Trans-Pacific: The outlook to reconnecting Asia and the US

Transcript

John Thomas:

Hi, my name is John Thomas and I'm a senior advisor at CAPA. Welcome to today's CAPA Live event, the topic being "Trans-Pacific Airlines Outlook to Reconnecting to the US." We're delighted to welcomefrom Japan Airlines, the Vice President, Asia and Oceania Region Marketing & Strategy Research Akihide Yoguchi, from United Airlines, the Director of Greater China and Korea and Southeast Asia Sales Walter Dias, and from Alaska Air Group, the Vice President, Network & Alliances Brett Catlin.

John Thomas:

Yoguchi, before we look at Trans-Pacific let's look at the region itself. I believe that the Japanese domestic market is starting to show signs of recovery. What is your outlook for the current domestic and regional market for Japan?

Akihide Yoguchi:

Okay. First of all, thank you for having me. Yes, we're picking up in terms of demand in Japan because the Japanese government has lifted the restriction, what we call the state of emergency at the end of September. The number of infection has drastically gone down, but at this moment, it's nothing like the recovery of what we see in the summer in Europe or United States. Maybe it's because the [inaudible 00:01:36] savings is yet to come and maybe Japanese are more careful on travelling after this serious pandemic. Yes.

John Thomas:

Yoguchi, given that you have seen some recovery in the regional market, how do you see this translating into the Trans-Pacific market? As you said, there's still some reluctance of people to travel. Are you seeing that on the longer sectors or are people starting to come back?

Akihide Yoguchi:

I think it's a different rule outside Japan and inside Japan because of course the government restriction is on the way. In most of the Asian countries, including Japan, the restriction is not as free as Europe or United States. I think the demand comes back on the base of the reciprocal situation. Maybe Asians are more reluctant to travel than the US or Europeans, but we have seen numbers of demands. Even under this COVID situation, what we call the necessity, the people who travel for necessity. I'm sure it will gradually go up and especially after Asian countries go into COVID initiatives and start to open up their borders.

John Thomas:

Right. You actually kept quite a good network to the US during COVID did you not?

Akihide Yoguchi:

Oh yes.

John Thomas:

I know that that wonderful, direct Tokyo-Boston service seemed to go throughout.

Akihide Yoguchi:

Thank you very much. We were very fortunate to have many students from Asia to United States in Boston and Seattle and so on. Because Japan is quite careful in opening up the border, we had to rely on the connecting demand. Here we realised how important the connecting demand from Asia to America is. We saw more on one-way direction to the US from Asia for the flow of essential travellers, even during this pandemic. Yes.

John Thomas:

Right. So good at developing or solidifying than Narita hub?

Akihide Yoguchi:

Well, I think so. It wasn't intended. Of course Narita hub was always an important hub, but we used to pay more attention on the Haneda hub. We used to have more business demands, but at this time Narita demand has helped us a lot. Yes.

John Thomas:

Right. As it relates to the US market, what do you see as the greatest impediment and what concerns do you have out there?

Akihide Yoguchi:

As I'm talking about the restriction, the biggest concern is the restriction in the Asian borders, including Japan. Fortunately Japan has just announced last weekend that for the business traveller and travellers for studies, they're going to shorten the quarantine measure, the duration of quarantine to three days. For the pleasure demands, the relaxation is yet to be seen. We are looking forward for that to happen in a foreseeable future, I guess.

John Thomas:

Right. Walter, I know that in markets like Australia, United did an amazing job keeping the supply lines open to the US. Can you give an overview of how you have seen the last 18 months as United has kept supply chains open in Asia?

Walter Dias:

Sure. Yeah. Pre-pandemic United, we actually operated the largest network between the US and Asia. We recognised really early that this was going to be a long pandemic and that we had to really aggressively reduce our schedule. I think well over 90% of the Trans-Pacific schedule was suspended in the early days of the pandemic. As you mentioned, we did retain the US-Australia flights and some of the other critical lifeline fights in our network like Guam-Honolulu and Guam-Narita. Those early fights were critical in carrying medical equipment and PPE back to the US as well as ventilators and medical equipment to places like India. It was very critical to have some of those flights continued. When we suspended all service, of course, the entire industry reduced by over 96% in the Asia Pacific region.

