Finding Your Partner Outlook: Alliances, JV’s M&A’s Dr. Emre Serpen Executive Vice President InterVISTAS Consulting Group WORLD ROUTES 2012, ABU DHABI, UAE
Air transport growth is greater in emerging economies in Asia, Latin America, Middle East, ďƒ˜ Shifting market growth: The GDP growth of emerging economies is significantly higher than mature economies ďƒ˜Small growth in GDP translates to significant market growth in Asian, Latin American markets
Partnership and cooperation with airlines in emerging markets is critical for future growth Airbus August 2011 Forecast
1
Using geographic advantage Gulf Carriers and TK are growing connecting emerging markets in particular Asia, Middle East and Africa The emergence of Gulf/Middle East carriers causing shift in global traffic flows across major connecting hubs
2
With significant new aircraft orders, growth is set to increase in coming years
3 Source: Diio Mi Sept 27th, 2012. Both directions total.
Emirates supported its network thru code shares
Profitable year-on-year growth Second brand worldwide Significant marketshare in India, many African states Changed dynamics of Kangaroo route
Emirates
Continuing growth More market penetration in US Canada FlyDubai expanding regional routes Positioned to take advantage of markets with significant potential – Iraq. Iran etc 4 Source: Diio Mi Sept 27th, 2012 (For Sept 2012).
Emirates/QANTAS Partnership Signals Change in Traditional Alliance Relationships - Immediate impact on One world QANTAS Before Emirates Partnership: • 5 One-Stop Destinations in Europe (via QF operations or code shares) • No service to Middle East/North Africa
Did BA had to use its aircraft in flights beyond Singapore ? Reduction in feeder traffic with CX code shares ?
:JAL – BA Start 1st October •Include Paris /FR •19 Flights LHR/NRT •March 2013 ? Deal with CX, MH QANTAS After Emirates Partnership: • Stop flying from Singapore and BKK to Europe • Drop Frankfurt Service • Drop code share plans with MH to 5 European Countries • Discontinue BA code share (SIN/TPE), CX (HK/Rome) • 32 One-Stop Destinations in Europe & 31 One-Stop Destinations in Middle East/North Africa via DXB • Revised service to SIN/HKG/KUL for better connectivity to Asia 5 Source: Sample Summer 2012 schedule
Etihad using code shares supporting its growth
Source: Diio Mi Sept 27th, 2012
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Etihad adding partnerships to support its growth strategy 2011 profitable Interim 2012 revenues 30% increase 800,000 passengers from passenger airlines $ 281 Million from partner airlines Since 2008 growth fro 2 to 35 code share partners Mergers and Acquisitions key to 20 year plan 10 year strategic partnership with Virgin Australia
40 %Stake in Air Seychelles 29% Air Berlin Stake, access to high yield European Markets ? Partnership with Air France & KLM – one world indicated no issues with Air Berlin Economies of Scale in 787 fleet , 56 aircraft common activities 7 Source: Diio Mi Sept 27th, 2012 (For Sept 2012).
Strategic Partnerships Cross Alliance Boundaries and are Becoming More Complex
Sample of selected strategic partnerships of Etihad and Emirates
Cooperation under discussion
Codeshare/ FFP benefits under Discussion
8
Alliance focus on emerging markets, Asia, Middle East, Latin America The three Global Airline Alliances continues see strong coverage in the Americas, Europe and Asia. Nevertheless, there is notable absence of membership in the Middle East and India.
