Setting The Global Benchmark For Airline Business Models, Partnerships And Alliances

Transcript

Minna Monaghan:So, good afternoon, everybody. We're talking airline business models, partnerships, and alliances today with a very esteemed panel of gentlemen here. So, gentlemen, global alliances, tailored Partnerships. We've got today, we've got all the big airlines, legacy airlines who mainly belong in global alliances. We have your low-cost carriers, short-haul, long-haul, everything. And we've got LCCs now starting to make their— form their alliances. We've got Ufly, we've got Value Alliance.

Peter Bellew:Where?

Minna Monaghan:Are we going to? Who is— what's the right proposition? And is there one? I suppose, Peter, do you want to start?

Peter Bellew:Yeah, I think that the legacy carriers, that there's maybe a re-emphasis at the moment and everybody's reevaluating the alliances that they're in. But notwithstanding the fact, the IT enabling technologies are there now actually to make So in the case of Oneworld, there's a lot of work taking place behind the scenes with the different carriers to actually glue each other together much, much better from an IT perspective. Everybody had a lot of different systems, everybody had a lot of different backends, but actually with the cloud technologies, the enablement is much easier to get everybody to work together quite closely. So I think you'll see that happening. I think also the mobile device, the mobile app, is becoming much more important. will actually make everybody reduce down to the lowest common denominator and actually will make it much easier for the alliances to manage the customers and the customer relationship as they migrate from one carrier to the next. So I think there's a great future in the alliances. With the low-cost carriers, I'm not so sure because you get intrinsic problems with transferring bags.

Minna Monaghan:Mm-hmm.

Peter Bellew:And that, that's actually really, really difficult to solve. And it's not that easy to solve it because you get into the whole liability of if you're delayed, who picks up the cost and all of that. So I think that, that's quite difficult. I think the one area that we will see growing much quicker actually is the ultra, ultra low-cost carriers.

Minna Monaghan:Mm-hmm.

Peter Bellew:We haven't got one in Australia at the moment. I suspect there's probably a couple of kids in Sydney dorm of a university right now, looking at the 2 legacy carriers, Virgin and Qantas, and plotting and scheming some devious plan to set up a 3rd carrier, an ultra-low-cost carrier. That model generally does work very well everywhere in the world that it's been tested. I don't mean, you know, I'm talking real bare bones, you know, charging you for absolutely everything. And starting out with a bootstrapping mentality. And actually, some of those guys probably will have alliances with each other because they're coming with fresh thinking and they don't have any legacy systems at all. Some of them may not even end up having legacy GDS systems or traditional systems as we know. Because if you're point-to-point, for a lot of programmers out there, it wouldn't be that difficult to write a system.

Minna Monaghan:How is that different to, say, Tiger or Jetstar at the moment with Without the connectivity?

Peter Bellew:Tiger Jetstar are lowish, lower, or lowish cost operators of legacy carriers. They don't come anywhere near the cost base of a Ryanair or an AirAsia, and it is possible to go lower than that again.

Minna Monaghan:Yeah. So Barry, what's your take on this?

Barry Parsons:Well, I certainly agree with Peter that alliances are not dead. And there's still great value and more to come out of alliances than people understand now. But I think the days of just relying on alliance, they're long past for most. I think the exciting thing is there's so many other options out there now. I think for a legacy carrier, alliance membership is still key, but then you've got the big players inside the alliances, like say Star with Atlantic++, where You know, the big guys carve up the premium traffic, perhaps to the detriment of the smaller guys. The lesser members of the alliances have to be awake to that. Then there's joint ventures with antitrust immunity inside alliances, typically. Then you've got dual brand, multi-brand, Lufthansa.

Minna Monaghan:Mm-hmm.

Barry Parsons:Then you've got a sort of a maverick alliance, a maverick model that builds Builds return on capital from the productive assets, like JetBlue, who have gone from, say, I think, 3 partners in 2009 to 48 partners. And that's very appealing, because from an investor's point of view, the actual capital invested is not greatly increased to drive the increase in yield.

