Airlines International Dec 17/Jan 2018

AIRLINES INTERNATIONAL DEC- JAN 2018 - ISSUE 71

ISSUE 71 DEC-JAN 2018

CEO INTERVIEWS: Philippine Airlines, Brussels Airlines AIRCRAFT RECYCLING: The practice is set to take on even greater importance SPECIAL REPORT: Airports with significant market power must be effectively regulated

AN EXACT SCIENCE Time and temperature compliance makes air the clear choice for pharma freight

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Airlines International

CONTENTS COMMENT

SPECIAL REPORT

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7 Alexandre de Juniac Governments must be forwardthinking and recognize that sufficient infrastructure is needed to service the growing demand for air travel

22 Why airlines aren’t footloose Airports with significant market power must be effectively regulated

FEATURES

AGENDA

32 Coming in from the cold Time and temperature compliance makes air the clear choice for pharma freight

10 IATA and industry update 2018 industry profit forecast; Aviation in Africa; Challenges in Asia-Pacific; Argentine government agreement; AVSEC World special

36 End of life revelations Aircraft recycling is set to take on greater importance for both economic and environmental reasons

CEO INTERVIEWS 16 Having the space to grow Tony Concil asks Philippine Airlines President and Chief Operating Officer Jaime Bautista about infrastructure barriers and the airline’s importance to the nation

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Editorial Editor Graham Newton Head of content production DeeDee Doke Assistant editor Peter Lennox Senior designer Gary Hill Designer Callum Tomsett Picture editor Claire Echavarry Production Production manager Jane Easterman +44 (0)20 7880 6248 jane.easterman@redactive.co.uk Publishing director Aaron Nicholls

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40 20 year passenger forecast China to become world’s biggest market as demand soars

SOAPBOX

28 Be bold and ambitious Brussels Airlines CEO Bernard Gustin tells Graham Newton that Europe must strive for a more audacious aviation policy if it is to continue a leadership role in the industry

IATA Corporate Communications Vice President Anthony Concil Creative Direction Richard McCausland Assistant Director Chris Goater www.iata.org

DATA

42 Chris Tarry Founder of specialist aviation consultancy company CTAIRA asks if further consolidation is on the cards

Advertising Business development manager Nigel Collard +44 (0)20 7324 2763 nigel.collard@redactive.co.uk

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Comment • Alexandre de Juniac • Director General and CEO, IATA

For most of us, the time horizon focuses on an annual series of events. But the looming infrastructure crisis needs a much longer span of thinking

LAYING THE FOUNDATIONS A irlines make the extraordinary a normal daily occurrence. Crossing continents and traversing oceans in a matter of hours is an amazing technical feat. And the air transport industry does it with such reliability that we take it for granted. But safely operating over 100,000 fl ights a day is no less than a modern marvel.

And that marvel adds huge value to our world. How different would our lives be without aviation? Everything from how to work or relax to how we learn or the perspective we have on life would be different. Aviation enriches our lives. And that’s true even for those who have never set foot on a plane.

Historically, that value has never generated the returns to sufficiently reward our investors. The first commercial fl ight took place on 1 January 1914. And it took a century until the industry delivered its fi rst collective annual return that exceeded its cost of capital in 2015.

We look forward to 2018 with optimism. We expect airlines to earn $38.4 billion. If we are right that will be a fourth consecutive year of sustainable profits.

That’s supported by strong demand, rising revenues, and improving yields. The headwinds are on the cost side—the headline item being fuel. But we can expect continued pressure from labor, infrastructure, and other key cost items. Maintaining margins will be a challenge.

The one figure that keeps impressing me is the number of people traveling. We expect 4.3 billion passengers to board planes next year. That’s 230 million more than in 2017. The industry has the planes ready to do the job. But the pressure on global infrastructure is immense. And

there are precious few governments that have understood the severity of the challenge.

We face bottlenecks in the air and on the ground. Aside from inefficiency and delays, the failure of infrastructure to keep pace with demand will have an economic toll.

Spending by international tourists traveling by air has reached $750 billion. And global supply chains depend on aviation to deliver $6.2 trillion of goods. And those are just the most obvious risks.

For most of us, the time horizon focuses on an annual series of events. But the looming infrastructure crisis needs a much longer span of thinking. And policy-makers should not interpret the solid financial performance of the industry as an indication that all is well in the aviation world. The 230 million more customers in 2018 will likely be followed by a similar increase the following year, and the year after, and the year after that.

