Solid LCC Achievements As Legacy Airlines Start Restructuring - A Renaissance?

Transcript

Will Horton:So as Stephen mentioned, I'm going to give you a little bit of an introduction on some themes, try to move on pretty quickly, but throw some ideas out, some numbers, sort of along the basic theme that if you've joined us last year, since then we've seen continued achievements from LCCs, but we're now starting to see some changes with the full-service airlines, potentially your competitors to varying degrees. Many of the full-service airlines and perhaps even some of the low-cost airlines were in Cancún last week for the IATA AGM, but I think all of you here in Osaka, you've made the right choice coming to this event. Now, I am highly biased, but I do believe I have some strong evidence. First of all, here in Kansai, The beer here is better. Mexico has beaches, but on Kansai you are on an island. Perhaps even better, financially you're doing better than the full-service airlines. When we look across the world at a snapshot of many airlines, we see that the low-cost airlines have higher operating margins than their full-service counterparts, whether that's in Europe, the US, or here around Asia. Looking at market— looking at market share, I know some of you like these figures, so we've updated them. If you joined us last year, you saw that the Northeast Asia LCC rate for intra-regional growth was 11%, and now it's gone up to 13%. So about 2 more points. You'll notice Southeast Asia has actually gone down just a little bit. That's not because low-cost airlines are shrinking or cutting any growth in Southeast Asia, but actually over the last year there's been stronger growth from the full-service airlines, so that's tilted the balance. But still, LCCs are very prominent and bigger than they were a year ago. Looking at absolute numbers and not just market share, over the last year comparing the second quarter of the year, Full-service airlines have added about 15.5 million seats during the quarter for 8% growth, while LCCs have added 6 million seats for 26% growth. So a smaller absolute number, but much faster growth. Looking at the LCC market share rate by city, these are the 20 largest cities around Northeast and Southeast Asia. Considerable variation. You do see that LCCs have gained much more rapid share in Southeast Asia, but that overall in the region, Northeast Asia's airports are far more prominent, especially because of China, with many of the Northeast Asian airports there in China. So looking in at China, the overall market share rate there is 9%. You do see the major cities— Beijing, almost nothing for domestic market share. Shanghai, where our friends from Spring Air are helping with around 4% or 5%. Curiously, some of the highest cities, one of them is Zhengzhou, where AirAsia China hopes to launch. So let's see, with West Air and Lucky Air already there, is there room for further stimulation, more growth? Looking at the top 10 international markets within Northeast Asia and Southeast Asia, In Southeast Asia, LCCs are on every single market, whereas in Northeast Asia, almost there. 2 holdouts, one Hong Kong-Taipei, the other Hong Kong-Beijing. One market I want to draw out is the international market between Japan and Korea. Over the last few years, there's been tremendous LCC growth, where now this year LCCs have actually surpassed number of seats available from full-service airlines. And since LCCs do tend to have much higher load factors, they are carrying even more passengers than the full-service airlines. So congratulations, you've done it. Well done. Unfortunately, it hasn't been an easy year. We've seen some delays with aircraft, NEOs and so forth. Some of the usual suspects of governments looking to get more money out of you despite everything you do for them. And while it has been an overall positive story, unfortunately we did say goodbye to VietAir, which has exited the market. I will have you note that VietAir actually never spoke at a CAPA conference, so all of you here, don't worry, you have CAPA immunity. Alitalia also has never spoken at a CAPA conference. And we have more LCCs on the way, potentially to make up for VietAir's launch, quite a number in Korea, of all places, to start. perhaps the saturation of that market. We'll have some debate there. And 2 LCCs in the region from the AirAsia Group. With all of the growth from low-cost airlines, other types of business models, the region is becoming far more complicated. Relatively speaking, it used to be quite easy where the interest of an airline, its main hub, and the main airline, which may or may not have been a flag airline with government ownership, that was all broadly aligned, and there's a bit of a virtuous circle of everyone's happy, honky-dory, yellow brick road. But now it's far more complicated with more airports trying to value— get their value out there and say that they should have flights over the hub, with more airlines, whether it's full service, quite a number of low-cost airlines, and you even now get 5th and 6th freedom requests from foreign airlines. So governments are having to ask, what is value? Who is generating value? Is it necessarily the airline? been supporting for the last 10, 20, 30, 40, 50 years. I'll leave you with this quote from the former Prime Minister of Singapore saying that essentially you have to put your hub before everyone else, and that includes national carrier. And I think we can say that over the years, the government of Singapore has routinely sacrificed Singapore Airlines, and the Changi hub has benefited tremendously from that. But perhaps good luck passing that message on elsewhere. Perhaps to summarise some of the growth challenges, one epithet: where there are profits, there are no slots; where there are slots, there are no profits. A lot of the easy work has been done. LCCs were able to make very quick gains on the largest routes. And to give you an example of some of the challenges unfolding, up here you see 7 of the largest 72 aircraft. What exactly are those 72 aircraft? In order for Japan to meet its tourism target to 2020, 72 additional narrow-body aircraft will have to land every day in Japan for the next 4 years. Despite all of the efforts of our friends at the airports in Tokyo and Osaka, these 2 airports simply do not have enough capacity to handle all of this incoming traffic. So LCCs and other airlines will have to start looking at airports around Japan. As they do that, low-cost carrier terminals will become more popular. IATA this year visited Japan and actually expressed some caution about the development of low-cost terminals, and we can have a debate about that on some of the panels during this conference. Looking at the changes with full-service airlines, they're not as, you know, stuck up as they used to be. They're not taking things for granted. for granted. They used to think that LCCs would never work in Asia, but in fact they have and they continue to. They're no longer taking for granted that passengers will demand frills, the full service and all of that. They may be no longer so enshrined