Setting the Scene: Never waste a good crisis! Why haven’t more airlines disappeared?

Transcript

Peter Harbison:So all those of you who've read the agenda will know this is, are we going to waste this crisis? And I, I want to leave it pretty freewheeling. We might even have some questions from the audience if things go right. We've got a decent spell to talk. But maybe I could start with you, Tim, as you're right next to me, but also because you've, you've experienced a lot of change in the industry over the years, probably more than just about anybody here. In fact, you're the sort of paterfamilias of the industry these days. Started 30-odd years ago with Emirates, and you've been through—

Sir Tim Clark:37, yeah.

Peter Harbison:Pretty much all of the, all of the storms we've seen. Is today full of the biggest issues that we've ever had, the most confronting?

Sir Tim Clark:I think probably in that respect you're absolutely right. COVID is probably the most disruptive force we've had in the business since the Second World War. And on top of that, we've had now this war in Europe. But look, I'm not one of these— I don't share your view. I got a lot of pessimisms coming out of what we were saying because we were— you were presenting statistics which are conditioned by many, many other things other than the demand. What we're finding, and by that I mean the ability to get fleet back into the air to respond to the markets that we and Emirates, though, are existing for us, but being impaired because we can't get into China, we couldn't get into Thailand, we couldn't get into Malaysia, we couldn't get into Singapore, Australia, New Zealand, you name it. But as soon as we started activating our fleet in all the network that we have in place today, and that started in about the summer of last year, the main condition to our ability to get where we want to be has been the ability to get the pilot and cabin crew workforce back into place. Where we have started operating, the market has come back. You remember I was with you some time ago in one of our virtual discussions about the bow wave of demand. And what I've learned in the many years I've been in the business, particularly since the mid-'90s, that trauma, change, for some strange reason, And we're looking at those, and we have looked at those for many years, engenders increased demand. It spawns new segments within those demand segments that we saw in absolute terms, and the nature and characteristic and the behavioral characteristics of those segments within the demand, which by the way grow all the time, are of great interest to us. But in absolute terms, I am— I believe that the global economy will emerge from this traumatized, shocked and stunned if you like, but it'll get over it, guys. It will get over it. And the notion that we should regress to the '80s and '90s with regard to what is going to happen on the international aviation scene, I don't share that view. I'm a great believer in the fact that corporate markets will return. And in the last 4 or 5 months, the evidence of the corporate markets returning certainly to Emirates has been very strong, surprisingly so. And in fact, we're finding our premium cabins under greater pressure than our economy cabins. So I kind of, you know, I know this is in compendium, in aggregate.

Peter Harbison:Yes.

Sir Tim Clark:Probably taken together, the worst that we've ever seen. But as you say, therein lies the opportunity. And if you understand the way things are changing, not by demand in absolute terms, but the nature of the demand itself, and using technology as something— I did agree with you in a great extent, to a great extent— having a better understanding of what is it that people are going to want post all of this. One thing they are going to want, they are going to want to travel, but they may be a little bit more selective as to how they do it, where they do it, with what, etc., etc. And technology will help you identify exactly what that's going to be with a bit of luck and try and attune your products to it. But the notion that, you know, the long-haul international super hub comes under threat from smaller aircraft point-to-point, all this business, sorry, I don't share that view. What I'm looking at out there is the future, basically, you know, the incumbents today will still be there. You'll still have a Thai International, you'll still have a Qantas, you'll still have a Malaysian. You may or may not have Cathay Pacific, but of course that is anybody's guess. And I really fret that some of our great airlines in the world that have been highly profitable, Cathay is one of those, should be subjected to this terrible situation where they are out of their control, and they are a great airline, a great product, wonderful business model, hugely competitive, and important that we keep in place. So I worry about those, but unfortunately, you know, that's life. We have to, we have to deal with that. But going forward, I see this as far as Emirates is concerned, the beginnings of our 3rd epoch. We will maximize the opportunity. We'll grow our fleet to the levels that we had Prior to COVID and more. Our biggest problem is the ability to get the aeroplanes into us at the pace that we need, so we're going to have to retrofit our whole program. We're spending $1.5 billion of our own cash getting that done to raise the product standards, expand the network, and take us well beyond where we were prior to 2019. But the CAGR of that over the next 15 years is only about 4%. Given that the 380 is dropping away and the ability to put the right unit on it. But when I, again, I look at airports, look at the frightful mess we're in in Birmingham and Manchester and some of the UK airports, the ability for airports to grow and meet the demand. IATA is suggesting that we, if we pick up the curve post— pre-2019, we're at 4.2%.

Tony Douglas:Yeah.

Sir Tim Clark:On a 4 billion passenger segment movement during the course of the time prior to the pandemic. Now do the maths. By the mid-'30s at 4.2%, you're pushing double what we have today. How are we going to accommodate that? How are the airports going to be able to deal? Which airports have got the money with balance sheets shot to pieces at the moment to be able to spend to do what they need to do? Read 3rd runway at Heathrow. Kevin was talking earlier about Stansted going from 35 or 38 to 43. Guys, this is diddly squat if we're going to do the job and you're going to react to what I— I will not accept that we will have impedance or any kind of inhibition demand once we get through these 2 big traumas, unless there's something else coming along. Listen, the Black Plague.

Peter Harbison:There always is, of course.

