Overview of LCC development in different global markets

Transcript

Peter Harbison:Welcome to Singapore. Welcome to our— actually, what is actually our first global low-cost airline conference. Funnily enough, it's almost to the day 14 years since we did our first low-cost airline conference here in Singapore. Not at the CAPA Centre for Aviation, But 14 years and things have changed a bit. You might have noticed. The world— it was the first one in the world, this conference, and it was at a time when there were a lot of doubters. In fact, most people really didn't believe that low-cost airlines had a place in this market because Asians don't like to travel on low-cost carriers. And also because it was international, it was too difficult. Anyway, it's pretty hard to know what to say about low-cost airlines anymore because so much has been said and obviously most of you here are experts in the business. So what I've done is to sort of try and look at some of the general aspects of what's been happening over this 14 years that we've been tracking the market. And I should say we were very much, as CAPA, we were very much on the outer. We were very much chastised, particularly by the full-service carriers, for even thinking that there could be low-cost carriers in the market. And at our first conference, many of you here will remember Doc Chong, who was then CEO of Singapore Airlines. And he came along and he made a passion statement from the floor holding the microphone. I can still see him now. standing in front of me and saying— running through the reasons why low-cost airlines wouldn't work in this region. Well, obviously they have worked, and a lot of things have happened in that 14 years to evolve the way they do operate. So you might find this a bit odd, this title, but in a lot of ways these are some of the things we're going to be talking about over the next 2 days. Just how to a large extent what's happening in the low-cost airline industry is mimicking what's happened in the full-service carrier industry because basically what we're talking about is responding to consumer needs. Arguably low-cost carriers responded to one particular aspect of it very effectively and that was the price. But as the market evolves there are other aspects and accessibility. You obviously— it's a point-to-point operation. You obviously cannot serve every point in the world just on a point-to-point basis. So recreating the network system is part of what this development is, and I've called it Phase 3. Before I start, just a quick word about fuel prices. Obviously, this is a very important part, particularly for low-cost carriers, of the input costs of And because of low-cost carriers, lower costs overall, obviously the sensitivity to higher fuel prices is very important. So we've seen quite significant fuel price increases over the last few months. And over the last 5 years— that's not 2913, it's actually 2013, for those of you who might have spotted it— That's a good one. I just show that to show where we came from and nobody predicted that spike. Nobody's predicting a spike anymore but it is a risk and it's always out there. So, and we've seen with the reporting just recently, particularly in Australia, of the full-service carriers, what it's done to their results and what the impact is of successful hedging or not. And so, but I mean hedging is only a temporary thing anyway so you can't sort of protect the future in that way. Okay, let's— so let's go through this basic point I was talking about. Low-cost carriers are still quite young. They totally disrupted the way the airline system worked and the way not just low-cost carriers but all airlines think about serving the public. Operated point-to-point because that was the cheapest way of operating. And as I said, you cannot link every city pair in the world by point-to-point. So there's a natural— maybe it's not a natural, but there seems to have been a natural movement towards getting some sort of connectivity to feed routes. And that obviously became much more potent, much more important once low-cost carriers started going long-haul because feeding into long-haul routes with some sort of connectivity became very important. But they're costly, they're complex, and different ways had to be found. So just essentially here the basics of the low-cost carrier, why it was particularly different, and importantly the ancillary stream, which instead of actually incorporating that in your costs and not charging a additional amounts for it. Interestingly, account— ancillaries now account for almost all of the billions of dollars of profit that the big 3 airlines in the US have made. If you take away baggage charges and booking changes from the profits of Delta, American, and United, you're left with almost zero. And that's a massive flip-flop in the way not just low-cost carriers work but legacy airlines as well. But what happened with low-cost carriers was, of course, it took a long time for the full-service carriers to be able to respond, and that opened up a gate, a floodgate, which was never closed. I just wanted— this is the low-cost carrier