to their loyalty program and are looking to enhance value, although enhance is often in quotation marks. Over the last 2 years, most of the full-service airlines in Northeast Asia have undergone a leadership change, either at the CEO level or perhaps the president level, with then resulting leadership changes at sort of your director, vice president level as well. Overall, we're seeing a younger generation of leaders come in. Not all have LCC experience, though Asiana's new CEO was running Airbusan for a while. But I think it is fair to say that overall they are taking new views and they're not taking the market for granted. And they are looking, I think, essentially to reduce their cost base and become more competitive with LCCs and also with airlines in mainland China. We really like this slide comparing various cost factors from Spring Airlines and the overall average of Chinese airlines. This is actually not from Spring Airlines, but quite tellingly, the Chinese government itself issued this and circulated it around. And when you look at the metrics, Spring Airlines is consistently much lower on every metric. So this is a warning, in a way, to the full-service airlines there that we may be able to protect you for some time from this very efficient Spring Airlines and other LCCs, but you do need to reform. You do need to lower your costs. So if you do think about what will it take to get Northeast Asia's market share to a level seen around Europe, North America, Southeast Asia, it is essentially dependent on greater market share gains in the domestic Chinese market. We've put here a series of sort of what-if scenarios. So if, for instance, the Chinese domestic market went from 9% to 20%, the overall market share of LCCs in Northeast Asia would be 20%. But if you look at maybe some more even far-fetched scenarios, such as LCCs in Japan having 50% of the market share, making a much greater leap than where they are today, the market share around Northeast Asia for all LCCs would only get to around 18%. The good news is perhaps, depending how closely you read into some statements from the Chinese president, things could be changing. At the World Economic Forum, the president remarked that protectionism is like locking yourself in a dark room. Now, might we apply this to aviation, which has long been subject to all sorts of different rules and has been far more protected? Xi Jinping went on to say that China will keep its doors open, but that it also expects other countries to, potentially meaning that Chinese airlines will continue and ramp up their investment in foreign airlines. So with the door open and with protectionism to fall, will we see private airlines and essentially non-state-owned airlines be allowed to fully grow? We've seen the impacts of protectionism and private airlines being held back. Spring Airlines, it took them 10 years to get to 50 aircraft. They originally wanted to do that much, much earlier. If you look at the very top of this chart, which tracks the number of aircraft by the year of operation of a few LCCs around the world, you see that the very top, JetBlue in the United States, which is perhaps the most comparable market to China. In 10 years, JetBlue got to about 150 aircraft, whereas, whereas Spring could only get to 50. AirAsia in Malaysia was able to surpass 50 despite Malaysia being a much smaller market than China. Tony Fernandes has spoken about his new LCC getting 50 aircraft in 5 years in China. Certainly the market could absorb it. AirAsia is very capable, but is China ready? Looking at a slightly different topic of China, one thing to draw out is the increasing role of transfer traffic at the full-service airlines. Using the market between Sydney and China as an example, the transfer traffic has held pretty constant, sort of around 13%. But of course, as the overall number of flights is growing, they're carrying much greater transfer traffic, whereas last year there were 8 daily flights between Sydney and China. One of those flights effectively carried nothing but transfer passengers. As those passengers are connecting to other points around Asia and also other continents, that does start to disrupt some of your O&D pricing around regional Asia. Last year, we looked at unbundling at full-service airlines. China Airlines started with a handbag-only fare on some routes from from Taipei to Japan. Curiously, I tried to find these fares on their website. They're no longer available. Another part of the website said the fares are now only between Hong Kong and points in Taiwan. I couldn't find those either. We actually do have some people from China Airlines here, so hopefully I get to speak to you and ask you about this. But in North America, we do see these handbag-only fares, basic economy they often call it, is getting quite popular. American Airlines has found that it's been able to use basic economy fares, which are much lower than their standard economy fare, to upsell. So they draw people in with the basic economy fare, and half the time they upsell to a higher fare. So they get the benefit of seeming to be cheaper than LCCs with their lower advertised fare, but in the end, half the time they do end up selling much higher. So with challenges, I think we have the usual, but increasingly around the world we see some reluctance. To tourism. Amsterdam Marketing CEO, I think, got himself into some trouble when he said that we really don't want more visitors, especially from low-cost airlines, and Ryanair causes the most trouble. Certainly around markets in this region, there is some hesitation about local culture potentially being disrupted by massive influxes of tourism. And how will this conversation unfold over the next few years as tourism continues to grow and people are often traveling for the first time and may not have the established norms of how to behave elsewhere. Disruption, I think you have to talk about, and I'll give you some recent examples. This was from Christoph Mueller, who's sort of these days the number 2 or number 3 at Emirates, saying that if in a few years you don't radically change your business model, you will end up working for Google. And I think for a few years now we've been talking about the potential for Google to lead in flight search and innovations, and will they end up commoditizing the industry all over again? But now Airbnb, which a lot of people, especially the younger generation, who are increasingly booking— Airbnb is throwing something out there and saying, maybe we'll do something as well. We won't tell you what, but we will make it very different. So the region continues to hold a lot of potential, but increasingly there are challenges that are very well beyond your handling. And we are looking now for there to be change at government and all sorts of other levels. And what will be the pace of that change? Will it be slow? Would it be fast? Or perhaps both? So I'll leave you with that thought, and I look forward to discussion over the next few days on this wonderful tropical island. Thank you. Thank you, Will.

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