Walter Dias:

Our cargo team immediately noted strong demand from our freight customers and so we started operating cargo only flights throughout the region. These flights were really helpful in allowing us to reconstitute some of the passenger service as we approached the third quarter of 2020. That was really helpful to maintain flight activity to places like China, Japan, Taiwan, and Korea. That's been a long process over the last 18 months or so and where we're looking at right now for December of this year, will probably be close to about 28% of our pre-pandemic schedule.

John Thomas:

Right. You say a good portion of that is underpinned by the strength of the cargo operation?

Walter Dias:

Yes, absolutely. The cargo revenue just increased dramatically. I think it's still operating at well over 84% of pre-pandemic levels so freight has been critical to maintaining these networks in Asia.

John Thomas:

For sure. Yeah. General recognition that freight sort of saved the bacon of the industry. Given that experience over the last 18 months, how do you think the freight component of United's network will play on the broader network development going forward?

Walter Dias:

I think for the short term, obviously it's very critical to be able to reconstitute the schedule in Asia Pacific with the freight only flights, but as we've been progressing in other markets, we've seen some of the passenger traffic come back and of course that is the main focus for us going forward.

John Thomas:

Right, right. Yeah. It helped by having fantastic new technology aircraft. Reasonable economics of 78s.

Walter Dias:

The 78s are beautiful birds.

John Thomas:

Yeah. Yeah. Walter, just touching on the recovery, what's your perspective over the next six months? As you say, you are back to about 28%. Do you think that that will stay there for the next six months or you do think it will start to climb back?

Walter Dias:

I think Asia Pacific is going to be a little bit lagging the rest of the international markets. We do see very robust recoveries in Europe right now with the Trans-Atlantic. With the US opening the borders again we're seeing great increases in interests of travelling back and forth between Europe and the US. Asia Pacific, I think is going to be challenged for the near term. As Yoguchi mentioned, the government quarantine requirements are quite strict and until those are relaxed, I think we're going to still be challenged for recovery in Asia Pacific.

John Thomas:

Right. So it is more government regulations than as a lot of people say, a lag of business travellers.

Walter Dias:

Right. We see a lot of interest pent-up demand sitting there. A lot of customers are really keen on getting back and reconnecting with the customers. So it's really important for the industry to work with the governments to safely reopen the borders.

John Thomas:

Right, right. Do you think once the regulatory issue is changed, then the underlying business demand will be there?

Walter Dias:

We do see definite interest in getting back on board and reconnecting people.

John Thomas:

Great. So Brett while Alaska doesn't fly to Asia, you obviously partner with a number of the major carriers with Seattle being an important US hub both to and from the Pacific. In working with your Asian partners, what's your perspective on the demand outlook?

Brett Catlin:

It's a great question, John. I think first off, we're thrilled to be in Oneworld. We joined back in March and to partner with great flagship carriers like Japan Airlines and American Airlines, we certainly see Seattle as being the gateway to Asia. It's the largest hub on the west coast of the United States and we're eager to build it back quickly. I think our perspective would be similar to those of the other panellists in terms of Asia certainly lagging what we're seeing from international demand more broadly, which is natural given the closures in place. I think we're optimistic in the second half of next year, that in partnership with American Airlines, some of our joint venture routes will be able to launch including nonstop Seattle-Bengal or nonstop Seattle-Shanghai. That really is dependent on the lifting of travel restrictions and that's an unknown at this point.

Brett Catlin:

I'll say though as an analogue, there's certainly hope with Europe reopening. We've seen a strong recovery in terms of connecting flow from our partners in Europe and elsewhere and I'm confident that once Asia reopens we'll see a similar dynamic. Ultimately it's a function of government restrictions and when those are lifted country by country is when demand will come back.

John Thomas:

Yeah, I don't know whether it was rumours but I think Aer Lingus said that all of their flights to the US were full today with the recovery. Perhaps this notion that business travel is going to be a lag art in coming back. As you say, once the regulations are lifted the business travel will come. Brett, you've got a lot of Seattle based corporate customers that obviously are heavy fliers to Asia and I think there's still this notion that large corporations are going to be much more conservative of in terms of their travel policies going forward. Perhaps the SMEs are going to be more liberal. With the large corporates, are you seeing general travel restrictions or do you think they're starting to loosen those up?