fleet in 1988, just a few little dots scattered around. US, obviously. which was almost exclusively Southwest, was the biggest of them. And if we fast forward to 2018, it's almost like a disease scattered right throughout the world. And the US is probably a little bit sort of, in terms of including the largest airline and the domestic airline in the world, Southwest, which has, I think, about 700 or 800 aircraft. And If you take that away, it's not actually— hasn't actually grown that much. But what's important is Europe particularly and Asia more recently, how the growth has occurred there. And increasingly now in South America, Latin America, where changes are occurring. Just looking at the domestic and international market shares by region for some sort of comparison. Europe's a bit difficult to count because obviously you've got international markets, but with the European Union it operates as a domestic operation. So, but internationally to and from Europe, it's actually relatively low as a market share. India today is probably the highest in terms of domestic, still pretty low internationally, but that's going to change, believe me. Southeast Asia Grew to about 2/3 and again, it's a little bit hard sort of defining just what is domestic and what is international. A large part of that domestic there, of course, is Indonesia where massive changes have been wrought in the last dozen years or so. Philippines, again, very high level of low-cost domestic operation. Internationally, the highest in the world, and Australia too, which has sort of varied because we had Virgin which became a full-service carrier. So it was actually quite a lot higher than that domestically. But overall, globally, about 30% of all domestic operations are on low-cost carriers. Internationally, just above, just into double figures. So Phase 2 came along. We saw basic forms of networking, hybridisation, which is part of that process. In Asia, because of the international marketplace, there had to be— to get operating efficiencies and to get access to foreign markets, the cross-border joint ventures which were led very strongly by AirAsia. Tony Fernandes, in a much smaller suit than the one he was wearing last week, was actually at our first conference and very much the proponent of what was happening. And he's the one probably through AirAsia who's changed the system in this region more than anybody. And those cross-border joint ventures have been very, very important in that process. And they quickly found, particularly once they got to AirAsia X, that people were self-connecting very quickly over KL where they had a sometimes controversial low-cost terminal which then moved to an even more controversial bigger low-cost terminal. But passengers were self-connecting. This was happening naturally. It's happened not just in, not just in Asia. Happening in Europe as well. In some cases with support from the airports themselves who saw benefits in making it easier for low-cost carriers to connect. Long-haul was probably the biggest change and I think is really going to start transforming the way the international market works. Arguably, of course, the Gulf carriers are long-haul low-cost carriers, particularly Emirates. They've devised a scheme where they really are aggressively low-cost but in a full-service garb. And then we've seen the addition of premium seating in a lot of low-cost carriers, a way of stimulating a bit of growth in the yield profile. And then more recently, just taking that logical extension, to marketing, to business travel, as well as to corporates. And that is, in other words, in a lot of ways mimicking the characteristics of the full-service carriers, who in turn have done a lot to mimic the LCCs themselves. I've just taken 3 groups here: AirAsia, Jetstar, and Norwegian. If you look at the top there, You can see the date turning over and this is where the growth's occurring just as we sort of see these 3 groups gradually getting bigger and you notice it particularly in this region with the AirAsia and Jetstar groups. But Norwegian is probably, in terms of international expansion, been the strongest. So we've got quite a significant group of airlines which are established in more than one country through various types of ownership model. Sorry, clicking on. How did the full-service carriers respond? Well, the smarter ones fairly quickly by establishing low-cost subsidiaries. They realised that they couldn't compete in the back of the aircraft effectively. One or two airlines still have stayed with that old position. Notably in the US where the airlines have really been able, for various reasons, to resist having subsidiaries. But elsewhere— and I'm going to quickly flash through a number of the full-service airlines who do have low-cost carrier short-haul and long-haul subsidiaries. Yeah. Just to emphasise the fact that this is a real, very widespread response by the full-service carriers. This now is starting to change too because as long as you had long-haul— low-cost carriers operating only in short-haul markets, the network carriers obviously were affected on those short-haul