Minna Monaghan:Mm-hmm.

Barry Parsons:That delivers a tremendous boost to return on capital. So they've gone from— and there's a lot of other things going on across that that period of, say, 7 or 8 years, but the return on invested capital's gone from just over 3% with 3 partners to around 16% with 48 partners. Now, as I say, there's a lot going on, but from an investor's point of view, that's a very sexy model.

Peter Bellew:Yes.

Barry Parsons:So the answer is alliance, ATI JVs, A hybrid, alliances with low-cost, all of the above, whatever you need to do, and it is very market-specific. So not all airlines find themselves in the same position geographically, and not all find themselves in the same issue competitively. There might be a very strong state-owned but irrational competitor nearby. There might be— you might be in a very open market. You might have China next door. So it all depends on a lot of things.

Minna Monaghan:So is it with global alliances, is it that global alliances are more customer-oriented and then your tailored alliances then become a business decision?

Barry Parsons:Yeah.

Minna Monaghan:And global alliances are more for the customer?

Barry Parsons:The big traditional alliances, they're going to have to, as Peter said, they're going to have to become much more relative to customers. You've got to get more out of it for the customers. And airlines will make their own decisions on the value of alliance membership. But in my view, for the foreseeable future, the big legacy carriers need to be in those alliances.

Minna Monaghan:So the big legacy carriers are in alliances, but increasingly everybody is making their own tailored alliances outside the global alliances, with the obvious example here, Qantas with Emirates. And more, I suppose, astonishing recently is, say, Lufthansa announcing a codeshare with Etihad after a long period of negative feelings towards Middle Eastern carriers. So what's your read, Peter, on—

Peter Bellew:I think the Lufthansa-Etihad one was a little bit like a pre-engagement party. I think they were probably going to do a massive deal together to do with Air Berlin and everything. That kind of half sort of kind of happened and didn't. So I think that was part of that. Etihad, of the 3 carriers, the one that's really taken the scalpel to the airline. I think they were quite responsible a year ago and they've taken action and then they've opened themselves up to talking to other people. And, you know, there's some change of management there that probably makes that a little bit easier to happen now as well. So I think that is interesting and I think it makes sense, but I'm not sure how full Will they actually get married? I think they might get chicken on the altar. That's my belief on that one.

Peter Harbison:Yeah.

Peter Bellew:But I think what's going to happen to the oil prices, which I do believe fundamentally are going to go much, much lower over the next 10 years— I think we're going to see a period due to the acceleration of renewable energy. I think we're going to see a tailing off in demand for oil. I think we're going to see oil prices at $30, $35 a barrel. That will be very relevant for the Gulf carriers because the oil wealth won't be there that backs some of those carriers. And maybe their relevancy over the next 10 years will not be what it was over the last 10 years. And the disruptive nature of it may slightly recede. And that may help the likes of the legacy carriers as well then to make some headway. And we might get some yield back.

Barry Parsons:OK.