Sir Tim Clark:There is. But you know, in the end, look, it makes life interesting, doesn't it? The more you put together, the more difficult it is. You've got to navigate it through. So for the kids who are coming, certainly in the new business, this is a hugely mentally challenging thing. If you get it right and you can bring all these ingredients into place and harness the power that is inherent to the global economy— I'm sorry, but I know there's going to be a lot of onshoring. I know supply chains are likely to change out in the next 10 or 15 years. They won't go immediately. We've been strung out with our ability to— the notion to sustain just-in-time inventory, which drove so much of our manufacturing in the West, et cetera, because of what was coming out of the East. Low cost starting to disappear as we onshore more because we can't face the reality of having to be caught like this before. So this is a big transitional thing. It's having— it's making us reset and rethink how it was. But if you're smart about it, you don't have to give up. You look forward and think, how is this going to change up what I'm going to do? So for someone like Emirates with a super hub, I see this as a huge opportunity. for, for the next 10 years. And I, if, if, if we are reading the tea leaves right, I think we're going to get there. And the notion, and my biggest single problem, which will postdate me of course, will be the decline of the 380. Because that, in terms of the ability to meet the hub requirements in the 2030s, when you've only got a limited number of slots at the primary hubs, Sydney, Heathrow, Hong Kong, you name it, New York, etc., what are you going to do with a single aisle, 5 or 6-hour aircraft, the A321XLR? Slots are going to be at a real premium. And if you pump— drop in a 200-seater and we've got a 600-seater going in, and don't forget, so that slot carries huge opportunity costs.

Allan Kilavuka:Yeah.

Sir Tim Clark:Not the least, and part of that, of course, is the ability for the airport operator who's desperately short of cash and needs the money. So 600 people get into the airport, and as you know, you all empty your pockets. You go and buy a burger, you drink coffee or whatever, as against 200 people. So the, the economic multiplier of a larger unit, uh, obviously being full, and the more the, the capacity starts to shrink So in certain other areas, so the, the, these large aircraft will be of huge interest in the 2030s, notwithstanding ESG, etc. But as I tried so hard before we actually gave up on the A380 with regard to Airbus to produce an aeroplane of that size which could give us between 12% and 15% reduction in its operating costs simply through propulsion, aerodynamics, material, etc. But they didn't buy it. In fact, I was actually drawing it out for them. This is what it needs to look like, a smaller tail, different wings, and everything. But it didn't work. But in the future, we're going to need that. So the future for me is not a whole raft of single-aisle. The temptation to come into the business, as you said earlier, the lessors are out there. My friends, the lessors are always out there, goodness me. And they kind of prey on the fact that, as you said, the ability of the airlines to raise the debt because they've got junk status.

Tony Douglas:Mm-hmm.

Sir Tim Clark:Makes it more easy for them to go to the lessors, but lessors come at a price. Don't kid yourself. These are very, very expensive entities to deal with, and I'm sorry to my lessor friends in the room, but Steve is a great friend of mine, but I know the game. And I've been, over the time, gradually disengaging from them as our balance sheet has strengthened and our ability to pin debt onto the Emirates balance sheet at better rates than the lessors have got, then we are less reliant on them and we'll do our own deal with the manufacturers. So I, you know, let me just say, I've always said this, I've been at it too long now. This will be an opportunity for us to reset what we're doing. It is an opportunity to get things right. There are very strong business models out there. I object to the notion that there are carriers, that aircraft airlines are basket cases and never make any money. And that I find that extraordinarily hard to to to to understand, especially in the case of Emirates where we mentioned an IPO and I had I had to disconnect the phones and the iPhones because every banker in the world was on our door saying we've got investors who want to chuck money at you. I said what about the ESG side of things? You know they're very conscious about this. They're very good. Yeah, don't worry about that. Are you ready to do a 20%, 30% IPO. So the notion— that is because—

Peter Harbison:Well, you're an exception, Tim.

Sir Tim Clark:Look, it's all fair in love and war. We started with a clean sheet of paper. We started at a time in the mid-'80s when, okay, we took advantage of the fact that the airline industry was a severe basket case. It was all state-owned. Nobody really knew what they were doing, and we could see all the weaknesses, and we decided just redefine the way it was. Everybody's had that opportunity. If you don't, you know, if you don't make it, it's possibly because your, your business model is not as good as it should be, or the people running the business model are not as good as they should be. So in this case—

Peter Harbison:Or maybe because you're relying too much on government and having to—

Sir Tim Clark:Yeah, I guess, you know, look, if you, if you have a situation where the government intervention is minimal, We are a state-owned carrier, but the government intervention stops there just by the name, and we run the business on the basis of a, as you know, a completely commercial enterprise. My financial ratios, all the other bits and pieces are just as important to us as they would be to a merchant bank. So, you know, we've got to get all that right. But unless you can identify what it is you really want to do, if you're just here as a national carrier trying to serve the needs of the state and getting that all wrong, and it It, you know, that's anathema to the way we do it. This business can be run profitably. There are great people out there with great models that can be very successful in everything they're doing irrespective of what's happened now, and I strongly believe that because I believe in the ability of this resilience. And as we've shifted away, it's taken a long time, we've been 20, 30 years since state ownership has— but there is still the tentacles of state in there. You mentioned about the ability to cross equity and the notion that you'd have a national carrier owned 80% by foreign nationals is anathema to it. And you're right, they're going back. Aeropolitics is changing a little bit now as a result of all of this. And it may be that they retreat into the siege mentality of predeterminism, read '70s, '80s, and '90s. I hope that doesn't happen. Because the airlines have got to be able to, and the industry has got to be able to deal with this and reset. And it's— everything we do, aerospace supply, the aerospace industry, the hospitality sector, they rely on what we do. And the notion that we would, for instance, in your neck of the woods, Oceania, Australia, New Zealand, start withdrawing capacity. No, I want to go the other way. I want to actually put more in. Yes, we may put wide-body twins in there for some of the smaller points in Australia, But our production levels are going to go up and up and up because I do not believe that people will want to stop traveling in all the sectors that we're in.

Peter Harbison:Thanks, Tim. I'm also very impressed or flattered that you listened to a lot of what I was saying.

