CAPA Airline Leader Summit: Airlines in Transition 2022

Manchester, United Kingdom
7-8 Apr 2022
08:00-09:00 Registration, Networking & Coffee
Hosted By Registration Partner  
09:00-09:05 Welcome by Conference Chairman, Chief Financial Analyst & European Airlines Analyst, Jonathan Wober
Welcome by Host, Manchester Airports Group, Chief Development Officer, Ken O'Toole
09:05-09:35 State of the Industry:
CAPA - Centre for Aviation, Chairman Emeritus, Peter Harbison [Download Presentation]
09:35-10:35 Setting the Scene: Never waste a good crisis! Why haven’t more airlines disappeared?
The airline model is complex. It is typically a hybrid, with many variations on the theme. With a handful of exceptions, the common feature is that airlines are commercially unviable. A JP Morgan report stated some time ago, airlines are “deeply serial value destroyers in the long term, to be owned only in the up-cycle. The network airline industry’s long term profitability is fundamentally flawed”.The “traditional" airlines, or flag carriers, are supported by governments to a greater or lesser extent – if only by the inherent protectionism in the regulatory structure. By contrast the more recent low cost models are mostly independent and unsupported, having to crash through barriers to grow. Yet all perpetuate the myth that they can operate profitably. It’s a house of cards, but one on which millions of jobs depend, which stimulates global economic activity, underwrites a global tourism industry and generates jobs and profits for a long chain of suppliers.

For many countries, and not just developing nations, the national flag carrier is iconic, a vital fixture, sometimes loved sometimes despised. It is – or has been – relied on to deliver connectivity and has an economic and a social importance well beyond its direct commercial relevance. So it’s a heavy burden to carry when it is also expected to make profits.

To paraphrase Germany’s Finance Minister when bailing out Lufthansa last year, “we will do whatever is necessary to secure the future of our aviation industry. Flag carriers may not be “too-big-to-fail” but they can be “too-important-to-fail”.

Remarkably, fewer than five large airlines are able to achieve more than junk bond credit ratings; and it is rare that more than five qualify as investment grade. That alone speaks volumes. A couple of those are European LCCs; the others achieved the status because they have strong (protected) domestic markets. Paradoxically, only one is a “flag carrier”.

After 75 years of evolution we might have expected better. How is such an industry able to survive?
Quite amazingly, even the massive upheaval of COVID hasn’t yet been sufficient to dislodge the airline industry. Instead, today all hopes are pinned on restoring the same old - uncommercial - ways. The only “strategy” goal to be heard is “getting back to normal”.

So, we’re in serious danger of wasting a good crisis, the biggest the modern industry has ever confronted. The only saving grace is perhaps the small mercy that the pandemic hasn’t yet run its course. The shock waves of such an upheaval take years to work their way through the system. As The Economist magazine observed last year, “a merely illiquid firm can quickly become a truly insolvent one as its earnings stagnate while its debt commitments expand. A rise in corporate and personal bankruptcies, long after the apparently acute phase of the pandemic, seems likely, though governments are trying to forestall them.”

Ownership & Control and the Constant shock syndrome
In the airline industry there is a frightening constancy about the “beyond-our-control” – exogenous - shocks. They are never expected, less still planned for; with rare exceptions the annual struggle to make a viable return on capital occupies all of management’s bandwidth, without squirreling away enough nuts to help them survive the next “shock”. And anyway, governments have usually been there to give them a helping hand in their hours of need.

Take the US as an example, the home of commercial airline operations, where government subsidy of airlines is abhorrent. Over the course of just the past two decades, there have been numerous responses to support the US industry.

After 11 September 2001 airlines were still staggering from the tech bubble burst and loss of high value business travellers, were bailed out by the US government. Despite this, a series of Chapter 11 bankruptcies (also considered by international competitors as bailouts) followed. Writing off debts under the bankruptcy proceedings facilitated more consolidation, greatly strengthening those major airlines left standing.