Minna Monaghan:Other Peter, have you got—

Peter Harbison:Yeah, well, just to follow up on the other Peter's last comments, I sort of wonder too when the American airlines are going to get smart and do a deal with one or more of the Gulf carriers. It's one of those things that seems inevitable. But just rewinding to your original question, my view on this whole thing is a lot more radical, and Peter, you will have heard this in Dublin recently. Why do we have partnerships in international aviation? Why do we have global alliances? Because you can't operate from outside your country, basically. You can't have mergers like every other sensible business in the world. And as Steve said, Steve Wathwick said this morning, we're still in the horse and buggy age when it comes to regulation. My belief is that, in fact, that the ownership and control rules which prevent all of this merger activity happening, which is a logical process. There are far too many airlines, it's far too competitive, they're largely unsustainable in the long run unless they've got some sort of protective regulatory support, that there will be mergers. And the mergers will come because of some of the extraneous areas, the whole issue of distribution and sales, marketing and distribution. Once the Amazons and the Googles and the The big, the seriously big players get into the market with their big data, they're going to be going along to airlines and saying, by the way, would you like to buy 500,000, sell me 500,000 seats this year? And then essentially what happens very quickly is they become a vehicle as opposed to a national flag carrier. I think that can happen very quickly because it's going to come from the sales end. And at that stage you see a total undermining of the ownership and control rules and therefore You're actually not going to need partnerships anymore because you'll just go and buy that other airline. But in the short term, yeah, I mean, it's interesting, isn't it, that partnerships have always been necessary in the airline business. And going right back to day one, and IATA used to do it with its whole interline and multilateral interline arrangements, and then we rediscovered them with alliances and networking within the alliances.

Peter Bellew:Yeah.

Peter Harbison:Today it's the bilateral partnerships that's the powerful one. It saved Qantas' life, arguably, with the merger, with the partnership with Emirates. Allowed it basically to focus its attention where it could make money internationally and allowed it to concentrate domestically. Sure, the global alliances are still useful, but look at Qatar in Oneworld and Where does it fit with partnering with the other oneworld carriers? Malaysia, you're a little bit different, I suppose, in that respect. But I mean, Qantas isn't going to partner with Qatar, even though it's an alliance, because it's in a partnership with Emirates. So there's a lot of these specific, these market-specific partnerships are now becoming much more powerful.

Minna Monaghan:Mm-hmm.

Peter Harbison:And they are driving a whole lot of questionable new directions within the alliances. They're having to be very, very pragmatic. Especially when we're talking about Emirates and Etihad rather than Lufthansa, for example, sworn enemies for years.

Minna Monaghan:So one of the news last week was Delta, who already owns 49% of Aeromexico and 49% of Virgin Atlantic and 3.5% of China Eastern, they are now expanding their alliance with Air France-KLM and Alitalia. To include Virgin Atlantic and Air France-KLM are taking a 10% stake in Virgin Atlantic. Is this the new model of global domination, of build your own team and own it?

Peter Harbison:I think Delta would like to think so. I mean, Delta is a very cautious player internationally. It's very comfortable in a big domestic market where it's one of the 3 or 4 big players, and therefore is able to extract very large profits because it's a protected market.

Minna Monaghan:Mm-hm.

Peter Harbison:When it goes internationally, it wants some sort of protection on those different routes that it operates. So the North Atlantic is a perfect example of how the global alliances have come together in sort of more reduced partnerships to protect the major carriers on those transatlantic routes.

Peter Bellew:I think they got a bargain as well. I think they've got so much money they actually probably don't know what to do with it right now. They can't do any more share buybacks really because they have to have liquidity in their share. I think they got a bargain. I think what they paid for it was a fraction of what you would have to pay 10 years ago. And they bought into some very strong brands. KLM is a very well-run company. It's very well operated. I think Air France is very well got operated. I think the key is that they're considerable challenges with their unions. So, and if you look back 30 years, Delta, Northwest, KLM have had an incredibly long relationship with the anchor always being KLM, actually. So, and there's probably a lot that Delta can learn from KLM, who are probably one of the most advanced in the world other than Qantas on the digital side. So the Virgin thing I'm not so sure about, but they've got incredibly valuable slots. I think the Virgin thing is a bit of a Mm-hmm. The value of the slots that they have, Virgin, I think is greater than the value of the company. So I guess that's probably what they're after. So they snapped up Heathrow slots at a bit of a bargain there as well. So it looked— corporate finance, investment bankers, absolute dream deal, I would have thought. And I don't think it took that long to go through either because the Do you think Sir Richard needed a bit of cash? Yeah, yeah. And I think in terms of get out now while the going is good a bit too.