Brett Catlin:

Yeah. You're right John, Seattle is fortunate to have a number of major US Corporations, Amazon, Microsoft Starbucks, spelling the name just a few, but ultimately in terms of a return to travel, it's an order of operations question. Step one is you have to show up at your own office, which we're seeing for some companies who mentioned small, medium enterprises they've been kind of at the Vanguard of that, but larger tech companies are still not back in the office. It looks like January might be when they start to come back. You check the box when people are back in the office, hopefully Q1. We think step two is you'll take a domestic trip here within the United States for those Seattle based US companies. Then step three is hopefully you take an international trip. You can imagine that working through each of those maturation's takes three to six months.

Brett Catlin:

We think about the rebuild, the business demand, particularly to Asia. Imagining that the borders are reopened and travel is like it was pre-pandemic, you're probably nine to 12 months out before you see a large recovery in business travel. Of course there will be the aberrations to that but we think for the masses at the working level, it will take a bit longer to get people back on point.

John Thomas:

Right. We just need to change the paradigm Brett and to say to people "Travel is more important than getting back into the office." The getting back into the office is artificial whereas travel is much more tangible and beneficial. We just need to switch the order in terms of how they do that progression.

Brett Catlin:

That would certainly be helpful if we can convince the risk managers of these large corporations, that that would be our key.

John Thomas:

Right. Right, right. Brett obviously, as I say, there's a lot of carriers that fly into Seattle or fly to and from Seattle to Asia. I know it's a hard question, but clearly in terms of observing the carriers into and out of Seattle, do you think that will translate into any medium term changes in the competitive landscape?

Brett Catlin:

Yeah, it's an interesting perspective. I think certainly having the ability to hub and have strong connecting flow is as important now as it's ever been. That's been true throughout the pandemic. I think the example as it relates to Asia for us is Qatar Airways, our Oneworld partner, began flying to Seattle in February. Out of the gate, the flight has done very well. Their Alaska's second largest partner this past summer, second to only American. So I think there is this mentality if you build it, you connect into the right hub, people will come and you have the right connecting networks beyond; certainly that doesn't apply to every airline, but demand is out there. Ultimately it's a function of being able to create the O and Ds where people want to go. It isn't that simple, but I think I had the base level. That's what it's all about and I think the competitive environment will change as a result for carriers that have strong hubs. We talked about Narita a bit before and the ability to create those ODS is going to matter more than I think it ever has.

John Thomas:

I think also, to Walter's point that having the right aircraft in the 78s, that you can actually underpin the economics with freight helps you maintain that network. I think Qatar have been the standout in terms of how do we actually build our network and backfill before others can actually get back into the market.

Brett Catlin:

Absolutely.

John Thomas:

It sounds like that strategy is working for them. I know we talked about the current restrictions but Yoguchi, do you think there is more that governments can be doing on both sides of the Pacific that could assist in the recovery? I think you used the example that perhaps some of the quarantine restrictions in Japan are being shortened. Is there more that people can be doing or you think that we're just going to have to wait and have governments do it at their own pace?

Akihide Yoguchi:

Yeah. So first of all, I think industry should voice up more to the government to ease the restriction. Also, what worries me is the complexity for travellers to obtain these necessary documents and the rules differ from part to part. I think it would be better to have more unified rules in terms of travelling across the border. I think it's necessary to have a unified device if I may, or apps like IATA Travel Pass or VeriFLY because we even see now a long queue at the airport with all this evaporation of the demands. When it comes back I'm sure the efficiency of the traffic operations would be questioned. I think the aviation industry should voice up more for the authority to cooperate with this industrialising.

John Thomas:

Or provide that alternative as you say.

Akihide Yoguchi:

Exactly.

John Thomas:

I was in Europe a couple of weeks ago, and obviously they look at you, they ask for your digital certificate which of course us in the US, we don't have digital certificates. A colleague I was just talking to, he was in Singapore and you actually cannot enter Singapore without a digital certificate. If You then try and sign up as a consumer or as a traveller to the IATA Travel Pass, you can only do it if it's actually from a carrier. You would think that IATA would just allow anyone to sign up and get this digital certificate.