There will no doubt be many urgent issues to deal with in the New Year. But let’s also keep a view on the foundations that will secure aviation’s benefits for generations to come. A key message to governments has to be the need for serious planning to accommodate the growing needs for connectivity with sufficient quality infrastructure at affordable costs. •

07

Alexandre de Juniac

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The Big Picture

ILLUMINATING THE HOLIDAYS

T

he super-connector hubs in the Middle East aren’t just a place to change planes. The Gulf region is a popular for refreshing en-route stopovers or as a vacation destination in their right.

It is particularly true when mild year-end temperatures

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combine with lively year-end activities. The “piece de résistance” for many are the spectacular fireworks displays that ring in the New Year.

Hundreds of thousands of locals and travellers watch each year. The fireworks themselves arrive in the region by boat. But many of the spectators, show crew and control equipment arrive by air.

In Dubai, year-end festivities help to boost hotel occupancy towards 90% and January tourist arrivals to nearly 1.6 million arrivals.

While in the Emirate, tourists also flock to local shopping malls, restaurants and a plethora of attractions. •

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Agenda

Upcoming events...

AGENDA

Aviation Day USA 22 February New York City

Legal Symposium 27 February-1 March Bangkok, Thailand

IATA reveals 2018 financial forecast Strong airline profitability is expected to continue in 2018, according to IATA’s latest financial forecast.

IATA forecasts global industry net profit to rise to $38.4 billion in 2018, an improvement from the $34.5 billion expected in 2017. Strong demand, efficiency, and reduced interest payments will facilitate this rise in net profits– despite rising costs. Overall, revenues are expected to rise to $824 billion, up from 2017 revenues of $754 billion.

Meanwhile, the number of air passengers will rise from 4.1 billion in 2017 to 4.3 billion next year. Average net profit per passenger is also forecast to rise to $8.90, up from $8.45 in 2017.

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Regionally, North American airlines should perform best in 2018, and are forecast to generate net profits of $16.4 billion (up from $15.6 billion in 2017). African airlines will likely post the weakest performance, and are forecast to make a $100 million loss.

IATA’s Director General and CEO Alexandre de Juniac said “these are good times for the air transport industry”, but highlighted the many challenges airlines face to remain profitable.

“It’s still a tough business, and we are being challenged on the cost front by rising fuel, labor and infrastructure expenses,” he said. •

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Japanese departure tax ‘would hurt tourism growth’ IATA is challenging a proposal by the Japanese government to impose a departure tax on air travellers.

The tax—which would be between JPY1000-2000 per passenger ($9-18)— would be used to fund tourism initiatives, the government says.

IATA, however, believes implementing the tax would negatively affect tourism growth.

Japan is predicted to attract 40 million visitors by 2020, and 60 million by 2030.

While there are a number of implementation scenarios, IATA estimates the introduction a JPY2000 ($18) tax could lead a reduction in demand of up to seven million passengers—lowering GDP by JPY34 billion ($300 million) and leading to 4,800 fewer aviation-related jobs being supported.

Meanwhile, IATA has also expressed disappointment after UK government increased Air Passenger Duty (APD) in its latest budget. It froze short-haul APD rates and long-haul economy rates, but increased long-haul rates for premium economy, business and first-class passengers.

Rafael Schvartzman, Regional Vice President for Europe, IATA, said: “Across the UK, the benefit of cutting APD is becoming increasingly obvious, as Britain seeks a new place in the world post-Brexit.” •

Japan is predicted to attract 40 million visitors to the country by 2020, and 60 million by 2030

Milestone for SAF A total of 100,000 flights using sustainable aviation fuels (SAF) have now taken place.

This marks a significant milestone in the industry’s goal to reduce carbon emissions. More than 25 airlines have now flown at least one SAF flight, while SAF is now supplied permanently at airports in Oslo and Los Angeles. Brisbane, Chicago, Geneva and Toronto are lined up to supply SAF in 2018.•

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www.iata.org/events World Cargo Symposium 13-15 March Dallas, USA

Wings of Change 4-5 April Santiago, Chile

Safety and Flight Ops Conference 17-19 April Montreal, Canada

Barriers holding back African aviation

Security plan requires swift implementation IATA has urged the swift adoption by states of the first Global Aviation Security Plan (GASeP).

GASeP was established by the Council of the International Civil Aviation Organization (ICAO), and IATA says it has the potential to strengthen security by providing governments with a global plan to which they can align their national efforts.

GASeP will address four key elements to improve security: ● closer government-to-government cooperation to eliminate the long-term challenges of extraterritorial measures, ●

Africa is the region with the greatest aviation potential, but punitive taxes, and high infrastructure and fuel costs are curtailing air transport’s benefits on the continent, IATA has said.