Minna Monaghan:Right. OK, have we got any questions from the audience about alliances in particular? Or we'll move into— we'll get James talking as well. So I suppose, James, I mean, can you give us a bit of an overview of the idea on what the issues are sort of legally for alliances and this whole global—

James Cooper:Yeah, sure. I mean, it's been interesting in this area. If you look historically, civil aviation regulators had taken a more sort of prominent role in terms of these sorts of industry developments. But as we've moved forward through deregulation and and so forth, issues around competition law have certainly come to the fore. One of the difficulties, and one of the major difficulties, has been, and still is, that there is no sort of global set of laws, or indeed a global authority that's able to deal with these proposed arrangements, whether it's alliance or mergers or what have you. So then that in turn creates difficulty both for regulators where there's 2 or more countries involved, and indeed for the carriers in question. Inevitably there's issues around inconsistencies between competing competition law regimes in relation to the countries involved. So there are difficulties and challenges there that need to be factored in. In terms of the lessons that we can take from more recent examples of these sorts of deals, if we look here in Australia, for instance, and indeed in a couple of other major jurisdictions around the world, the assessment of, or authorisation of these sorts of alliance or other partnership arrangements is done on a— A case-by-case basis. Perceived sort of public benefit analysis versus potential detriment flowing from any anti-competitive effects that the deal might have. And that can be a challenging process. It's often a process that's worked through over a lengthy period of time with the relevant regulator. And it's something that I think airlines and indeed others within the industry need to be conscious of that it is a moving feast in terms of that analysis, so to speak. So what might be relevant in terms of a benefit versus detriment analysis at one point in time might change 2, 3, 5 years down the track. So it is very much an approach where you need to be relooking at that and If you've got arrangements coming up for reassessment, for instance, it's not just simply the case that you can look back at what's been done previously and expect that that's going to be sufficient and relevant second time around. The other— one of the other issues we've seen is there are different factors at play depending on what the type of arrangement is, whether it's an alliance, A joint venture merger type arrangement. So again, airlines need to be conscious of those peculiarities with the particular deal that they're working through. If we look at, for instance, what was relevant, or partly what was relevant for the authorisation of Virgin's acquisition of Tiger here, for instance. So, some of those factors were not successful in terms of the Qantas-Emirates alliance, and that had to be sort of approved through different avenues. So that's again just something that airlines need to be aware of. Finally, just from a practical perspective, is the issue of time. These processes take time, and we've seen that, for instance, if I use the example from Europe, the Europe's European Commission's approval of the core members within the Star Alliance, for instance, that took a number of years to get through. They've had other code-sharing arrangements that have taken a number of years. So again, that's just something that businesses need to be aware of in terms of their modelling and what they're seeking to achieve in a given period of time.

Minna Monaghan:I suppose in Australia in particular, it is the customer benefit that drives the whole process always. sometimes hard for the airlines to be sitting there and saying, well, we want to do that, but what is the customer benefit actually? And looking at it purely from that point of view. So it's proven difficult sometimes.

James Cooper:Absolutely.

Minna Monaghan:So let's move on to a different area. We've got dual and multi-brand strategies with airlines. So we've got more and more airlines, basically. We have legacy airlines, and we have the low-cost airlines, as we spoke about before. Now we have legacy airlines starting their own low-cost carriers, like as we have with Jetstar and Qantas with Jetstar and Virgin with Tiger over here. And overseas as well, same thing happening. In the States, I suppose a lot of the carriers, the US carriers, weren't that successful with their low-cost startups. And they seem to have moved into more of a multi-tiered products where, say, you have your Delta who now has their basic economy products and same, the other carriers are following that. Is there— do you see that as a trend? And why are the US carriers not?

Peter Bellew:It's funny. I think probably the only one that's actually really genuinely worked in the world is Qantas. And I think when they set up Jetstar, It actually was set up as a completely separate different company and it didn't really have too much of the baggage. And then there was a really, really good team that ran that company for a number of years.