routes because they were being undercut on price. This translated to making it harder to get the sort of frequency they wanted to feed their hubs on the short-haul sectors because— and that was a negative. And in Europe, of course, you've got constant talk about whether, for example, Ryanair will substitute for Lufthansa's feed. But the long-haul carriers, the full-service carriers, could pretty much tolerate that because they dominated long-haul. So the big thing that's changed in the last 2 or 3 years is the advent of serious long-haul aircraft operations, helped a lot by aircraft types and smaller aircraft types which are able to fly long distances. So we're at the next stage now where the full-service carriers have really had to respond much more aggressively. To give you one example, I was at a conference a couple of years ago in Germany with one of the senior strategic people on— of Lufthansa on my panel, and we had a bet there that Lufthansa would one day have a long-haul low-cost model. He fervently denied that that would ever occur, and that's had to change. It's really interesting how even though they might not be very good or very low-cost long-haul models, They've had to adapt and arguably this is the way of the future. So just running through, a definition of a long-haul low-cost carrier of course is, is a difficult one. But what the, the sort of official definition is anything over 4,000 kilometres. And a lot of carriers do have perhaps one service over 4,000 kilometres. So I've highlighted there the ones who've got more than 10 services that fall into that category, and they're all pretty well known to you. Even though Lion Air, perhaps you wouldn't really have thought of as a long-haul low-cost carrier, has got 30— in its group has got 36 routes that qualify on that basis. So they're spreading, and they're spreading geographically as well. Norwegian has done a lot, obviously, to spread that in the North Atlantic region. But this is how over that 10 years the thickening of international routes has occurred on long-haul markets. And it's actually probably a fair bit thicker than you would have expected, in fact. It's gone from— in domestic 55% growth. The numbers are there at the bottom. International long-haul low-cost has gone up almost tenfold. Still fairly small proportion of global traffic, about 10%, but of global long-haul traffic, but it's a significant increase and it's a continuing increase. So just running quickly through it, what I'll dwell on this one just to to show you what's in these slides. So this is China Southern and the yellow bars are relatively low-cost airlines one way or another and long-haul and short-haul ticked in here and the number of aircraft they've got. So it's just a sort of accounting. As I said before, the point of putting these up is just to show how widespread The full-service carriers with subsidiaries are Taiwan, Japan— sorry, just back on that. I put all the airlines in the group, but the ones which are low-cost in one form or another are actually highlighted in gold, the golden ones. Air India, Garuda. These are all different. They've all come from different reasons, but the fact is they're all there and they're all a necessary— seen as a necessary part now of a full-service carrier segmentation in response to various segments of the market. In Australia, of course, Jetstar was the first really of this type of model. And the Qantas Jetstar group, the dual brand, has worked very, very effectively. Aeroflot just recently had its probida last year. Air France has made a few— and again, it's interesting to delve into some of the history on these airlines, but obviously Air France has really suffered from the fact that its unions are very, very reluctant to allow it to embark on any new course. So, Dune, for example, which is a, quote, lower-cost full-service operation, is part of that compromise process. And it— I think Jetstar showed pretty effectively that unless you have a total segregation between the full-service airline's operations and the low-cost one, even though you need to have some sort of coordination at some stage, each of the airlines should be allowed to operate separately. That's evolved over the years, but if you just have secondments and operating out of the same office headquarters, that sort of thing, it just ain't going to work. You all know that. Lufthansa, I mentioned that case before. A flurry of low-cost carriers really. Some of them were pre-existing and again of different natures. I'd argue probably they don't have an effective long-haul low-cost carrier at this stage, but they're going in that direction. IAG probably has the low-cost handle better than most. With Vueling as part of its group now, the new long-haul low-cost level actually gives it quite an advantage. And Iberia Express, again, a different sort of low-cost model in the group, feeding into its hub in Madrid. Even Air Canada has been able over the years to persuade its unions to establish Air Canada Rouge, and it started as a long-haul low-cost carrier. It started fairly cautiously and is now really starting to spread its wings with 50 