Passengers carried by Middle Eastern airlines that belong to a global alliance account for only 2.4% of total alliance passengers and 1.8% of daily departures. 9
There may be further impacts on Alliances due to JV and Merger activity Membership in Global Alliances is very fluid. LATAM, Emirates-Qatar Deal
join SkyTeam
exits SkyTeam & joins Star join SkyTeam
joins Star Malaysian Sri Lankan
join SkyTeam
join oneworld
10 Source: OAG Max
Ownership laws, national interests typically restricts industry consolidation Perceived national Interest •
Ownership rules
•
Singapore/China Eastern
•
Public opinion against foreign multinationals
•
Some improvements (Malev, Air India)
Competition Law •
The interpretation of the competition law often inhibit ed consolidation EU/US
•
In 2001 DOJ blocked United/US merger on the grounds that the fares would increase
Practicalities •
Fleets, cultures, work practices, IT, seniority lists
Hence level of airline consolidation is still relatively low compared with other industries, Airlines Share of Industry
Distribution Company Share of Industry
12 months ending March 2007
12 months ending March 2007
Delta 12% United 16%
Continental 12% Northwest 10% US
Galileo / Worldspan 30%
Sabre 34%
Top-3
95% of Industry AirwaysRevenues
4%
Other 5% Amadeus 31%
Rental Car Company Share of Industry Top-3 American 48% of Industry 20% Revenues
Other 26%
12 months ending March 2007
Avis / Budget 20% National / Alamo 9%
Hertz 29%
Network carriers reduced From 20 Carriers to 8 (90-06) Regional Carriers Reduced From 150 -70 (90-06)
Thrifty / Dollar 6% Other 5%
Top-3 80% of Industry Revenues Enterprise 31% Note: Other based on estimates from industry reports
Some consolidation has started within EU, also some flag carriers ceased to exist Lufthansa
The synergies from integration with Swiss, exceeded 200 million Euros •
expanded route network with more destinations and better connections
•
interlinked frequent flyer programmes and mutual lounge access
Total synergies from integration of Austrian are estimated at around EUR 80 million Euros (both revenue and cost) •
•
improved access to international passenger flows and joint international marketing,
Nonstop Total Weekly seats Operated by Lufthansa Group Aug. 2003–Aug. 2008, Dec. 2008
cost advantages and economies of scale
The scope of integration Swiss /Austrian were similar •
Autonomous carrier own business management, own crew and fleet
•
Zurich integral part of Lufthansa’s multi hub strategy
Air France / KLM
The airline related savings of €525 million over three years by combining purchasing, sales and information technology. Depending on further progress of discussions between FAA – EU in future we could see similar deals between US/EU
Joint ventures increasing in across the board Joint Venture / Anti-trust Immunity relationships allow for better coordination in scheduling and pricing to offer passengers more convenient travel options.
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Short haul routes : LCCs have quadrupled their intraEuropean market share in the last ten years RAPID LCC EXPANSION ACROSS EUROPE
LEADING TO INCREASED MARKET SHARE
2001 2008 2012
FSC
LCC 2001 Source: OAG, 2011; Lit search;
2004
2008
2012E
Similar patterns in Asia, Middle East , also closer business models may lead to further cooperation between network and LCC Focus on short haul profitability, reduction in CASK, Eg Malindo, Air Asia, Cooperation between Network and LCC carriers -Eg LH/Jetblue. Etihad/VA et Network carriers to leverage LCC relationships much better Air Arabia
Do we have more opportunity for further partnerships between Network And LCC ??
Flydubai 16 Source: Diio Mi Sept 27th, 2012 (For Sept 2012).
Increasing Joint Ventures and “Innovative Partnerships” Alliances and • Joint Ventures • • • Mergers Cross-Border • • •
Innovative Partnerships
• • •
Central Africa / India / Middle East / CIS carriers likely next to consider Global alliances membership Potential new JVs to form in light of recently announced Emirates / Qantas Joint Venture and codeshare partnership Global Alliances attracting LCCs to join via hybrid partnership platform (SkyTeam)
Within the EU: Lufthansa with Austrian, Swiss, Brussels Airlines; IAG: British Airways and Iberia Latin America – AviancaTACA; LATAM Airlines Group Potential US-EU airline mergers? (Pending regulatory approvals)
China Eastern & Qantas (carriers in different competing Global Alliances) to form Hong Kong based LCC Etihad /Australia Porter (small, regional Canadian airline) signs interline partnership with South African Airways via Washington IAD
Finding Partner: Analysis, Strategy, Execution
Analysis Overview Identify changes in region and market level in both demand, supply, considering circuitry and yield
RegionRegion EU-NO NO-EU AP-AF AF-AP
Circuitry
108% 109% 107% 106%
1.
Relative growth of region to region flows considering yield and circuitry
2.
Benchmark connectivity with key competitors considering yield
Yield Aug-09 8.8 8.7 9.4 9.4
Onboard O&D Aug-09 Aug-10
Aug-10 9.0 9.1 9.3 9.3
869,909 835,797 657,943 655,028
1,019,118 986,496 703,314 701,660
Industry O&D Aug-10 Aug-10 8,330,229 8,330,229 5,776,835 5,776,835
8,479,367 8,479,367 5,630,906 5,630,906
Region EU-EU LA-EU EU-NO AP-EU Connect Markets CDG-MED DAM-MXP PEK-ODS BKK-TLV
3.
Historical growth O/D growth
4.