Akihide Yoguchi:

Yeah, I think as a traveller, it's an enormous burden for worry. I travelled in Japan during this pandemic and what worried me the most is "What if I get deported?" As an airline staff, it's very embarrassing but all the documents required in Japan and even Singapore was quite strict. That is getting on the way of the recovery of the demand, I would say from the consumer point of view.

John Thomas:

So Walter, anything again that you think governments or the industry could be doing to assist this recovery?

Walter Dias:

Sure. John, Hey, I think a good example is Singapore as a roll out the vaccine travel lane concept throughout the region. They started it with the US and four other countries. They've expanded it. Now, I think it's up to almost 50 countries now that they have ETLs with; Korea and some other markets. That's a great example that I think other countries could look to Singapore for leadership in that realm of reopening, in a safe manner, their borders. I think the other big issue that perhaps is in Asia Pacific is the vaccination rates. I think that's really what helped Europe and the US reopen some of the markets - getting those vaccination rates up close to 80%.

Walter Dias:

I think Singapore leads the region with their current vaccination rates. I Think are over 83% or so. They felt comfortable about safely reopening some of the border restrictions with these vaccine travel lanes. It's very exciting to have that in place. Again, we're hoping that some of the other governments in the region will look to that model to work with the industry to reopen the air flights. I think for us as an industry, we also need to work very closely together to build those programmes and methods to make people feel comfortable. That's where we spent a lot of our time over the last 18 months, building the technology, making sure that the experience from the origin airport to the aircraft and to the destination airport, people feel comfortable about the travel experience. That it's safe. That's something we need to work together to really get that message out. I think again that when we look at Europe, what we're seeing right now, I think people are ready to travel. We've just got to work together as an industry with the private public sectors to reopen borders.

John Thomas:

Right. Right. Brett, what do you see as an opportunity for governments or industry to help with the recovery?

Brett Catlin:

Yeah, I would echo my colleagues sentiments. Certainly clarity is important. Where we've seen success is where the policies have been very well documented, setting aside technology and the applications. Ultimately, I think if governments can put forward a very clear set of protocols and procedures, that's the baseline requirement. I think in many locals, even in north America where we fly today, we're not seeing that and that ambiguity, ultimately it creates a barrier to purchase. Even if somebody is excited to go to an international location, if they can't easily figure out what needs to go there, then they're immediately going to default to something that's known. So I think it gets back to this idea that we have to do the basics, the blocking tackling before we begin to really focus on how we get a single application or an integrated system. We have to get there eventually but I think in terms of digging out the pandemic and the situation we're in today, that's really step number one of us having clarity on the requirements.

John Thomas:

Yeah. I think, as Yoguchi said, it's this standardisation because if you try and do a multi-country trip, even going to Canada and Europe out of the US, there's something different for every country and obviously it does cause a lot of angst for travellers.

Brett Catlin:

Yeah. Ill say John, an interesting example in terms of early in the pandemic French Polynesia, which is heavily reliant on tourism, put forward very clear guidelines all the way down to the specific test they would accept from the specific manufacturers. I think it's that clarity. There's no ambiguity if I get X test and it's negative, I'm admitted. That's critical.

John Thomas:

Yeah. Yeah. To Walter's point of the vaccination levels, some countries are using the carrot and stick. Perhaps using the stick to get people to get vaccinated with the opportunity that things will open up once they get to a certain vaccination level. So Yoguchi, Walter mentioned before, and we talked briefly before about the importance that cargo had played for United and keeping some of the supply chains open. Obviously cargo's always played a very important role to Japan Airlines. Any different perspective now, given the more important role it's played over the last 18 months?

Akihide Yoguchi:

Yeah. Like Walter mentioned, cargo has helped Japan Airlines a lot during this pandemic. Like I mentioned, we realised the importance of cargo business, although it wasn't the main revenue until now. We realised the importance of the connection demand through Narita and also of cargo. Even after the pandemic, we will proactively focus more on the partnership with other cargo airlines because at the meantime, we don't have cargo specialised aircrafts. What we do is we put [inaudible 00:25:30] and many 787s and fly to get profit. As we realise that this is a very important part of airline business, I think we'll look more deeply and progressively into cargo business strategy, yes.

John Thomas:

Right. Another good attribute of the Narita hub or the Haneda hub? Not just passengers, but cargo as well.

