. And as I say, we do have a lot of airlines in here. They're the ones who are voting, but even if they're not, I think the preponderance is that the traditional alliances perhaps will not be quite as strong. And I've actually used quite a strong word there, ignore the traditional alliances. So I presume that actually does incorporate that a bit. So yeah, we're looking at basically 3 to 1 in terms of pragmatism in partnerships. Is that how you'd see it?

Zhihang Chi:But I don't understand, Peter, why these two are exclusive of each other. You can do both.

Peter Harbison:You do— you will do both, but I think probably if you'd asked the question 5 years ago, it would have been very much along the straight line. We have our partnerships and we want to follow those, and we don't— we're not going to be— we're not going to go outside our marriage, in other words. Because, but I mean, just sitting here, we do have this potential conflict between you 2 guys in terms of a joint venture with United, don't we? I mean, obviously, JAL services a bit of Chinese traffic, but you are really competitors in a wider Asian market than just a Chinese or Japanese market, aren't you? Well, just on that, I mean, what sort of timeframe would you see Air China moving towards a JV with United. Is that something on the— I mean, we know issues like open skies have to be in place, or—

Zhihang Chi:So you want, you want me to tell you the biggest secret?

Peter Harbison:Yeah, please. I mean, no one here is going to say anything about it, I'm sure.

Zhihang Chi:We have some government people here, obviously, for, for JVs to be formed between US and Chinese carriers. Obviously, there needs to be some serious discussion on open skies.

Peter Harbison:Yeah.

Zhihang Chi:And which is basically a prerequisite of any JV so far. That's the US policy. Now, of course, there are going to be business needs, you know, to, to, to drive that. And obviously, we all say that government policy is relatively independent of enterprises' needs. Mm-hmm. But there does need to be, first of all, in my opinion, some serious discussions on open skies. I think it is becoming— it used to be a very theoretical question. Now I think it is actually a very practical issue because if you look at the US and China, we are bumping frequently against the frequency cap on both sides, but more so on the Chinese side.

Peter Harbison:Mm-hmm. But it was China who didn't want open skies, of course, and still doesn't.

Zhihang Chi:I'm sorry?

Peter Harbison:But it was China who didn't want open skies.

Zhihang Chi:Well, I wouldn't comment on that.

Peter Harbison:But now you do. You wouldn't comment on that either?

Zhihang Chi:No.

Peter Harbison:Oh, okay. Would you like to comment on that?

Zhihang Chi:Well, I will say we do need more frequencies. That I will say.

Hou Wei:Talking about JV, I think you have to keep in mind that China's domestic market is still regulated. So in my view, we strongly oppose any JV with major, you know, US carriers from any of the major Chinese carriers, because how can you balance antitrust? Because, you know, it's, it's, it's a very Different scenario in China. Who knows who has the final say in terms of antitrust immunity? It's not CAAC. It's not it's not Department of Transportation. It's NDRC, which has no clue about what's going on in aviation society. So this is something we have with due respect. We I have a different view versus China. I think if the domestic market is still regulated, there's no background for, you know, JV with the major carrier. That gives supranational access to foreign carriers to have the domestic traffic rights.

Peter Harbison:So how do you feel, for example, about Delta buying into China Eastern?

Hou Wei:Well, that's a minority share. That's from the open market. Yeah, I think this is absolutely legitimate.

Peter Harbison:You're one of the sort of— as an independent operator, you're one of the more sort of innovative in terms of particularly cross-border equity acquisitions. I mean, how did we— Matsushita-san mentioned consolidation. How do you, how do you see the potential, sort of going out maybe 10 years in Asia, for some form of consolidation or more equity shares, large equity shares between Asian carriers?

Hou Wei:Between Asian carriers? Oh, I hope that one day the top 3 carriers in China will become only 1 or 2. That makes us automatically number 2 or 3 in China.

Peter Harbison:I like that. That's, that's good logic. Thank you. Good. Thank you.

Hou Wei:But they have to release some slots to balance, you know.

Peter Harbison:Well, yeah, I mean, that's a big issue on your end, isn't it? So, but the issue on the US end, of course, is you're also banging up against the ceiling, aren't you, in terms of capacity, you know, the number of services you can add. So there is something, something's got to give fairly soon. This slots issue obviously is a major one, and it's not just in China, it's throughout Asia with the sort of growth we've been having, obviously.

Zhihang Chi:All the slots issues are going to be gone when the second big, when the second new airport opens in a couple of years in Beijing.

Peter Harbison:So how long?

Zhihang Chi:2 years, 3 years.

Peter Harbison:It's a long time to wait.

Zhihang Chi:They do it fast in China.