Relative growth of airline Connect Markets market share share compared BKK-ARN PEK-TIP to O/D market flow IKA-YYZ considering yield and circuitry ALG-MED
Service Share Jan-09 0.8% 0.6% 1.4% 50.2%
Jan-10 0.9% 0.7% 1.3% 100.0%
2005 87 1,452 847
2006 391 35 2,050 1,294
O&D Share 2009 2.0% 1.6% 7.3% 86.0%
Growth A1 Share A1 Industry of Industry 17.2% 18.0% 6.9% 7.1%
A1 6.2 9.4 9.1 9.5 2007
853 29 1,195 2,308
A2 6.6 9.2 9.1 9.1
2008 793 56 1,539 3,745
% Change 2010 Service O&D 3.3% 8% 61% 2.9% 4% 79% 8.9% -9% 23% 86.3% 99% 0%
1.8% 1.8% -2.5% -2.5%
12% 12% 12% 12%
A3 Yield 8.5 9.6 11.0 9.1 10.6 9.0 8.8 9.3 2009
1,717 2,347 2,539 3,679
2010 2,566 2,561 2,528 2,499
CCt 101% 101% 110% 117%
O&D 6,786 5,968 5,674 5,196
Focus on city pairs we want to develop/improve 19
Yield 3.0 3.0 2.8 7.7
Strategic Evaluation - is critical to establish competitive strengths and determine scenarios for growth opportunities
ďƒ˜Market analysis -the demand and supply, competitor activities and strategic change ďƒ˜Market Growth compared with Client Growth, where client growth may be slower than market growth, also vis-a-vis fare changes. ďƒ˜Strategic evaluation is used in the of the development scenarios 20
Strategic Evaluation Market Analysis and SWOT
Market share growth compared with total market growth ďƒ˜ lose marketshare whilst reducing its average fares. ďƒ˜marketshare growth and fare protection in growing markets
21
For example growth of competitor activities at airline’s hub. This analysis shows though this particular client is growing y-o-y 25% on its hub serving top 500 markets, 22
Other deeper analysis include analysis of an airline’s hub which may be poorly designed with the lack of a clear arrival/departure bank structure. This for instance equates to lost opportunities in connecting O/D markets
23
Market forecasting to determine priorities Top-down elements include GDP-driven passenger growth.
There is an established correlation between year-over-year GDP growth and corresponding growth in passenger volumes. For increased accuracy, the GDP of respective countries on a route network and point-of-sale data are considered in the analysis This smoothes temporary fluctuations of bottom up analysis The bottom-up elements include regression analysis utilizing IATA Paxis and MIDT flown passenger data. The market forecasting results are then used as an input to network optimisation tools.
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Development of Route Strategy Selected scenarios evaluated to establish
route strategy and route structure Test different scenarios and business models and evaluate respective differences in variable contribution towards selection of the best model Use of optimisation models.
New destinations with better market growth, and yield advantages. The route structure that maximises marketshare, and variable contribution improving competitiveness is selected Identify key changes to Long Haul, Medium Haul, Regional and Domestic Identify key changes for better use of alliance and code share partnerships
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Deciding on code share, alliance, Joint Venture Strategies Strategic Plan Market Forecasting
Network Planning Long & Medium Term
Capacity growth (incl competitors)
Average Fares Costs Service Objectives
Scenario Development
Hub Optimisation
Changes to Fleet Plan
Network Design
MIDT/BIDT
Shorth Term Strategic Plan Network Planning Long & Medium Term
Scenario Development MIDT/BIDT
Network Design
Identify value of current codeshares
Identify new codeshare opportunities to improve sustainable variable conytribution
Monitor Performance of current codeshare agreements
Identify alliance to opportunitie improve sustainable variable contribution
Monitor execute changes to improve gains from the current alliance
Identify Joint Venture Partners to improve sustainable variable contribution
Monitor Benefits from JV partnership
Alliances Shorth Term
Pricing Alliances
Contact candidate airlines and initiate new codeshare agreements
Develop code share agreement
Execute codeshare agreements
Contact alliances to initiate membership
execute Alliance Participation
Contact JV Partners towards agreement
Execute Joint Venture Agreement
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Determination of code share benefits
Following the network optimisation analysis, bilateral and codeshare development opportunities can be identified and examined ďƒ˜ or long-haul flights with codeshares to other alliance hubs including beyond points, ďƒ˜medium/short-haul flights in a feeder role.
As some alliances selectively restrict code shares with rival alliances, the value of current code shares must be evaluated. beneficial for the airline. Example: Value of Current Codeshares
27
Evaluation of Alliance Benefits
Network Benefits Additional pax due to meaningful and advantageous connections. Develop the best strategic fit with the alliance for own strategy Different Objectives feeder to alliance hubs protect stratetic interests Bilateral agreements excluding other airlines .