Sir Tim Clark:That was because you were wearing a tie.

Peter Harbison:I'm surprised you recognized me, actually. Thanks for that. Look, let me just clarify a couple of things. I did stress that this— what I was saying there was generic. I sort of implied too, and I'll say it now more directly, and Tony, perhaps you can pick this up. I have been enormously impressed, and I'm not just saying this because you two are on the stage, enormously impressed, particularly from Australia, over these last 2 years that the Gulf carriers have picked up the ball and kept the world connected. Nobody else has, and that's made a massive difference, and I think that will come back to whatever the opposite of bite you is, to help you. But, and particularly when we talk about business class travel, or not business class, business travel, I think the fact that you are in this position now to be able to connect the world while others may be struggling, you know, you're essentially long haul to long haul.

Sir Tim Clark:Yeah.

Peter Harbison:Where the short haul to long haul may be more difficult. I'm thinking particularly of the European carriers. I think you will therefore probably be in a much better position to be picking up the business traffic. So while it might be down 20%, it might even be up for you guys in the Gulf. And obviously the Gulf is going to become much more important.

Sir Tim Clark:Look, yes, business travel is vital, it's important, drives the yields up, but it's a bit of a misnomer to call a cabin business travel, business class. I've always struggled with that. As the corporate segments have ebbed and flowed, we found more and more people are ready to pay it. Read the way premium economy is ripping through the airline scene at the moment. We're just about to kick it in a big way. And it is clear that as wealth creation has moved through segments other than the corporate segments, as we define corporate segments, others have been ready to step up and take the inventory. And talking about the technology, the ability to harness technology in the B2C world, design your systems to reach out and communicate, personalize, and offer them a range of products we've never been able to do in the old legacy days of, you know, Amadeus and Galileo or whatever it was then.

Peter Harbison:I'm forgetting that one now.

Sir Tim Clark:This has been a big mantra of mine. As soon as the B2C came along, I wanted to communicate with all of them and come up with a menu of choice. And as you do that, so you find that all the people have been off-sided because of the corporate segments wanted a piece of this. They'd have that, they'd have this, they wanted the flatbed, or they didn't want this, didn't want that. We have the technology to do that. And our ability then to get people to move into the premium cabins— premium cabins, both now premium economy and, and what we call business and first— has been far, far, far better enabled. than we did in the old days. So now we can reach out to all sorts of segments. Remember what I said about the change of the segments and the behaviors, behavioral characteristics of those segments? They are changing by virtue of technology. And technology, if you use it right, whether it be in your loyalty schemes, whether in your B2C reach to all of them, is the key to the future. If you get that right, you've got a better chance of understanding what your consumers want in the changing world order, whatever they may be. I'll be long since dead, don't worry. But, and then, then work it out. And if you get that right and you harness it and you use it, you'll be in good shape.

Peter Harbison:Yeah, yeah. I mean, we've been lagging in that respect. That's, that's one area where obviously technology has really got to, at an airline level, has got to flow through. Tony, I mean, you've got, as I mentioned before, you've got some, a lot of narrowbodies coming through too as well, and a slightly different model in terms terms of international connectivity, and bearing in mind a lot of the attractive market is out of South Asia. Do you agree with my suggestion anyway, and I think Tim's sort of going along that line as well, that you will probably capture more of the business market pro rata than the other carriers? I'm talking about business travel, you know, even the road warriors, not necessarily But the ones who pay higher, higher yields.

Tony Douglas:So first of all, Peter, thank you to you and the incredible CAPA team, because being together like this again in person, I think we'd all acknowledge makes a great difference. And for me, there's a special relevance to it, which I'll share very briefly. I was born 30 minutes away from here, and so I'm a Lancashire lad. even though we're in Cheshire. And my love affair with aviation started here 33 years ago because I used to be the manufacturing director at what used to then be British Aerospace Regional Aircraft in Woodford, which is just south, or was south, of Manchester Airport. So I think that love affair that probably everybody shares within the room and those who are online is one that could probably be mildly depressed by your earlier presentation.

Peter Harbison:I'm disappointed.

Tony Douglas:In the sense that, you know, there is no opportunity to be successful from a financial sustainability standpoint. But I know the intent that sits behind that is actually to stimulate the right dialogue, to enthuse and to excite everybody who's in aviation, and frankly, the next generation who will end up taking it forward. And I largely agree with everything Sir Tim said, which quite frankly I normally do because of the gentleman's wisdom. But I guess the point is as follows. There's more cliché jokes out there that we're all familiar with around, you know, how to start off with an awful lot and end up with a lot less if you invest within aviation. But of course, the simple reality is there is no successful global economy that doesn't have world-class connectivity. Globalization will only ever increase, and therefore the demand is probably going to be ever-present for generations to come. The question is around what's the right model and how they tack and adjust as the many challenges that continue to be presented to us offer themselves up. But also, again, as Sir Tim said, the quality of the people who lead and make the judgments accordingly. And I remember my father, God rest his soul, when I was brought up in this part of the world, one of the many things that stuck in my mind that he always said is that I can easily sell a tenner for a fiver, son. But then the clever lad is the one who sells tenner for £15. For aviation, anybody can sell $10 for $5, and the world's full of mugs that have been doing that for a long time. There are a lot of people one step and two steps removed where they've been making money. But at the heart of it, there's been a kind of prevalence of people who at times have got carried away with models that aren't commercially sustainable and have effectively been giving away $10 for $5. And Etihad created its own crisis a number of years earlier, and in some ways, whilst it's been extremely painful for us, It's probably proven to be a gift because when the pandemic came along, we were already engaged in open-heart surgery with our balance sheet through necessity because it wasn't sustainable. And as a teenager, we perhaps learned the hard way that you've got to go back to basics. So for us now, we have largely a strategy which is around a 2-horse stable. Which is 787 Dreamliner. We've got the 3rd largest fleet in the world and was absolutely delighted last week to put our first A350-1000 into commercial service into Paris. We believe those 2 are the winners because of the technology of the airframe, the power, the avionics and the control systems, and the environmental performance of them. in particular is essential. There is of course a vital place for next-generation narrowbody and we're more likely to operate them through our partnership with Air Arabia Abu Dhabi which we own 51% in. But I guess the takeout in terms of the business cabin question, Peter, that you asked is as follows. Like Sir Tim, I struggle with the nomenclature in because it's less relevant today than it used to be in the past. Because over the course of the last 9 months, our premium cabin load factors have actually been higher as a percentage than they were pre-pandemic. And it's not people who are, you know, traveling under the credit card of the corporate per se. It's people who are now seeing the value in space and the quality of the product from a wellness standpoint.