Peter Harbison:By the way, the result of that last vote, when everybody had voted, was 71 to 29, so we're about 3 to 1. Well, US airlines ignore traditional alliances, so that's an interesting development, I think. There is another question I want to put up for everyone to ask— to answer, but I'll first ask the question around the panel, and that is, can US airlines hope to penetrate Asian distribution markets. This is a really interesting one, I think, you know, on a lot of levels. It's not just about the GDSs, but it's actually how can you get point of sale in Asia as an American carrier. Ian, I might start with you. I mean, just not taking your Travelport hat off.

Ian Heywood:Well, I was going to say I can, because I used to do that. That was my role with BA. So the answer is yes, of course it can be done, but it needs a lot of work. It perhaps needs partnerships. You most probably need to use GSA, general sales agents, in some of the countries in particular. You need to put a lot of effort in there. A lot of the airlines, particularly with China, base a senior person in China just doing the politicking, and then Technology is helping, helping. So just back with my Travelport hat on, you know, you've now got rich content available where you can now tell the, the agents, you know, about your product, which is very, very hard. So an American airline in Asia trying to tell the agents who may sell, you know, one of their sectors a week, you know, what their product is is that's one of your biggest challenges. And technology is helping there now. So that is moving, making that, you know, easier to, you know, make people informed. Because again, you know, you're talking— But what's—

Peter Harbison:can I go beyond this? We're talking social media as being a really important medium. How do you get to that?

Ian Heywood:Well, you need to again work locally with, you know, the companies, and there's loads of companies that are social media experts, but in China, I mean, I don't think you can operate in business without using social media these days. That is absolutely vital to do business there, and it is so huge. So you've got to go with, you know, what are the trends, but you've also got to go with what's the culture. And, and an Asian travel agent will often feel very reluctant to sell your service if they don't know what they're selling to the person they're selling it to. A lot different than, say, an American travel agent who's just there, you know, trying to get the booking and perhaps not worrying so much about the customer service. You know, in Asia, they will be very, very worried about that personalization. So the more you can tell them about your product, the more you can get familiar with it, the the easier it is to get that wide agency base selling for you. But you've— yeah, you've got to—

Hou Wei:you—

Ian Heywood:that's what I said about your presentation. You had it spot on. You can't believe that you can operate the way that you do in America in Asia. It's a completely different market for loads of the reasons that you've said. And so you've got to, you know, work hard at it, work with the culture, But can the American carriers do it? Of course they can, but they are also going to have to tweak their brand, and they may have to have a product that is a completely different one than they have on the rest of the world and have a Pacific product out there that is designed for the Asian market. And I believe it's going to become such an important market that that could be worthwhile doing.

Peter Harbison:Rosemary, really out of left field, but is there anything that airports can do to stimulate traffic at the other end? I mean, I know one or two airports are doing it in terms of airport partnerships, but I mean, is it something that you've looked at, trying to get— in other words, get behind the airline and actually stimulate the markets?

Rosemary Vassiliadis:Yeah, well, as a destination city and airport, we have a different perspective.

Peter Harbison:You've got a bit of an advantage there, don't you? Yeah.

Rosemary Vassiliadis:So, you know, can American airlines work in Asia? Sure they can. We hope not because we know as a destination— and not to be controversial, but as a destination city, the big 3, the big American 3, they'll never fly point-to-point to Las Vegas from any international because they're going to go into their fortress hubs. That's how their systems are set up. We can't even expect them not to do that. So—

Peter Harbison:Even with the new aircraft coming that actually do allow— I mean, they're—

Rosemary Vassiliadis:Well, look at how their systems are set up. You know, look at what my colleague just said. They're going to fly into their hubs so then they can disperse from there. Well, when that happens for a destination such as, you know, Las Vegas, Orlando, San Diego, you know, that's 2 or 3 stops. And that's not something that's attractive.

Peter Harbison:Yeah, but I made the point in my presentation, and it wasn't my point, it was a point that I've seen a lot, that passengers really do prefer point-to-point, and you'll actually drive a lot more traffic if you can operate that point-to-point profitably.

Rosemary Vassiliadis:And that's something that Open Skies helps a whole lot with. You know, we've been a very beneficiary of that as well. We've had over 20 airlines take advantage of that. We're vigorously working on it currently as we speak, you know, but the other thing my partner here said on the panel is that the large airlines can operate both, and that is true. And so that's our part of it, knowing that a system and a fleet can accommodate those type of point-to-point as well as the fortress hubs depending on the type of passengers is something that we look at and study.

Tadashi Matsushida:Yeah.

Rosemary Vassiliadis:And we go— we try not to go with a package that's not realistic. We go with a package that can work in their system. And in our case, you know, it's the Southwest region of the United States.