The result was an oligopoly operating in a domestic market strictly protected from foreign competition or ownership, then able to generate half of the total world’s airline profits, despite only accounting for about 15% of global RPKs.

Clearly such an immense profitability imbalance had to be due to some special status that other airlines didn’t possess.

That alone offers a key pointer to how to create economically sustainable airlines – allow them to merge, with a protective barrier against foreign investment or competition! (even though hundreds of billions of dollars in subsidies were still needed to lubricate the process). Hardly a solution for the world, but the importance of the ability to consolidate shines through. Removing nationality controls is the key issue internationally.

In this context, Southeast Asia may actually be provoked into a moderate form of ownership liberalisation, the more so because it faces a continuing disastrous outlook. IATA has forecast traffic levels in Asia Pacific for the full year 2022 will be around 11% of 2019 levels. If anywhere near correct, that spells catastrophe for most network airlines, as border uncertainty persists. Even the 60-70% projected for global recovery is near-disastrous.

To quote IATA CEO Willie Walsh on Asia, “...it's a major, major problem. Several airlines have accessed the capital markets, either through raising debt or equity, but not all have been able to do that. …. the scenario we've painted for 2022 is going to leave a number of airlines in a very precarious financial position. And we know that they're on the brink at the moment. So I think governments will have to understand what's likely to happen if these airlines do collapse, because it's going to take a long time for the infrastructure to be rebuilt.”

In essence, something has to give.

Being a leader in accepting cross-border joint ventures - where the “effective control” element of the bilateral requirement for “substantial ownership and effective control” frequently did not reside nationally - has greatly helped in the expansion of Asian airlines for both LCCs and full service airlines’ subsidiaries. That offers a hint of a solution.

Moderator: CAPA - Centre for Aviation, Chairman Emeritus, Peter Harbison
  • Emirates, President, Sir Tim Clark
  • Etihad, Group CEO, Tony Douglas
  • Kenya Airways, Group MD & CEO, Allan Kilavuka
  • SAS, President & CEO, Anko van der Werff
10:35 Coffee Break & Networking
11:05-12:00 Aircraft Ownership: paradigm shift or more of the same? 

Given the dimensions of the past two years’ disaster it is remarkable that so few airlines have fallen by the wayside. But that cannot persist indefinitely. The global traffic forecast, envisaging a 30-40% reduction on 2019 traffic would have been the stuff of nightmares just a couple of years ago.

This could and should have been a time for rethinking the way airlines operate, rather than clamouring for a recovery to the old ways. As Willie Walsh made clear, this leaves the only survival strategy a resort to more government bailouts. As time passes that will in itself force some reimagining of the aviation framework; but in the meantime there is more bad news to come for conventional thinking.

In this session we focus on the nature of the aircraft ownership model. We look to review what’s happened over the last two years at a very high level, both from an airline perspective as well as from a lessor perspective and revisit the perennial “buy vs. lease” question, from a post-pandemic perspective, given the current situation of airlines.

The pandemic has had an incredible effect on the industry. Airlines’ overall financial situation has been greatly impacted and many will have huge debt repayments for a long time whilst they deal with an uneven passenger demand recovery:

  • How is the relationship between airlines and lessors going to evolve against this background?
  • What are airlines looking for in lessors as they begin a slow and uncertain recovery? Similarly, what opportunity do lessors see in this indebted airline industry? Do airlines have to accept a new reality in “owned vs. lease” ratios?
  • How is this landscape affecting aircraft procurement decisions and how long is it likely to last?
  • What are the main factors that airlines should consider in terms of fleet renewal at this time?
Moderator: WestJet, Board Member, Alex Cruz
  • airBaltic, Chairman of the Board & CEO, Martin Gauss
  • BOC Aviation, MD & CEO, Robert Martin
  • Senior Aviation Executive, Lynn Guiney
12:00-12:50 Mega-Trend 1: Decarbonisation
The only good news for airlines in reducing emissions through the pandemic is they are helping save the planet. Aviation emissions are an explosive issue for the airline industry and the mountain to climb has become even taller than it was before COVID.