Peter Harbison:Mm-hmm.

Tony Douglas:And for, again, many of the global economists who will offer analyses to show that credit card debt in particular has been paid down significantly over the last 2 years, there's a lot more cash in the system than there's been for an awful long time, and the latent demand for travel, I would argue, is probably greater now than it's been in any time that I can remember. Consequently, what we've seen it go off almost like a fire hydrant as the travel restrictions eased, and particularly in premium cabin. It's not necessarily, as I've said, and I think Sir Tim made the same point, the old definition of business travel. It's what people are prepared to pay for value. And if you take the parallel, which I know is simply cyclical at the moment, but if you look at air cargo, 2019, cost per kilo, cost per tonne, etc., pretty much at an all-time low versus where it's at now. It wasn't at fair value before the pandemic. You could probably argue if you look at, you know, in sea freight, CGM, CMA, and MSC, just 2 of the big 4, $40 billion net profit last year. Unheard of in generations. So you could probably argue that it's artificially inflated now. Fair value is somewhere in between. And I think part of the challenge in this as well will be resetting how you sell a tenner for £10 and a penny or more, as opposed to, sadly, the trap we were involved in in the past was being sucked into thinking big was beautiful when frankly it wasn't necessarily the right strategy to pursue. And finally, I would suggest the one gift that COVID has presented to all of us, over and above everything that's already been mentioned, is the need to be far more agile than we've ever been in the past. You know, the acknowledgement that ambiguity is a resource, but only if it is kind of accepted as such when it comes to network planning, when it comes to the way in which the cost base is managed. We've got zero-hours contracts now. It was unheard of within our region. You know, we've done things in terms of putting seasonal destinations on for Nice. Obviously Sir Tim operates that as a full-time service. We, we couldn't, but the Nices, the Mykonos, Santorinis, etc., etc., Zanzibar— we would have never done this in the past, but it's forced a different mindset and one that's more likely to be agile in its response.

Allan Kilavuka:Mm-hmm.

Peter Harbison:Yeah, and of course you're part of this growth in the Middle East. You're not all of it, but I think my point too was because of what's happened in the last 2 years and because of the role of the Gulf carriers particularly, and looking into the future, the connectivity that you're able to provide in a whole new environment, and I think it is a new environment, Anko. I'll be interested in your views on this, obviously, because you're coming from a different position. But in this whole new environment, it just seems to me that the Gulf connectors are in such an ideal position to be collecting far more than their fair share of business travel. Let's not get into the definitions of that, but anybody who's travelling on business, because of that array of different options and because of the The fact that you've been operating for the last 2 years as well will stand you in very good stead for that. Anyway, let me give Anko a chance to— you're a bit outnumbered here, Anko, I'm afraid, but have a go.

Anko van der Werff:As I was last time, remember, half a year ago?

Peter Harbison:Yeah, sorry about this.

Anko van der Werff:I was the only one on the panel who said, let's be real, and everybody was— it was all going to be great and things were back to normal and it was fantastic. And I agree to a lot of what's been said, but fundamentally, and also you can always count on the Dutch to spice it up a bit, yeah? So just bear with me. I'm not fully convinced and I'm not sold yet on future. Yes, we see rebound. Yes, we see pent-up demand. Yes, we see premium demand in, call it premium economy or other segments than just corporate. But I think in essence, I agree with everything that you put up there, which is this industry as a whole has really never made any money, is reliant on governments left, right, center. There's plenty of brands, and I'll just look vaguely across the room to not look anyone in the eye, that have to admit that they've never been profitable, right? And there is an issue with that in the long run because that debt The debt that we have taken on has to be repaid. I am short wide-body aircraft. I believe that already for the last 10 years, the world has produced too many wide-body aircraft. I think that is reflected in the wide-body aircraft prices post-COVID. I think the wide-body market has traditionally been one of long-haul connection and premium traffic. And I'm, again, not negative, but I'm certainly not yet positive when I see what's going on because, yeah, high fuel, inflation, war in Europe, and the connected elements to it, which is overflying Russia just in short— shorter term. That's not going to be a matter of months. I really think it's going to be longer. which I translate immediately into there's going to be an impact on globalization as we knew it. I really do think so. So to just— and I'm not saying that, right, the gentlemen here are saying that, but as an industry, to just build back what we had, who we were, that's not going to fly, right? And again, that's not what the gentlemen are saying here. So I thought there was something really interesting in your presentation this morning, Peter, Where you showed about capacity developments and capacity and route development coming back in, and it was far less about demand. And there was one slide that you had which was, I thought, interesting, right? What is not being said, and we've now touched upon it a bit more, but what was, I think, not really touched upon in your presentation was you had one slide which I think said something along the lines of, Business travel, minus 20, minus 50, question mark, but down, dot dot dot, right? And that's also where I am. I mean, look, I think for many airlines, the pure corporate, right, and again, there's different segments, we also see them really performing well at the moment. Will there really not even be a 1% change, right, 2%? You said it yourself, right? It's How do we factor that in, right? Sustainability, especially of course arguing the Scandinavian corner, it is going to be important. And I do feel and hear and see also reflected already a bit more in RFPs and what have you. People are really saying, no, we're not going to travel as much as we did before. There is clear sustainability, individual CEO pages that these, right, CEOs of the companies have and where they have to reduce their emissions. I've heard plenty of companies now say, we can't do offsites anymore, we can't do any incentive schemes or whatever events that we want to do with the team because that's just not who we want to be. So I think we do have to change. We do have to get, I think, real about what is working for the industry. I do agree with you. That a large chunk of that is around loyalty programs and the value that they are able to contribute. And a loyalty program immediately then links into digital. It's almost like a digital currency. It's almost like a Bitcoin avant la lettre, right? I mean, this is something that we've come up with 30 years ago, 40 years ago almost. And I think there is value to be made there. But the airline as such, the wave of debt The structural construction of that demand, with that demand changing, and again, that long-haul piece, which I do see affected by inflation, fuel, and some dent of globalization, definitely for the next few years, I see as a challenge. On the short haul, that's a completely different game. That is a cost game. And there, right, you don't have necessarily that same right cast curve, of course, and therefore it becomes a cost game. I think we all have to compete much harder. So, um, yeah, it's, it's, it's half really to at least put the discussion out there, because otherwise you were the only one, Peter, with your slides, and I think that's unfair to you. But it's definitely also half of what I believe in.

