IATA WFS, September 26

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Issue 02: Thursday 26 September 2019

Airlines.

6th World Financial Symposium

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September 25 - September 26, 2019 | Miami, USA

Avianca CEO: Profitable growth is key

ISSUE 02

Airlines and their partners must focus on sustainable and profitable growth instead of increasing route and fleet size without thinking of the impact on business operations. That was the message from new Avianca CEO Anko van der Werff as he addressed delegates at the 6th World Financial Symposium in Miami.

He urged airline finance departments to ensure network and fleet planners did their homework before adding aircraft, routes and destinations: “Airlines have never needed good finance departments as much as they do now,” he said.

The Avianca CEO said that in any industry, every decision either creates or destroys value and the air transport industry is no different.

However, in the airline industry, “the cost of bad decisions far outweighs the rewards of good ones.”

Van der Werff pointed out that “growth for the sake of growth” is afflicting the airline industry.

He urged caution and said that when airlines feel optimistic about capturing a market, it is often assumed that external factors—political, environmental, economic—will remain equal.

“A former chairman in another company wanted us to achieve double-digit capacity growth, yield growth, market share growth—the whole thing. That is surreal,” he warned.

Avianca’s CEO said that for airlines, being aware of macro-economics and the political

Day 01 highlights 25 September, 2019

Anko van der Werff

“The cost of bad decisions far outweigh the rewards of good ones” Anko van der Werff, CEO, Avianca

situation in their own domain is key. He added that his airline, which is currently in recovery after a bailout plan was accepted, has scaled back operations to focus on quality over quantity.

“Our new vision is simply ‘back to basics’,” said Van der Werff. “The growth has been too much, our customers are complaining and on-time performance has suffered. If you see that your operation starts to get stretched and you can’t fulfil basic KPIs of running a decent company then you have to wonder, have we gone too far?”

The Colombian airline’s CEO also called on suppliers to “force sustainability” on aviation and increase the profitability for all stakeholders. airlines.iata.org

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Issue 02: Thursday 26 September 2019

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Continued but falling profitability

“If a recession occurs, we may see more industry robustness to profitability than before” Brian Pearce, Chief Economist, IATA

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The global economy is “shaping up for a period of low-growth, but not recession,” IATA Chief Economist Brian Pearce told attendees, while also cautioning that he “would not rule a [recession] out.” He cited the ongoing trade war between the US and China, which has caused trade to fall off a cliff, as well as uncertainty around Brexit.

IATA’s forecast for 2019 continues to be for an industry net profit of $28 billion which if achieved, will be the industry’s 10th consecutive annual profit, although it will mark a decline compared to the last two years, while industry operating profit margins actually peaked in 2015-2016.

The profitability slide of the past few years has not gone unnoticed by investors. Based on recent airline share performance compared to share prices as a whole, financial markets have lost confidence in the sector, and fear that the recently-improved fortunes may prove to be transitory. Pearce also noted that the industry

remains highly diverse in terms of earnings.

Looking to fundamentals, Pearce said that airlines have been quick to match passenger capacity to demand, which has helped to mitigate the fact that the ability to recover rising costs disappeared in mid-2018. Also helping is fare unbundling and ancillaries, which are making a larger contribution to airline revenues in an era of declining base fares. Pearce noted that in some jurisdictions the ancillary model is not popular with regulators and lawmakers. The industry needs to make its case that this model benefits consumers, who continue to enjoy low fares and only pay for those things they want.

The bottom line is that airlines should expect to face tough conditions next year and the downward pressure on profits will continue. But if a recession occurs, “we may see more [industry] robustness to profitability than we have seen before.” This should persuade even skeptical investors that the industry has changed its spots.

Thursday 26 September 2019: Issue 02

Financing a sustainable future The Industry Financial Advisory Council (FinAC—previously FinCom or Financial Committee) has had a busy 12 months.

Incorporating the insights and feedback received during the 2018 World Financial Symposium in Madrid, for example, has helped to drive forward numerous projects and initiatives developed and approved earlier. A great example of this is NewGen ISS, which is strengthening the industry’s financial backbone.

“We’ve also supported IATA in finalizing its new strategic framework, including an amended organizational set-up of our Industry Advisory Councils, strategic goals, and actions to be taken over the next few years to achieve the newly set and ambitious key performance indicator (KPI) goals,” says Michael Doersam, Chair of the IATA FinAC and SVP, Group Finance at Emirates.

New technologies will play a significant role in the strategic framework. Finance, as an internal service function, often has to adapt to new technologies being introduced by other airline departments, such as commercial. But there are also plenty of systems specific to finance that will streamline processes. Ultimately, a balance is needed for a sustainable future that delivers an appropriate return on investment, whatever the needs of a particular airline.

“What’s clear to everyone is the increasing speed of how new applications and new disruptive products or processes are being introduced, challenging how we currently manage the business,” says Doersam.

This has led to a major issue in finance. Now, to maintain an excellent workforce in finance functions and grow the talent pool, the sector must compete with other business units and industries for such similar skills as data analytics.