Minna Monaghan:I was part of that initially.

Peter Bellew:And there was depth in that team and there was scope in it and it didn't get infected by the nonsense from the main airline at the time. Probably then the main airline has benefited from that. I think you have to look long and hard around the rest of the world to find another one that's actually worked, that's really created the return on capital. I think you've seen IAG buying in, you know, Vueling and, you know, doing some interesting— you know, Aer Lingus, which actually is a low-cost long-haul carrier but hid it for many years. So, you know, they again, they've bought in. But I think you have to look long and hard around the rest of the world. I think that's a really good point. Many of them have been set up and closed down and subsumed and gone back over the last 30 years. So I don't think it's easy. There's a certain pomposity in legacy carriers, and there's a vast amount of BS in them.

Minna Monaghan:Yeah.

Peter Bellew:And it's very hard if you're trying to be Ryanair, AirAsia, Southwest-ish airlines, and to be dealing with stakeholders on a board, many of which wouldn't know one end of a high-pressure turbine blade from an exhaust on their Maserati, so to deal with it. So I actually don't think it works that very well.

Minna Monaghan:How about Scoot with Singapore Airlines?

Peter Bellew:That's still to be proven. And that's been a bit of a mishmash for the last 10 years, and this, that, and the other, and what is it and everything. And so we'll have to see. I think the jury's out on that one for the next 3 or 4 years. There's been some pretty heavy losses in there over time. So it hasn't worked yet. I think it might work now.

Minna Monaghan:Mm-hmm.

Peter Bellew:But no, I don't think it works very well, actually. I think you just end up having— you end up being with the legacy carriers setting up these lowish-cost carriers.

Barry Parsons:I don't think— the trouble with legacy carriers is the ones that failed, they pretty well tried to make the low-cost subsidiary an extension of the commercial team. And the CEO of the commercial— of the low-cost subsidiary would report to the commercial team. So infected or contaminated with the legacy culture. So that's probably the short answer. I think that's a very good point. And a lot of the failures were also— they were back in like 2003, '04, '05, and it was a different low-cost environment. But the other problem is most of the people in a legacy carrier who have started an airline, they're all dead because most of the legacy carriers are very old. So to go and start a low-cost carrier from scratch, like the first day on the whiteboard, it's starting with network planning and brand development And market research, and what are we going to be?

Minna Monaghan:So there's a lot of the legacy carriers are now starting their low-cost long-haul operations.

Barry Parsons:That's right.

Minna Monaghan:And is that going to be different then?

Barry Parsons:But there's more known about that. So I think to Peter's point about ownership and control, I think if you're in the boardroom at a legacy carrier, and do we start a low-cost long-haul subsidiary, which there's probably a few of those discussions going on now. The shareholders are going to sit there and say, well, are we going to do a Norwegian? The capital required to do that's considerable. But what's the strategic reason for that? Can we start a long-haul operation that has, say, 60% of the unit cost of the—

Minna Monaghan:So Air France has just announced their new— what is it called? called?

Barry Parsons:Yep.

Minna Monaghan:I can't remember. I've got a slide there somewhere which says the code.

Peter Bellew:It was first called Boost, but they've changed the name again.

Minna Monaghan:They changed the name to Joop, I think, or something different, something with 2 Os in the middle. But so they're starting a new airline. They're saying it's a long haul. It's not low cost, but it's actually aimed at millennials. So it'll be an all high-tech, high everything. There is Joon. That's what it's called. And we've got Level by IAG and Eurowings by Lufthansa. So are they all going to be successful going forward, do you think?

Barry Parsons:Well, multi-brand I think is different to dual brand. And again, you can go out and acquire brands. So you can assemble a stable of brands over time. But you might actually break a couple of the low-cost ones if you're a legacy carrier. But otherwise, to go out and start one is just not in their DNA. Because, like, say a short-haul one, 60% of the unit cost compression comes from greater asset utilization and seat density. So in a long-haul model, you've already got pretty considerable asset utilization.