Peter Harbison:I am still of the opinion that this industry I think you probably won't find a lot of people to disagree with that, Anko. It may have been a bit revolutionary before, but I think something has changed, obviously.

Anko van der Werff:It was fun because— sorry, and then really, it was only in October that I said this, and I was really the only, in a way, social outcast at that meeting that you led. And I actually, over those months after, got probably more positive, right? Because we saw the demand rebound and we saw everything that is going on also in the world, all the positives. But at the same time, the underlying fundamentals of who we are have not changed. So I think I'm, again, also to argue it here a bit more, but I'm back in that corner of something needs to change.

Peter Harbison:Allan, Welcome to CAPA for your maiden appearance. It's hard to follow those acts, I guess, but congratulations also on your new role at Kenya Airways.

Allan Kilavuka:Thank you.

Peter Harbison:It's a very— been a very interesting airline over the years with a few transformations, but hopefully things are looking up now, looking good. I showed some numbers which suggested that Africa and Africa-Europe at least was looking relatively healthy, and for various reasons you don't seem to have been hit all that as hard as some expected by COVID so far. How do you see— just following up on this conversation we've been having— how do you see these things from your perspective? And I guess particularly in terms of the role of governments in aviation.

Allan Kilavuka:Yeah. So I'm very glad to be here to make this maiden appearance and to sit among these distinguished guests and panelists. I was listening to them, don't have 30 years of experience running an airline, but we, you know, I listened to you, Peter, and again listened to the panelists, and I do think I want to walk the middle ground. On this one, because on the one hand, I do agree that 2 fundamental things that you brought up that are related to what we're doing at the airline, which is that we definitely have to change. Secondly, that we need to do a lot of cost out, which we have been doing. I mean, airlines, that's what we do. On the other hand, there is a— Of course, a difficult road ahead. There is a difficult to really bring back the market. Economies are suffering, particularly in our part of the world. So at Kenya Airways, we we I mean we we were in a bad situation before the pandemic. We we've been loss making for a long time, and so the situation the The pandemic made it just much worse, much, much worse. You talk about a reset, and that's what we've been doing at the airline, to reset the airline, to make it viable, and to contribute to the global economy, to contribute to African economies. The reason why I think the model has to change, particularly for us, is because we do have a big population in the region. We are 17% of the global population. We are the second largest continent, if you think about Africa. We have a very poor road and rail network, so we need air travel. It's essential for us to have air travel. We only have— I think you showed it on your screen there— it's 2.6% of the air traffic, global air traffic, and about 70% is flown by foreign carriers. African carriers have to grow, should grow, but we are constrained from an equity point of view. We are constrained from a cash flow point of view. How do we change that? Largely state-owned, I mean, in our own case, we— 48%, 49% is owned by the Kenyan government. There was a thought earlier on in 2019 to completely nationalize the airline and see whether that would make it much better. Now, that has changed. We have rethought that because it's probably not the right thing to do at this moment in time. But then, what is the best model, I think, for us? Sir Clark was talking about 2 things. Either you have the right model or wrong model, or you have the right people or wrong people. I believe, I hope we have the right people. We're still looking for the right model. The model needs to talk to how do we encourage traffic within Africa, Right now, we have just created— Africa has just created a free trade zone, so it needs to have a lot more traffic from people and goods, and we need to reconnect the continent. It's not fully connected. It's about at least 60% less efficient compared to Europe, Americas, and Asia, so we need to reconnect that. Now, the continent is also very fragmented from an airline perspective. We have so many airlines. that are not viable. In fact, the number is estimated to be between 200 and 300 airlines. Some of them have 1 aircraft, 2 aircraft, but they're not viable. So what my personal view is that what they— what we need to do is to consolidate aviation in Africa, and that's what I'm working on, and that's what we are working on. We've already started discussions with some of the major airlines in Africa. I'm particularly talking to South African Airways to see how that can work. The idea is overall to see how we can use assets from both airlines, increase connectivity, have a 2 or 3 hub strategy that will encourage this large continent to connect to each other. I think that overall will improve options for our customers. I think it will reduce the overall unit cost of operating, and then it will debunk the nationalism that we have in Africa and I think globally. It's a very delicate situation. We now have political will. We need to win the will of the specific airline than the nationals of those countries. But I think the future of aviation, particularly in Africa, lies in consolidation so we can reduce our unit cost and so that we can connect the continent a lot more and to take more share that I think we need to have for connecting the continent. From that perspective, I think that's how we're working and that's where we're working to so that We can future-proof aviation in Africa, and it's extremely important. Aviation in Africa is probably more important than other continents because of what I said, because of the infrastructure deficit that we have. Not just that, because the growth rate is much lower, and I think we can help to catalyze that to increase the growth rates of the economies and, of course, aviation. That's how I see it. Although I'm kind of concerned about the state of particularly aviation in Africa, I still feel there's a lot of opportunity for us if we change the model and use that model to catalyze the growth that we have.