Michael Doersam

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“What is clear to everyone is the speed of how new disruptive products are introduced” Michael Doersam, Chair, IATA FinAC and SVP, Group Finance at Emirates

The traditional finance job profile is history and the diversity of finance roles is growing.

Moreover, new generations entering the corporate world have a completely different approach to work. To attract talent not only to finance but also across the airline spectrum, sustainability in all its forms is vital.

Finance is vital to shaping the future sustainability agenda for the industry. Continuing profitability for re-investment in new green technologies, negotiating environmental taxes in an appropriate manner, and delivering alternative aviation fuels for a competitive price are just a few of the big ticket items that finance can positively influence. airlines.iata.org

Issue 02: Thursday 26 September 2019

WFS Gala Dinner

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Thursday 26 September 2019: Issue 02

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Issue 02: Thursday 26 September 2019

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Trade tensions continue to pose a threat Trade wars show no sign of lessening going into 2020 and continue to pose a significant challenge for airline finances.

With relations between the US and China affecting passenger and cargo traffic and globalization suffering from protectionism, financial institutions working in the air transport industry have much to be wary of.

Speaking during yesterday’s trade-war-focused ‘Walls and Trenches’ session, Rick Johnston, Director, International Government Affairs at Citi said that the situation—particularly in the US—is likely to get worse before it gets better.

Just-launched impeachment proceedings in the US could “muddy the waters in Washington” when it comes to trade, Johnston warned, adding that it could lead to failure to pass the US-MexicoCanada trade agreement.

Johnston said that in the year when the Bretton Woods Agreement turns 75, the level of trade tension across the globe is so high that he is

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wondering “will there be a 76th anniversary?”

He also warned that the attacks on Saudi Arabia’s oil infrastructure and civil unrest in Hong Kong play a huge part in affecting airline finances owing to disruption and uncertainty.

“Oil infrastructure is at risk,” said Johnston.

“While other supply chain disruption has seen production moving outside of China to the likes of Vietnam; that is good for Vietnam, but in reality they are lacking in the infrastructure required.”

At present, the trade wars worldwide are impacting the industry to the tune of $120 billion.

With Foreign Direct Investment also falling around the world, Johnston said the situation is unlikely to improve in the short-term.

“We are operating in an altered security environment, the Intermediate Range Nuclear Forces (INF) treaty is coming to a close; there’s going to be a new arms race—one could say we are in a 21st century version of the ‘Cold War’ now involving China and Russia,” said Johnston.

Attacks in Saudi Arabia and civil unrest in Hong Kong play a huge part in affecting airline finances

Thursday 26 September 2019: Issue 02

Payments sphere evolving rapidly The pace of change in the payments sphere is increasing, while customer needs are changing, experts agreed.

Chris Fendley, SVP, Enterprise Partnerships, Mastercard, said that, “customers want a frictionless experience,” while Jason Byrne, IATA’s Head of NewGen ISS, noted that customers want payments, “that are transparent.”

Both cited the importance of offering consumers choices in their payment options.

Delivering on all of this will not be easy, however. Byrne highlighted a number of challenges including complexity and legacy systems and process, scalability and costs, fraud protection and data breaches.

The risks of cyber theft and fraud were highlighted by both. “Don’t underestimate the power of cyber thieves,” Fendley warned, while Byrne said that industry losses related to payment fraud amount to $1 billion per year. At the same time, consumer pushback on privacy, and the EU’s new General Data Protection Regulation (GDPR) have presented huge challenges to the payments industry. “Consumers must own their data,” Fendley said.

Byrne said that ideally there should be “plug

“Customers want a frictionless experience” Chris Fendley, SVP, Enterprise Partnerships, Mastercard

and play” payment solutions for every channel, to enable airlines to meet their customer’s requirements. Fintech companies can provide the technologies, but Fendley cautioned that while important, their solutions “are never complete.”

Fendley also defended the value of so-called virtual cards or VANS, citing their security benefits in particular. But, he added “We recognize that we’ve got to get the commercial [side] balanced. We want to work with industry… to understand the best win for everybody.”

Finance ‘needs to be more exciting’ Getting new finance recruits excited about their work will play a vital role in achieving digital transformation.

At the ‘Finance Talent in a Digital Era’ session, Tabitha DeFrancisco of PwC said that with “everyone becoming a master of analysing data”, finance functions are in a crisis.

“MBAs are leaving because they’re not being challenged,” she said. “It’s getting them excited about this—if someone is interested in automation or innovation, empower them.”

In response, Patrick Jonas, Chair, IATA HIPO Working Group and Head of Financial Accounting, SWISS said “agility transforms finance”, something the PwC Director agreed with. DeFrancisco added that key skills such as creative thinking and storytelling to convince business partners of the importance of the finance function will be key in helping to break down silos and transform industries.

“We are trying to make that happen, but it is a big culture change,” said DeFrancisco. airlines.iata.org

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Issue 02: Thursday 26 September 2019

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