Peter Harbison:Yeah, yeah. I'm going to put this last question up. Can US airlines hope to penetrate Asian distribution markets? And you've got a little bit more complex answers in this one. No, don't even try to bother because it's too hard. Just focus on US-originating traffic. It's high yielding. You don't have to worry about point of sale. You don't have to worry about currency. Secondly, yes, Asian distribution markets are no different from any other international market. Or thirdly, yes, you can hope to penetrate them, but it's going to be hard. I think I might have known the answer to that. that one, but it seems that most people agree with, with me. Is this— I mean, just in a vote on the panel, is that pretty much the way you'd see it? Yes, they can penetrate the markets, but it's going to be tough.

Zhihang Chi:Yeah.

Peter Harbison:Yeah, go ahead.

Tadashi Matsushida:Okay, from our experience, so what we, what we are learning from Asia market is I was actually having a conversation with my colleague who is based in Singapore, and he was saying that because of the emergence of LCCs, budget airlines, and you talked about passengers, 6 out of 10 are now served by budget airlines, so people are getting used to buy tickets on-site, so web-based purchase.

Peter Harbison:Mm-hmm.

Tadashi Matsushida:So that's actually affecting the traditional carriers like us as well. So people are getting into our website and buying. So I'm not— we're not— I'm not saying that we're undermining the importance of travel agency, but there might be a jump in Asia because of the budget airline, people's behavior is a little different because the budget airlines have given them the experience.

Peter Harbison:Yes, educated them in the process.

Tadashi Matsushida:They actually learn from purchasing tickets on the website. Yeah, easy and, you know, very convenient way of purchasing tickets.

Peter Harbison:That's the other important— sorry to interrupt. I think the other important ingredient there too is Is a belief that if I do go direct, I'm not going to be ripped off. Because I think 10 years ago, if you went direct to an airline's website, particularly in Asia, you were going to be paying far more than anybody else was.

Tadashi Matsushida:Yeah, yeah.

Peter Harbison:And now I think it's more transparent, isn't it?

Tadashi Matsushida:And transparent because of internet, I think. They can— the passenger, as we all know, passengers can— customers can check the price in advance. And make decision. So it's very easy. Of course, it depends on the countries. Where there's less penetration of the internet, it's very hard. So we still rely on travel agencies. But countries like Singapore, Thailand, or China, or those countries are different. And what I want to say is, say is customers' behavior is a little different from what, what we've seen in the developed nations.

Peter Harbison:And changing.

Tadashi Matsushida:Changing.

Peter Harbison:Yeah, we're running a bit over time, but just—

Zhihang Chi:Again, object to your survey. I think you should have an entry there that says somewhat different, but, but, you know, not that different.

Peter Harbison:So he's looking at the answers to the question. Here we go. So what would you have added to that?

Zhihang Chi:I think, I think US airlines have a very good chance of penetrating the Asian market, especially in the case of—

Peter Harbison:So you're with the 18% though?

Zhihang Chi:I'm sorry?

Peter Harbison:So yes?

Zhihang Chi:Well, it will be not much more difficult. I mean, it's, it's, it's somewhat different from the US, but then, but then, well, the point is today it's China is probably a lot more mobile than the US. Everything is internet-based, and you know, you don't need real estate on the ground. Number one, you don't need terminals, GDS terminals. Number two, you don't need a lot of warm bodies as you used to. So it's more technology-driven. even, it's more mobile. If you can publish an app there and then your app works well and then, you know, payment is not a problem, I mean, I don't see why they cannot penetrate China, you know, the China market.

Peter Harbison:This is actually a full day's discussion, isn't it? I'd love to do this, but we're going to have to finish.

John Jackson:And—

Peter Harbison:Yeah, go ahead.

Zhihang Chi:Can I finish? Just like, you know, Ross Perot said, can I finish? And then it's easier to partner with local distributors as well today. You know, again, in the old days, you have to have real estate on the ground. Today, you know, it's— if you can link your system very, very well with guys like Ctrip and whatnot. In fact, SeaTrip has a partnership with Expedia anyway, so you see that happening already.

Peter Harbison:How much do you sell on your website internationally?

Zhihang Chi:Internationally, I think it's a fast-growing component of our business, very fast-growing. Direct on your own website? In the US, yes, and in China as well, both.

John Jackson:Peter, if I could just mention one quick thing. I think you could turn the question You know, you can throw the question around and say, you know, can Asian airlines hope to penetrate U.S. distribution markets? And, you know, we've shown it can be done. And I think the simple answer, maybe at risk of making it too simple, goes back to what you said in your opening remarks. And the important thing is to get somebody local who knows the market and who can translate the home market into that market.

Zhihang Chi:Yeah.

Ian Heywood:The home listens.

John Jackson:Yeah.

Ian Heywood:And that is a big issue. You know, the US have got to listen to their people in the field.

Peter Harbison:Well, that's the autonomy that you need. Yeah. OK, look, as I say, I'd love to go on with this all day, and I'm sure people would like to have some coffee as well. It's been quite a long morning so far. Thank you very much, panel, for a really interesting discussion. And thank you for your participation too.

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