Peter Harbison:Yeah, thanks for that. It's interesting to get that perspective. And I think you'd probably agree that Africa has— I mean, it hasn't changed in all the time I've been watching Africa, which is a long time. in terms of aviation, you'd probably agree that Africa is the poster child of nationalism in the aviation industry. And I'd like perhaps if we could sort of run the next part of the session about where that will go. Will nationalism— and you mentioned it, Sir Tim, just in passing— will nationalism, will protectionism be on the rise, or will rationality prevail like you're suggesting, Allan? And Because it's in our mutual interest to do this, can we rise above this, this shallow inward-looking nationalism? What do you think, Sir Tim? I mean, you've been one of the ones who've busted through this and made a lot of difference, I think, to liberalization.

Sir Tim Clark:Yes, you're absolutely right, and I— this predeterminist model that was endemic in, in, in continent Africa of all the countries there, and other places in the world. To get back to the general point I made about opportunity, if, as Allan says, Africa persuades itself and all its ingredients, those countries in it, that the wealth creation, not just for the airlines involved, but also for the countries that have a high level of connectivity within intra-Africa, will create and spawn all sorts of great things. It unlocks, it unlocks continent Africa, and therein lies a golden opportunity, not just for people like us, but for— and I, I have been fairly vocal many, many years ago when I was working with the South African government to try and persuade them to open, open, open. What I was finding, that the, the African countries were more restrictive to their own carriers than they were to the likes of Emirates or—

Peter Harbison:Yeah.

Sir Tim Clark:Etihad or Qatar and others coming in, and it always was a worry. And as a result of this intransigence with regard to the aeropolitical understanding with regard to wealth creation, they continue to restrict. Now, if you're successful— I wish you the very best, Allan— in championing this, and there are other champions in other parts of Africa who will do this, then continental Africa, which has been suppressed in terms of travel as far as I'm concerned, For many, many, many decades will unlock. And therefore, that's a great thing that we need to be working on. My concerns is, as I said earlier, COVID, wars, insurrections are likely to shift it the other way. So you need the champions in the industry to say, no, this is the wrong way to go, and you need to be doing completely opposite. And that will help us. navigate the way through the post-COVID war era. So I think hats off to you if you get it done.

Peter Harbison:It's a pretty unfair battle though, isn't it? Nationalism versus reality and logic.

Sir Tim Clark:Well, of course it is.

Peter Harbison:I, I look, nationalism tends to trump most things.

Sir Tim Clark:And, and, you know, the countries love having their own national carriers with the country's name on it. And well, we're no exception. It's got Emirates on or you've got Kenya Airways, or you've got Malaysian, or whatever, Singapore. And as long as you've got that, if you remember the good old days of British Airways and Robert Ayling, who was running it, and the, the tails.

Peter Harbison:Mm-hmm.

Sir Tim Clark:And his view was that he would change British Airways from having British Airways on the— as the sort of strapline on the aircraft, and that it would be a neutral carrier co-owned by multiple players from different countries. and that this thing would be flying around the planet, and that transcended all the aeropolitical barriers, the rules of the game, etc. Well, it was a good try, and Margaret Thatcher then came along and put a handkerchief around the tail of a Boeing or something, and that was the end of it. It died on that day, and so did he, by the way, in terms of CEO.

Allan Kilavuka:Sadly.

Sir Tim Clark:However, it— in the utopia, if you look at maritime and the way the maritime model works, With regard to cross-equity, we talk about MSC, we talk about MESC, we talk about all the other bits and pieces. Their ability to ply their trade in a multilateral environment is where the aviation industry should be, and that's a big ask. So you remove all these barriers and you don't necessarily— you move, you shift the narrative away from the belief that you need to have the name of the country on your airline. But, you know, we're such a glamorous industry and everybody loves us, you know, and hates us, you know, poster child for ESG hate, but loves us. And they want to, you know, they, they see glamour in it. There really isn't much glamour in it. It's hard work, as we all know, but it remains and has been one of those emotive things. Certainly in my career over the last 50 years, I've seen it time and time again. And it will not die. So as I look out there, carriers, countries still seem to want it, and they will go a certain way to saying, okay, we hear you, we'll let 20%, and we'll let other carriers come and manage you, or be— but in the end, there is an inherent reticence, and I'm not quite sure how that's going to be cracked. So back to the point I was making about Allan If he gets successful and Kenya Airways become a disruptor, a catalyst in the thinking of what goes on in African countries with regard to the value and the value chain that comes into the— what the airline industry brings to everybody else, Africa will be a better place for it. And, you know, they'll be able to move easily because, you know, get from, you know, Johannesburg to Nairobi on a train or by road, well, good luck. I'll tell you what. take you about whatever time it is. So you need huge amounts of connectivity, you need city pairs that are really starting to energize and produce the business, and once you get that, the rest will fall into place.

Allan Kilavuka:It's—

Sir Tim Clark:but we're not there yet. Good luck to you.