28
Evaluation of ATI Benefits ATI Benefits: Commercial and operational alliance-wide cooperation, reciprocal participation in each other’s FFP, proration of passenger fares, co-operation on facilities and passenger handling, lounge exchange program, common promotion and advertising
Category
Low High Revenue Com es From …
CRM
1.5
1.5
FFP
5
15
Opportunity cost of not having ATI/Open Skies
0
0
Low er COUNTRY distribution costs
6
9
Reduce commissions/overrides
Net Fares in COUNTRY mkts
0
0
Better coordination of net fares
Target corporate accounts
0
0
Internet sales increase
0
0
Increase in COUNTRY sales
30
30
Competitive effect in COUNTRY marketplace
0
0
Low er Country distribution costs
39
39
Negative competitive effect in domestic marketplace
0
0
Franchise Country CTO's
0
0
CRM improvements Increase costs per KM to suppliers using Alliance FFP. Could lose many benefits currently offered from Alliance
Offer corporations deals for their entire travel needs Joint coordination of sales campaigns & promotions Combination of pricing, RM, sales & marketing Competitive response (pricing, RM, sales & marketing) Reduce distribution costs Competitors erode Client market share Spin-off Country CTO's through franchise concept
common procurement 29
Joint venture success requires careful planning, stakeholder engagement and change management
Realistic assumptions, especially on yield increases Governance of network, pricing, revenue management, distribution
Cultural fit Tone of the Joint Venture Discussions Clear execution and communication plan towards JV, M&A activities Focus on revenue growth not just cost reduction Equity, ownership issues/value part of the business plan, as well as network and other benefits Emphasis of the alternative scenario during discussions 30
Critical success factors for successful JV’s and MA’s Benefits Economies of Scale Purchasing Synergies IT Synergies
Pre-merger Agreements
Delta/Northwest
Sufficient time Both Planning and Execution
AF/KLM
Business Case + Communications Plan + Funds
US Airways / United was blocked.
Realistic expectations + Benefits Cultural fit + Change management IT Don’t Touch Brands
Governance and organisation for JV M&A management
Maint. Synergies Corp. Planning Synergies Marketing Synergies Financial Synergies Economies of Scope Network Optimization Alliances & Mergers
New Market Growth
Mergers
Economies of Destiny
Alliances
Hubbing 0%
20%
40%
60%
80%
100%
Source: Dr Iatrou, Global symposium on Air Transport Liberalisation ICAO Dubai, results of global survey of 32 airlines
InterVISTAS’ Client Experiences Selected Current Clients • Qantas • Malaysian Airlines • Garuda • Turkish Airlines, • MAZ Holding, • DAS Holding, • Oman Airways, • Sri Lanka Airlines, • RAK airlines, • Royal Jordanian • Porter Airlines • Etihad • British Airways • Amadeus • Belleair
Sectors
Team Members’ Client Experiences: 60+ Airlines
Regions • Europe, • Middle East, • South Asia, • Eastern Europe 32
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Our Airline Practice Service Lines are Focused on Airline Strategy and Airline Performance Improvement Strategy and Finance
Strategy – Develop strategy, feasibility studies and business planning – Market Forecasting (Airline, Airport, MRO, Cargo) – Start up Airline and MRO feasibility and business plan – Mergers and acquistions planning
Network and Fleet Planning – Develop and optimise network and route plans for airlines – Route Planning and Schedule Development, Alliances – Hub design and optimisation, slot remarketing – Fleet planning , Aircraft leasing and remarketing
Financial Services – Evaluate airline investment opportunities – Due diligence (Airline, Airport, MRO, Cargo, GH) – Privatization and spin-off and financing of Airline, MRO, Pilot School, GH, Cargo
Performance Improvement Commercial Improvement – Airline Revenue Improvement – Pricing and Revenue Management – Marketing, Sales and Distribution – Technology solutions supporting revenue growth
Operations Improvement – Airline Productivity Improvement and Cost Reduction – Diagnostic and Cost reduction – MRO – Crew Resource Management
– Integrated Operations Control
Restructuring & Change Management – Airline Transformation and Turnaround – Restructuring (Airline, MRO, Cargo, Aerospace) – Start up Implementation – Performance management – Organisation improvement and change management.
IT Strategy IT Implementation 33
Thank You! Emre.Serpen@Intervistas.com
+447944163891 www.InterVISTAS.com