Minna Monaghan:Mm-hmm.

Barry Parsons:You get the seat density. So you've got to get a huge unit cost break from labor distribution somewhere else. And those skills are typically not in legacy carriers. So their option is to go out and acquire a successful low-cost long-haul outfit. And there's not many of them around. So I just don't think it's realistic to just go out and create a lot of low-cost long-haul brands, because you're going to cannibalize your business for a start anyway.

Minna Monaghan:We'll see how these guys go.

Peter Bellew:It's tricky. You know, the only— they wouldn't call themselves this, but they are. Aer Lingus is a low-cost long-haul carrier. They've got 13 or 14 aircraft doing the transatlantic. They've got a business class as well. So Ben turned AirAsia X around last year. But before that, it had been horrifically loss-making. But I think it's a really tough business. Nearly every long-haul route in the world is highly seasonal.

Barry Parsons:Yeah.

Peter Bellew:And has pockets of large 4, 6-week periods when there's very little traffic. And if you don't have business traffic up the front and people paying 4 times the fare up the front, a number of them, those big planes are expensive. And they're very difficult to maintain. And they're expensive, the utilization of them. So to me, the jury's out on the long-haul low cost. It hasn't ever worked to date.

Minna Monaghan:Yeah.

Peter Bellew:And I'm not sure it will do. I think Level came in. I think IAG has fired a nuclear missile at Norwegian by launching Level. I think that that's really going to make it very difficult for them to raise capital over the next 3 or 4 years, which is always a good strategy for an airline to take out by just announcing you're doing something, stick a few planes there, which I'm sure they will do more. But I still think they've done huge damage to Norwegian just by launching. So.

Peter Harbison:I think part of the unspoken conversation here is the unions. And as you well know, I mean, as you say, Barry, Jetstar set up at a very auspicious time. There were lots of aircraft around. It was a recovery period after 9/11 and so forth. But, I mean, Jetstar and Qantas Group have had to fight all the way. Initially, the pilots wanted to prevent Jetstar from flying, and the group really had to fight very hard to keep the two separate. And it's certainly the case with the sort of half-baked compromise propositions that Air France comes up with. It's all about the unions, and they can't actually do what they want to do. Lufthansa looked at doing a joint venture with an Asian long-haul— to do long-haul into Asia, looked at doing a joint venture. Essentially, they weren't allowed to do what they Probably really would have been a good thing for them to do, to have a— to buy into a low-cost operation rather than trying to do something like Germanwings or Eurowings, which is really out in no man's land still. And when Peter says, you know, the long-haul low-cost proposition is still out there, I mean, for that sort of carrier, yeah, I think it is. But for the genuine— for the AirAsia Xs and people like that, I think that is a proposition that works.

Minna Monaghan:Yeah.

Peter Harbison:Very uncomfortably in your market, unfortunately. So I think that's, you know, these institutional problems are there. That aside, and as Peter said at the beginning, the Jetstar model, the Jetstar-Qantas model, is really clear. It's really easy to see why it worked. So why has nobody done it? Partly it's timing. But I think mostly it's because no one's had the balls to do it, frankly.

Barry Parsons:And also, when did it work? It hasn't been a roaring success since day one. In its first phase, it capped the growth of Virgin Blue. And Virgin Blue was then seduced into Ansett's footprint, if you want to call it that way. It's only relatively recently it became a a better financial proposition. It's performed the dual brand group market share commercial piece admirably since the first day. But as far as being a good investment as an airline standalone, it's probably only relatively recently. So there's success in their success. But it had many missions, Jetstar, and it's eventually fulfilled them all, it would seem. True.

Peter Harbison:Too true.

Minna Monaghan:Okay, have we got any questions from the audience?

Peter Harbison:Mark.

Peter Bellew:Good afternoon.

Barry Parsons:Good afternoon.