Peter Harbison:Not there yet. I mean, there is a— there is a, to some extent, in some cases anyway, a financial logic to it. And I'm— I was always very struck by the statement of the German finance minister about, about a year into COVID when he said, we will do whatever it takes to protect our aviation sector. Now, that didn't just mean Lufthansa, that meant a whole array of skills in the industry. So there, in some cases, that is, that is necessary, but it's rare. Anko, I mean, you, you, you tend to, in Europe, you tend to find a few issues with national internationalism one way or another. Are you as optimistic as Sir Tim, for example?

Anko van der Werff:I fully agree, at least with Sir Tim on that. Really, it is remarkable, right? Indeed, it's that love-hate, but it's also the— it's that connectivity, right? And then when things go bad, we all want to save the connectivity, and then we buddy up again, and then of course, right, you're in the hands again, and then when things go Well, and you want to make changes, then, right, you want to move further afield. So I think both of us probably at some point have to decide, right, both governments and the industry, what really should be our place. Where do we have to be, right? And I can only hope for a future as Sir Tim is portraying. Look, I remember I started in the industry at KLM in 2000, and I just came across an article that my brother sent me from December 1999, which really feels like forever, right? Ages ago when the then CEO of KLM said consolidation, European consolidation, let's, right, quit nationalistic views on airlines. And it's coming up 25 years, right?

Peter Harbison:Here we are.

Anko van der Werff:I would have wished, I think, without saying really anything about particularly SAS or any particular airline, but I think if I had been the regulator in the European Commission, I would have done one thing differently. And rather than just forcing almost every country to chip in in 2020, I would have said sort it out amongst yourselves, right? Just consolidate. And right now, of course, a lot of money has been poured in with that one condition of— it actually blocks consolidation, right? There's an M&A ban basically for a lot of us. I think that was the moment to do it, right? And to really say, look, if you look for solutions, right, let's move a bit away from— okay, we all know how dreadful in a way the last decades have been. All right, so one of them was digitalization, frequent flyer programs, right, the monetization of that part. I think the other one clearly has been consolidation, and very much around airlines that are indeed transnational in a way, right? If you look at the United States, the prime example, right, and also in your invitation and all the things JP Morgan said there, right, was which was absolutely spot on. It was such a, in a way, lovely thing to read, right? All of that was just so true. How do we get there? I think consolidation is another solution, and very much around, I think, airlines that can take a bigger, broader role for not just one particular government or country. And that is, in essence, immediately the challenge with many of our brand names, right? Because Yeah, who would like to have that brand from the other country, right, dominating? It's ridiculous in many ways, right?

Peter Harbison:Well, how would you feel? There's a reasonable amount of logic in it, in a 50-50 joint venture with Etihad.

Anko van der Werff:For me?

Peter Harbison:Yeah.

Anko van der Werff:Yeah, look, open, it's at least government-government in a way, right?

Sir Tim Clark:Spoken for.

Anko van der Werff:Yeah, I was actually waiting for that. Yeah, look, maybe a bit too far afield. I was thinking more consolidation first on the European continent, right? Similar to how the Americans have done it. And on that—

Peter Harbison:But does that— I mean, is that actually such a great idea? I mean, do you put 2 not very strong airlines together and make something better? Or is it just 2 airlines who are still bad?

Anko van der Werff:I'm not sure who the 2 non-strong airlines are, right? But But I'll leave that for you. What I would like to say about the US consolidation, what you cannot argue is that it's been bad for economic growth or for consumer investments, right, price inflation drive-up or whatever you want to call it. I mean, that past decade, more investments probably than ever. It's been great for the climate because actually load factors went up and, right, fewer aircraft had to be It's been great for consumers because there was more choice. It really has worked operationally wonders because just beating the hell out of each other at every single hub was also not the solution. I think, in essence, it's been great for both employment and connectivity as well. I definitely am a strong advocate for—

Peter Harbison:Even so, as I mentioned, they've been bailed out 3 times this century.

Anko van der Werff:Yeah, but then once they got that done, finally things got underway. I mean, more than half of the profits in the worldwide aviation industry were driven in the United States. So look, it's not a one right type of fits-all recipe, but I again at least would like regulators to look at it. You cannot argue that has been bad for pretty much anybody. Honestly, it's been good.

Peter Harbison:I mean, Tony, what would your approach be to So in any sort of 50/50 equity joint venture, I mean, disregard what's happened in Etihad's past.

Tony Douglas:I guess in some ways, because there's so much I agree predictably to what's already said, allow me just, if I can, to connect something all 3 of you have mentioned. I think, you know, your question earlier on, Peter, about, you know, business travel, Sir Tim, around ESG, why we're hated as an industry, industry. And Anko, when you were talking about businesses and the right to choose, I think the big challenge out there is, of course, and we all accept, unless governments, policy setters, airlines, and manufacturers all turn around and say we're not serious about 2050 and they want to move the goalposts, if that stays the pathway, which of course that's what we're all committed to, that is by far and the biggest challenge that the industry has probably ever faced, because the physics of flight, as we all understand at the moment, do not have a silver bullet that will deliver that ambition. So I'm not going to go or attempt to cover the waterfront of the many things that we're all currently aware of as initiatives and the many things that still need to be considered and thought through, other than perhaps connecting those 3 dots. So We, like a number of others, have now introduced— for us it was a first— a corporate green loyalty program. And the logic behind this is, as well as governments and nationalization policies and all the rest, that ultimately consumers, the traveling public, are the most influential in terms of what they choose to spend their hard-earned upon. And corporates, of course, are the premium end, so to speak. So in terms of our green loyalty program, it's designed very, very simply. This table here represents a global bank, let's say. This table here is a global consultancy. And what we're making quite clear to you is if you operate on the sectors that we fly, if you wish to sign into our Etihad green loyalty program, it's called Conscious Choices, you have a conscious choice. Your conscious choices is you can first of all pay an environmental surcharge, so you have the option $20, $40, $100 per ticket, and then you can pledge it to either sustainable aviation fuel— good, because there's not enough momentum in creating the demand side of that equation to stimulate the supply side of it— you can put it into approved forestation, or you can put it into our mangrove—

Peter Harbison:Sorry, Tony, I'm sorry to interrupt, but we've only got a couple of minutes left. And I thoroughly agree with the fundamental importance of what you're talking about.