So far, the airlines’ responses are a dog’s breakfast; they are uncoordinated, contradictory, often evasive greenwashing, completely lacking in transparency - and they leave the industry a sitting target for unwelcome attacks.

Looking ahead to 2030, there is very little in practical terms the industry can do to reduce overall emissions, whether carbon or others. Even with the most optimistic outlook, the use of fossil fuels cannot be reduced significantly until the next decade – assuming the industry continues to grow.

Meanwhile there will have to be extensive reliance on offsets and – to a much lesser extent - the use of Sustainable Aviation Fuel, SAFs.

Offsets are costly and controversial; SAFs, if they can be truly green, will be costly, three or four times more than fossil fuel.

More positively, replacing older aircraft by buying newer more efficient equipment will have the largest impact.

In short, everything environment-related is about added costs, hardly a welcome prospect at such a fragile time. And there is no way to avoid them.

Moderator: Air Transport World, Editor in Chief, Karen Walker
  • Aviation Environment Federation, Policy Director, Cait Hewitt
  • IAG, Group Head of Sustainability, Jonathon Counsell
  • IATA, Director Fuel, Alexander Küper
  • Pittsburgh International Airport, CEO, Christina Cassotis
  • Skyscanner, Chief Product Officer, Piero Sierra
12:50-13:00 Innovation Roadshow
CAPA Elevate is designed to showcase the most influential innovations transforming aviation in the next decade. In this unmissable session key stakeholders from select CAPA partner organisations will deliver overviews of their products or services and explore its real-world applications.

Showcasing innovation has always been at the forefront of CAPA’s event strategy, and it has never been more important than it is in 2022. Expect to hear from a wide variety of interesting speakers who are revolutionaries in their own right.

Each supplier will be given a 10-minute time slot to showcase their innovation and explore how it is set to change the industry.

Cellpoint Digital, CEO, Kristian Gjerding
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13:00 Lunch Break & Networking
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14:00-14:50 Mega-Trend 2: Narrowbody point-to-point
Everything now points to the rise of narrowbody point-to-point operations.

And ‘cometh the hour, cometh the plane’! It is a truism that aircraft and engine technology advances can transform the industry. New long range widebody aircraft allowed Emirates to create one-stop-to-anywhere operation; efficient narrowbody Airbus and Boeing aircraft aided the spread of LCCs across the world (in each case two other ingredients were also needed: visionary entrepreneurs and liberalised market access).

Now, just as intensified environmental pressures demand lower unit emissions, along come the step-change efficiencies of aircraft like the A220, the A320neo series and Boeing’s MAX models. They not only are up to 30% more fuel efficient, they have expanding range characteristics, easily handling five hour journeys and up to eight; and then they are smaller than widebodies, so are much more versatile in the city pairs they can serve.

This flexibility is appropriate to their time in another way. As travel uncertainty persists, leisure passengers will both tend to stay reasonably close to home and to prefer non-stop operations. These services, mostly by LCCs, offer low prices – often cheaper than the obligatory costs of COVID testing.

Most data point to a rapidly diminishing proportion of widebody aircraft in the world fleet. Currently, narrowbodies in service outnumber widebodies three-to-one. By the end of this decade, that ratio will rise to at least four-to-one, based on current order books. Airbus’ most recent forecast predicts “shifting demand from fleet growth to accelerated retirement of older, less fuel-efficient aircraft”, so the proportions could shift even faster (also perhaps implying a slower rate of overall growth).

Another powerful ingredient in the transition towards single aisle models, as noted earlier, will be the leasing companies’ preference for easily interchangeable assets - a feature that suggests a virtuous cycle.