aircraft in service. and really making a mark on the Atlantic particularly. There are a couple more in South America that I haven't really included in there, but it is coming. Okay, so what are the future moves? Are we going to see alliances? Are we going to join the dots with these groups that I was showing? Long-haul narrowbody, which is probably one of the more fascinating new arrivals, which opens up so many new city pairs, the A320neoLRs which are starting to come into the market next year and beyond, will really, I think, once they get— have large numbers there, start to make a major difference. What's happening? Expansion, diversification, more networking, more network operations, more ways of being able to hub, continued hybridisation, And major new expansion. The US has been a laggard really in low-cost airlines since it created the granddaddy of them all in Southwest. So alliances, yep, we've got 2 in this region. Will there be more? We've got 1 or 2 people in the audience who know very much, who know a lot about these. Interesting. It'd be interesting to explore a little bit just how effective they have been. over the very short period they've been in existence, just 2 years. Joining the dots. Well, I go back to this slide. There are a lot of dots to join as we go through the years and you see gradually as we get to the sort of latter part of the first decade of this century how many dots there are joinable, the orange ones being Jetstar and redder ones being AirAsia. And there are other groups obviously. I've just picked some of the bigger ones here. One of, one of the indicators of course of where the future is, is aircraft orders, assuming that these are going to come through. Fairly aggressive and if I talk of other groups, Indigo for example out of India will become I think that sort of group as we proceed with about 500 aircraft on order. And Lion Air down in Indonesia, which is not— I haven't mentioned much here because it's not a full-service carrier with low-cost carrier subsidiaries. It's the other way around with Batik particularly starting to look very aggressive and particularly in the area of long-haul narrow-body operations. Talking of which, this is just the level of the pink ones. The pink bar of aircraft orders is full-service carriers. The green or greeny-blue is narrowbody. And you can see from that that 56% of all the narrowbodies orders are on low-cost carriers, whereas the next bar across you've got a very different picture when it comes to full— to long-haul, mainly because the right aircraft haven't been there. That is going to change very dramatically, and that's just a summary broken down by, on the left there, Airbus, and then on the right, Boeing. And you do see the preponderance there of the A320 model in terms of preferences by low-cost carriers as opposed to full-service carriers. These are the long-haul narrow-body aircraft on order. And what is a long-haul narrow-body aircraft? Well, arguably there are a couple of hundred in service at the moment, but the really long haul is starting to arrive. Most of those orders, as you see from that, the gold part of the doughnut, from low-cost carriers. And that again, I think, just entrenches that point I was making before, that the future is going to be with long-haul and short-haul low-cost carriers expanding too into the network process. And this is just the— that particular brand which has only got 54 on order at the moment and Interestingly in this too, a little higher proportion of the orders are from full-service carriers. It's almost 50/50, a little bit less than 50/50. Who's got them? Just the orders down here. These are from our fleet database and it's reasonably accurate, I think. Many of you use it. And so what's going to happen next? Well, I think I've sort of given my thoughts about what's going to happen next, but obviously the ones to watch are the carriers who haven't really spread their wings greatly outside their own countries. Lion and IndiGo in this region, necessarily. What's going to happen with Norwegian expanding its wings fairly quickly and perhaps too quickly, as some might suggest. Latin America, very interesting market. Which is very much underdone. So, for example, Norwegian has just established a low-cost subsidiary in Buenos Aires, in Argentina, and that is starting to spread across the region. Bill Franke, who many of you have seen at our conferences in the past, just put in a fairly substantial order in the mid-400s of aircraft for his range of low-cost carriers and He's very much involved and interested in moving into Latin America. Chile particularly because some of the other regimes are not so easy. But that said, there is a lot of upside in Latin America. Who knows what's going to happen in the US? It's been a very sort of stable market for the last few years and not a lot of innovation, creativity. A couple of ULCCs and some variations with JetBlue, for example, going much more along the trend chain of mimicking full-service carriers but a lower cost basis with their mint product and that sort of thing.

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