Tony Douglas:So I guess the 20-second punchline on that one, Peter, would be is for the corporate then you've got a conscious choice to get the carbon offset and when you're doing your ESG presentation if you're standing up and saying my profits were great but I went with I saved $1 on flying that's going to be bad news all round. So it's how we actually collectively move the dial that changes behaviour in a conscious way, I think is part of the challenge out there as well.

Peter Harbison:Yeah, yeah, absolutely. I think everybody would agree with that. As I said, we've got a couple of minutes left and I'd just like to ask one, one of those silly things on panels, one, one last question which I think everybody really wants to, to know the answer to and none of us does. When are we seriously, in terms of getting back to 2019 plus a level of growth, When are we going to break through the clouds? Just very briefly, what, what are your feelings on that, Sir Tim?

Sir Tim Clark:Well, if you'd asked me that before the war started in Europe, I would have said at the back end of this year, middle of next year. With what's going on at the moment, it may be retarded slightly, although I still think we'll be at 2019-20 levels by the summer of 2022.

Peter Harbison:24. 24. Summer of '24.

Tony Douglas:Tony? So we're in mid next year.

Sir Tim Clark:However, I meant '23. Sorry, I thought I was in '23.

Peter Harbison:It's like that, isn't it, these days?

Sir Tim Clark:I'm always out there thinking 10 years ahead. I meant in the middle of next year.

Tony Douglas:Sorry. So I'm far more aggressive than him. I'm really on '23.

Sir Tim Clark:But you're younger than me.

Tony Douglas:Quite right.

Sir Tim Clark:That's the problems in us.

Tony Douglas:But, you know, I guess— I know, that's really In terms, in terms of that, for us, our load factors this month— or sorry, for March— were greater than they were in March 2019. Our Q1 results for this year will be the first time Etihad's been profitable in its 18-year history.

Peter Harbison:Congratulations.

Tony Douglas:And that's because the yield in the ticket is still up there when the load factors come back, which is back to the comment before. If you can actually get £10 and a penny as opposed to selling it cheap, Long may that continue. So it's the first time we've had a stellar first quarter. Good to hear the history of the business.

Peter Harbison:But what about the industry?

Tony Douglas:Not all bad news.

Peter Harbison:What about the industry as a whole? When do you see something like a recovery? And obviously there are going to be some casualties along the way. Again, I think I'm in mid-'23, mid-end '23, because I remember end of '20 we were saying by 2022.

Anko van der Werff:Anko, As optimistic? Yeah, I think a bit. I mean, but again, let's break it down, right? And let's not make this into a 10-minute answer, honestly, but I would break it down into demand, revenue, profit, right? So it will follow that line. So demand, I do think this summer, I saw Eurocontrol, we're projecting ourselves as well, 80-ish, right?

Allan Kilavuka:Not perfect.

Anko van der Werff:So let's call it next summer 90, and then 2024, definitely 100. If not earlier on demand. I think indeed revenues, very decent at the moment for what's been bought, but at the same time, that's of course still on roughly 50% capacity. Then profits, I think, will lag those 3. Then I still have a summer-winter split that I'm not sold on. I think the summers, when we're talking 100% Yeah, I could see that 2023 summer is at 100% of capacity of 2019, but winters, I just don't know. I really don't think that is going to be as strong.

Peter Harbison:Yeah, so you're, to a large extent, you're focusing on leisure, obviously.

Anko van der Werff:Yeah, because that is what's leading the way at the moment, right? And I do see that changed market. We do see Corporates coming back. We do see, of course, corporates flying again, and that is healthy, but it's still lagging leisure as a whole. I do think, again, leisure will lead the way. Closer to home is leading the way. I'm happy, of course, with the domestic markets. Like I said earlier, I'm still short on widebodies. I don't see that recovery fully for at least our parts of the world. Not least because of Russian overflying. So again, I make that distinction between, yeah, between, let's call it demand and profits. Demand, I'm earlier than where I was when we met half a year ago, so at least that is showing you that I'm also more positive and able to change my mind. But I think the winters with, God forbid, new variants or just flu seasons or whatever, we've It seems still what it does at the moment. There is still shortages of people everywhere, and that won't go away, I think, in the next 1 or 2 winter seasons. That's where I'm—

Peter Harbison:Interesting point. We haven't talked much about that. Optimistic for Africa? Allan?

Allan Kilavuka:Yes, I am more optimistic than I was a few months, maybe 1 year ago. Africa is lagging behind the rest of the world. because of vaccination rates and state of the economy. But I, you know, I used to think we would be back probably end of 2024. That was my thinking. That was IATA's prediction as well. I've moved forward. I think we will probably recover, and I'm talking about demand, we'll probably recover by 2023, end of 2023, I think, but of course, subject to everything held constant, because we saw that our November-December last year was very strong, and then Omicron happened, and our Q1 this year collapsed almost, you know, compared to 2019. But when we look at forward bookings, particularly summer bookings, very, very strong summer bookings even this year, which is an indication of summer bookings next year, probably going to be back to 100%. by summer next year. I think Africa in particular is going to recover by end of 2023. I think the rest are probably going to be mid next year.

Peter Harbison:Interesting. Ladies and gentlemen, please give our panel a big hand. Sir Tim, Tony, Anko, Allan.

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