Peter Bellew:I'm Mark Cavalier, Chief Marketing Officer with Fiji Airways, and just a quick question. I would very much appreciate Peter and Peter's assessment of how Air Canada has done with Rouge now that they've been operating for a couple of years. What are your thoughts on how they've done with, with that iteration? I don't think it's a low-cost airline anyway. I think it's just a lower-cost, lowish-cost unbundling airline. They really leveraged off some older fleet that they had. So it was good utilization of assets that probably weren't respectable enough in the main carrier anymore. And they took some routes out of the main carrier and they converted them into Rouge routes.

Peter Harbison:So it's a low-cost airline.

Peter Bellew:So it's neither one thing or the other, but it probably is a good way just to roll over some assets, roll over some routes, and do all of that. So I think that's done OK. I think Canada's going to start getting complicated now because the American guys are looking there, and there's not much room for expansion in the States. They're starting to look north. The guys up north are starting to get very defensive. So I think the game's going to get a lot tougher. But I think it's neither one thing or the other. It's really just Air Canada with some older planes. I don't think it's anything really. I'll never be allowed across the Canadian border ever again. Actually, I think I've just insulted just about every airline on the planet in the last 20 minutes.

Peter Harbison:Why not?

Peter Bellew:So I'm in Sydney. Maybe they won't track me down here. But I just think it's very— long-haul planes are damn expensive to run. And if you haven't got people up the front, it's very hard to make the sums work out. We had a long look at it when I was in Ryanair. We couldn't make the sums. And we had incredibly low costs. And we were looking at some great aircraft from Airbus. But we just couldn't make the figures add up because the seasonality—

James Cooper:Yeah.

Peter Bellew:And also, go back to the point is, there aren't that many people around the world who've got the expertise in operating long-haul fleets and long-haul airlines. MRO gets really complicated. Engines gets really complicated. And maybe that's why Jetstar has done OK, because there's a bit of depth of talent in this country that actually isn't available elsewhere.

Minna Monaghan:I think that's a many really good point.

Peter Bellew:other places. And if you see people in Jetstar and Qantas, they're generally, you know, 10 years younger than most of the dinosaurs that, like me, that are wandering around the rest of the world.

Peter Harbison:Yeah, I think Rouge is another one of the airlines that's been castrated by the union. Before Qantas got to Jetstar, as you recall, there was Australian Airlines, which was based in Cairns and really had seconded Qantas pilots flying it. So its cost base originally was— and that sort of went right through the airline structure. It was doomed from the start. And I think there's a lot of similarity with Rouge in there. Different times, different places, and different routes, as you say, Peter. I mean, I think it's operating the more marginal routes that Air Canada certainly can't operate. Whether it can operate those routes in competition with with someone like WestJet who's still a bit lower priced, lower cost than they are, is another issue. And then you get a Norwegian coming in, whole different proposition.

Peter Bellew:But it's interesting for me. I'm watching what's happening with Norwegian in Ireland with the 737 MAXs. And the seats don't seem to be selling so well. And I'm not sure a lot of people want to go 7 hours on a 737. Either. That's the other thing. So we'll see. We'll know within 12 to 18 months, I think. But that model, I'm not sure, is proven either.

Peter Harbison:Well, like Nok Air was saying before, I think in Asia they wouldn't do it initially. I think once people get used to it being so incredibly uncomfortable instead of just really uncomfortable, they will go that longer distance.

Minna Monaghan:And so do you think Norwegian and EasyJet and Ryanair will form their low-cost alliance?

Peter Bellew:No, I don't think so. I think Ryanair is too big now. I think what they will do is they will do interlining with people. So I think they will interline with other people, but they'll do it in certain airports where they can manage the bags. But they won't do it everywhere. It'll be on a selective basis. So I think that'll happen. I think you'll have to see EasyJet. There'll be a new CEO. They'll probably change all the strategy and direction. You get all that stuff happens. And Norwegian have to survive now. That's got to be their mission over the next 2 to 3 years. They had a very good business. It's probably been infected a bit by the long-haul and low-haul. And it's really, I think, putting a lot of financial strain on them. So it's a tough game they're in now. So they'll have to hang in there.