Akihide Yoguchi:

Yeah. Yeah. We have these facilities more on the Narita side. Yes, exactly. Right.

John Thomas:

Yeah. Brett, you talked about your perspective to the Q3, Q4 of 2022. I just wonder if I could ask each of you in closing, as we look out to say 2024, obviously on the assumption that I know that there's still the concern that there may be another strain, but we had the various announcements about medications against COVID, et cetera, coming out over the last couple of days. Brett, would you dare to take a view in terms of where you see industry capacity across the Pacific and the breadth of the network in say 2024? Will we be well and truly back to pre COVID levels?

Brett Catlin:

Yeah. I think certainly from where we're sitting in north America, in Seattle with a network that is primarily focused on north America and we don't have huge international exposure, I would say we're optimistic. I think what we're seeing in the US is that people do want to fly both for leisure and business purposes. They're coming back in volumes that people probably wouldn't have forecast 12 or 15 months ago. I mentioned that as I do think it's important for Asia, where environment is different today than it is in the US or in the US domestic market, the demand will come back. The pandemic will be behind us. A lot of the traditional travel flows will resume. So I think to your question John, by 2024, it's hard to say what the carrier composition will be and what specific routes will be. But ultimately the global population is still growing. We're more connected now than we've ever been and people will want to see each other face to face again. We think that's ultimately good for our industry, good for air travel, no matter where you are in the world.

John Thomas:

Yeah. So Walter, a view on what United's network on the Trans-Pacific will look like in 2024?

Walter Dias:

Right. Again, I think it's really about human relationships, right? For a business, you've really got to get out and see your customers. Meet people face to face. There's no real alternative to that process. We do believe that eventually business traffic will come back fully. That'll fully recover. I don't have a timeline on that. The crystal ball is a little fuzzy as far as when that's going to happen, but we're fully confident that business traffic will recover fully.

Walter Dias:

I think when you look at it for United Airlines, we suffered a lot during the early parts of the pandemic because we were exposed more than other airlines to the international arena. We're definitely hitting that point of going from a headwind to a tailwind as we get into 2022 as far as international traffic recovery is concerned. I think with our hubs in San Francisco and Newark, east and west coast, LA as well, we're going to see great recovery in Asia Pacific. We're ready to go as soon as the borders open. I think we're going to be very careful about how we add back capacity. We're going to have to see sustainable demand for that to happen, but we're fully confident that over the next three to five years, we're really going to have a Renaissance in international business traffic and international leisure traffic as well.

John Thomas:

Yeah. Yeah. And Yoguchi, your perspective as well by 2024? I think the other thing too, I think I'm correct in saying that at Japan airlines, on the wide bodies, you've actually downgauged a little bit with more of a focus on the 78s and less on the 777s. It would be good to hear your perspective on how you think the network might look in 2024.

Akihide Yoguchi:

Yeah. About the downgauge, I think it's more correct to say that we have a plan to accelerate the change for the airline for A350 for several reasons. Not only the capacity because after this pandemic, people will pay more attention to this global warming issue. I think it's the right direction to have more efficient aircrafts. Also, like Walter said, we are always ready for the cut return of the demand. We tried to maintain our capacity to prepare for the return of the demand.

Akihide Yoguchi:

I often hear from people, or in the newspaper, that this business demand won't come back because of zoom meetings. This is more of my personal perspective, but I don't think that's true. That's not true. Look at 20 years ago, international calls were quite expensive. Now we can talk freely around the world. Did that evaporate the needs of conference or actually meeting? No. The aviation demand has doubled during this 20 years so it's very difficult to set a timeline. Eventually, like Walter said, I think this DX thing will accelerate the business chance and will lead to the return of the business demand. I hope the pleasure demand will follow as well.

John Thomas:

Right. So all we need to do now is fix the looming pilot shortage so that we can actually put that capacity into the sky.

Akihide Yoguchi:

Exactly. Yes.

John Thomas:

Yeah. Great. Well Brett, Walter, and Yoguchi, I really, really appreciate your participation today and as always fantastic insights. So thank you very much for joining us.

Walter Dias:

Pleasure, John.

Akihide Yoguchi:

Pleasure. Thank you very much.

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