Moderator: JLS Consulting, Director, John Strickland
  • airBaltic, Chairman of the Board & CEO, Martin Gauss
  • Embraer Commercial Aviation, CCO, Martyn Holmes
  • Play, CEO, Birgir Jónsson
  • SunExpress, CEO, Max Kownatzki
14:50-15:00 Innovation Roadshow
CAPA Elevate is designed to showcase the most influential innovations transforming aviation in the next decade. In this unmissable session key stakeholders from select CAPA partner organisations will deliver overviews of their products or services and explore its real-world applications.

Showcasing innovation has always been at the forefront of CAPA’s event strategy, and it has never been more important than it is in 2022. Expect to hear from a wide variety of interesting speakers who are revolutionaries in their own right.

Each supplier will be given a 10-minute time slot to showcase their innovation and explore how it is set to change the industry.

Speaker: HRS, CEO, HRS Crew & Passenger Solutions, Luca De Angelis

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15:00-15:45 Mega-Trend 3: The decline of business travel changes yield profiles 
There is a further force emphasising the role of narrowbodies, albeit slightly more obliquely. Higher yielding business travel (not just business class travel, but including economy class road warriors) will be slow to recover. That much is undisputed; the quantum and recovery period are less clear, but it will be sufficient to make the full service long haul model financially unviable. That has far-reaching implications.

For corporate travel accounts, the reduction will be provoked by cost savings, new connectivity alternatives and the impetus for decarbonisation.

First of all, chief financial officers have discovered how much cost can be saved by cutting out “unnecessary” travel. Amazon saved USD1 billion on travel in 2020. Travel expenditure will not bounce back to previous heights, notably where online meetings have become adequate substitutes.

Listed companies’ travel budgets will also be subjected to increased ESG scrutiny by investors, placing firms under great pressure to demonstrate reductions in their carbon footprint. Long haul flying accounts for 40% of all airline emissions, so that becomes a particularly soft target for any company wishing to display its decarbonisation credentials.

Travel will still be essential for global businesses, but journeys will be less frequent, with smaller groups of flyers from a company e.g. where four people used to attend an exhibition, only two or three might go.

Reduced business travel is of more than statistical interest for network airlines, where it can account for a third or more of total revenue. Even a fall of only 10% on previous levels can seriously undermine operating economics. Business flyers heavily cross-subsidise the cheap economy fares which help fill up the large widebodies. Without them the economics just don’t stack up.

The contraction in business travel, depending on the market, is much more likely to exceed 30%. Even in the US domestic market, where 2021 recovery has been rapid, business travel is still down more than 50%. Business travel growth had already been slowing relative to the overall market before 2019. It will recover from the immediate low levels over time, but its return will probably take several years; during that time, its absence will wreak enormous financial and often irreversible structural changes.

So, connecting those dots, there are some important outcomes. Faced by greatly reduced business travel patronage, as noted above, the dynamics of long haul operations will be severely put to the test.

First, stripped of a viable business component, long haul widebody frequencies and city pair directs cannot avoid being reduced. That will mean greater reliance on (more fuel efficient) single aisle aircraft, with much greater emphasis on intra-regional travel.

Secondly, because the full service network airlines rely most heavily on their long haul margins (where LCC competition is absent), their model will be further undermined. This equation applies most pungently to the European network operators, whose short haul connecting services have already already been cannibalised by the region’s LCCs. Notably, the Gulf carriers and some Asian carriers which rely on long haul-to-long haul hubbing may be less disadvantaged.

Thirdly, the smaller capacity of the new narrowbodies allows increased numbers of city pairs to be serviced, good news for smaller regional airports and cities. And, in turn, this growth profile should ease pressure on congested hubs.