Minna Monaghan:Interesting, interesting. So let's talk about the Gulf airlines. Peter, you interline, codeshare Malaysia with all of them?

Peter Bellew:With everybody.

Minna Monaghan:With everybody.

Peter Bellew:That's the key. So, and we even did over the weekend, we've gone back working with Oman Air again as well. So, and for us it's complementary. We are in a predominantly Muslim country, so we're serving the case there. There's a lot of point-to-point traffic. Malaysia is just about the best value destination on planet Earth at the moment. My local restaurant where I eat every 2 nights a week, you can get 2 main courses for the price of a can of Coke in Easy News around the corner here. So I think for us it makes sense. But I think it's going to be a huge change in the Gulf carriers over the next 4 or 5 years. Massive, massive seismic change. But we're happy to deal with them all. And that's cool with us.

Barry Parsons:Probably the biggest change they're facing is the geopolitical environment in that region, I think, in the long term— say, medium to long term. And then, say, from an Emirates point of view, where do you put all those aircraft you've just So the return on capital model of where you put an A380 as opposed to a 777, I can remember discussions with Emirates 2 years ago. There'll never be an A380 on that route. That route is not an A380 route. And then there's A380s on them today because they haven't got anywhere else to put them. They're all pouring in.

Peter Harbison:Yeah.

Barry Parsons:So they've got a big, big— How do we actually get a return on all that capital we've put ahead? And those airlines have got more objectives than are they profitable. You know, their projection of state power and build the destination. But they've got a lot of challenges. It's not a simple game. Plus, the engine airframe combinations are not too far away for a lot of places that they've put a lot of pressure on, like Australia. in the past to fly over the top of them. And that's going to change. It's going to bring Turkish into play a lot more out here. So there's some big geopolitical changes, some big geoaviation changes ahead for the Middle East.

Peter Harbison:Yeah, I mean, that's a really good point. I mean, aviation is such a bloody awful business. I mean, you try and do all the bits that you can control, and then you get hit in the back of the head by geopolitics. by disease, by—

Barry Parsons:Volcanic ash.

Peter Harbison:Volcanic ash, you name it. And I think the point you make about Turkish, for example, it's extremely fortunate for the Gulf carriers that Turkish is in— Turkey is in the problems it's got at the moment, and they don't look like going away very quickly. People are buying away from Turkey for tourism. It's been wonderful for Spain and for Greece and other places, but those geopolitical issues are very substantial. There's no doubt about that. But I think the world is going to change a lot in the next 3 or 4 years, probably a whole lot more than we expect. And I would suspect that the Gulf carriers are so valuable to someone that there should be some partnership. Someone will see some value in partnering with them, particularly if they look a bit sensitive and easy to partner— more easy to partner with in terms of their terms of their market dominance. I don't know, I just think it's incredible that the US carriers aren't prepared to dump their European partners and go with the Gulf carriers. Is that too far out, Peter?

Peter Bellew:I think the deal would be hard to do. I think it's always about, can you see the deal getting done? You know, could you see Could you see the deal getting done at the last minute? No, I couldn't see it getting done. Because, you know, if you've got Buck Rogers coming over here, you know, wanting to meet on a Friday at lunchtime.

Minna Monaghan:So we'll find out. Right. Thank you very much, everybody.

Barry Parsons:Thank you.

Copyright policy: All transcripts on this site are the copyright of CAPA - Centre for Aviation. Our reproduction policy is as follows: you may quote up to 400 words of any transcript on the condition that you attribute the transcript to CAPA - Centre for Aviation and link to the original video page. All other use is prohibited. While we aim for 100% accuracy in the transcript, there may be some minor transcribing errors.