Moderator: Spotnana, VP Strategy & Partnerships, Johnny Thorsen
  • Bernstein Research, Equity Research Analyst, Alex Irving
  • Ernst Young, Global Head Travel Meetings & Events, Karen Hutchings
  • Southwest Airlines, Vice President Southwest Business, David Harvey
  • Virgin Atlantic, CCO, Juha Jarvinen
15:45-16:15 Coffee Break & Networking
16:15-17:00 Mega-Trend 4: Low cost carriers; the model for the times
It is not a large step to recognising that all of these changes play well into the hands of the LCC model, which typically fly narrowbody equipment on point-to-point services and do not rely on business travel. It’s a simple formula that a reduced yield profile of travellers requires lower cost operations, if profit margins are to be achieved. The new narrowbodies greatly extend their advantages.

Global LCC capacity has increased from 27.5% of total world operations in 2011 to 32.9% in 2019. Perhaps more importantly in terms of future trends, during COVID-plagued 2020, the proportion of LCC seats rose steeply, to 35.1%. That of course doesn’t account for all short haul operations, the majority of which are performed by the larger number of full service airlines.

The proportion of LCC seats in the US by contrast has remained static at around 30% over the decade, and that proportion is largely accounted for by Southwest. The slow uptake is testament to the sheer market power of the big three airlines, which by virtue of their size have been able to adopt many of the low fare – if not low cost – features of LCCs.

Within Europe, where there is no such market dominance, the picture is very different. In 2011 LCCs flew 35.8% of seats, rising to 41.7% in 2019, then increasing another 2 percentage points in 2020.

As an indicator of where the market is heading, over half of all outstanding narrowbody orders (excluding lessor orders) are from LCCs alone, a remarkable statistic considering the much smaller number of LCCs globally.

An even more remarkable shift is that, whereas 42% of aircraft in service today are operated by full service airlines and less than 18% by LCCs, one third of all orders – not just narrowbody orders – are from LCCs, a similar proportion to full service airline orders. Admittedly this does not account fully for the role of lessors, but the numbers are extreme enough to paint the future picture clearly.

Most recently, of 408 new orders for Airbus aircraft at the Dubai Airshow in November 2021, only two were for widebody passenger aircraft. Boeing’s more modest tally of 98, also consisted almost entirely of narrowbody MAXs. Of the handful of widebody orders, most were for freighters. In turn, the vast majority of orders were from LCCs and lessors.

Even long haul low cost is poised for recovery. To emphasise the low cost role even further, long haul low cost airline operations look poised for revival in Asia Pacific as a result and an illustration of this emerging new travel profile.

There has long been a debate over whether such operations were viable. The argument ran that they couldn’t rely on higher density seating and utilisation, as is possible for short haul. More importantly, they could not attract the higher yielding business travel segment necessary for a solid operating margin.

But remove that vital business travel overlay and the long haul low cost model can come into its own. Despite the dismal outlook for Asia Pacific aviation, no less than six long haul low cost – widebody - operations are returning to the space; two of them are subsidiaries of full service airlines, Singapore Airlines’ Scoot and Qantas’ Jetstar; the other four are independent.

Moderator: CAPA - Centre for Aviation, Chairman Emeritus, Peter Harbison
  • Emerald Airlines, CEO, Conor McCarthy
  • Flyadeal, CEO, Con Korfiatis
  • Flypop, CEO, Nino Singh Judge
  • Manchester Airports Group, Commercial Director, Ciaran Brannigan
17:00 End of Day Presentation & Closing Remarks
17:30 End of Day 1 Sessions
19:00-22:30 Roundtable Dinner Debate: What is the best airline model for the times?
airBaltic, Chairman & CEO, Martin Gauss
BOC Aviation, MD & CEO, Robert Martin
Emerald Airlines, CEO, Conor McCarthy
Emirates, President, Sir Tim Clark
Etihad, Group CEO, Tony Douglas
Flyadeal, CEO, Con Korfiatis
Kenya Airways, Group MD & CEO, Allan Kilavuka
Pittsburgh International Airport, CEO, Christina Cassotis
SAS, President & CEO, Anko van der Werff
Skylight Aviation, Advisor, Cath Lynn
WebinTravel, Founder, Siew Hoon Yeoh

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