The African aviation industry loses $1.50 for each passenger it carries, with many airlines struggling to break even.

In a message delivered to the AFRAA AGM, IATA Director General and CEO Alexandre de Juniac urged African states to recognize aviation’s ability to stimulate the region’s economy, and spread prosperity.

“Taxes, fuel, and infrastructure charges are higher than the global average,” he said.

“Additionally, insufficient safety oversight, failure to follow global standards, and restrictive air service agreements all add to the burden that stands in the way of aviation’s economic and social benefits.”

However, a positive step was seen as the African Development Bank (AfDB) signed a memorandum of understanding (MoU) with IATA. IATA and the AfDB have committed to implementing programs and projects that will improve the aviation sector in Africa. •

IATA opposes Malaysia pax charge IATA is advocating against a proposed new passenger charge in Malaysia.

The Malaysian government is considering introducing a charge for all international passengers arriving and departing Malaysia to cover the cost of a border management program. The Advance Passenger Screening System (APSS) will be an interactive API (Advanced Passenger Information) program.

IATA recognizes the benefits API offers in terms of border security and control—but strongly opposes Malaysia’s plans to fund the program with passenger charges. The vast majority of countries who have introduced API have not implemented passenger charges. IATA estimates a hypothetical

charge of US$8 per journey could lead a reduction in demand of more than 1.3 million passenger journeys. •

US$8

per journey could lead a reduction in demand of more than 1.3 million passenger journeys

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the universal application of global standards, better information-sharing among governments and with industry, and the efficient implementation of new and existing technology capabilities. •

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Action needed in Asia-Pacific IATA says urgent action must be taken to address infrastructure deficiencies in the Asia-Pacific region.

IATA expects 2.1 billion extra air travellers in Asia-Pacific by 2036, and IATA Director General and CEO Alexandre de Juniac says improvements are required at number of airports.

“Bangkok, Manila and Jakarta are among airports that need major upgrades,” he said. “Chinese air traffic management struggles to cope with growth. And high costs at India’s privatized airports are burdening the industry.”

Also, with many Asia-Pacific countries deviating from global standards—for example, China has recently introduced new and unique requirements for handling portable electronic devices— de Juniac called for increased use of accepted best practices across the region.• DEC-JAN 2018

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MoU to boost aviation in Argentina

NDC gains acceptance across travel value chain

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New Distribution Capability (NDC) is enjoying impressive adoption rates.

As of end September 2017, 43 airlines had achieved NDC certification, demonstrating the ability to send and receive NDC messages that will enable them to display rich product content in travel agency channels.

Importantly, partners throughout the travel value chain are also seeing the benefits of engaging with NDC. American Express Global Business Travel (GBT) is working with British Airways, Iberia and GDSs to evaluate

NDC and its applicability to managed travel programs.

And global travel technology giant Sabre has announced a roadmap to achieve Level 2 and Level 3 certification for its global distribution system (GDS) in 2018. It is already Level 1 compliant.

“GDSs are fundamental business partners for airlines and other travel providers,” says Yanik Hoyles, Director NDC Program, IATA. “These are exciting times as we see the big players taking bold steps on our efforts to build airline retailing, together.” •

IATA members support NewGen ISS IATA member airlines have approved the implementation of financial settlement program NewGen ISS. NewGen ISS will deliver faster, safer, and more cost-effective settlement services and solutions to airlines and travel agents.

NewGen ISS represents the most extensive modernization of the IATA Billing and Settlement Plan (BSP) since it was created in 1971 to facilitate the global distribution and settlement of funds between travel agents and airlines. Last year, the BSP processed $219 billion in airline funds with 100%

on-time settlement.

Aleks Popovich, IATA’s Senior Vice President, Financial and Distribution Services described the implementation of NewGen ISS as “a critical step forward.”

“It will bring greater options and flexibility to our travel agent partners, while providing even more financial security to airlines,” he added. •

$219bn

BSP processed $219 billion in airline funds with 100% on-time settlement

Peter Cerda, IATA’s Regional Vice President for the Americas, says a new agreement signed with the Argentine government will “open the door” for further development of air transport in the country.

The Memorandum of Understanding (MoU) focuses on the exchange of information and expertise in areas such as data sharing to support safety operations, the modernization of air traffic management, and optimization of airport fuel storage.

“Already aviation contributes $9.6 billion to GDP and 300,000 jobs in Argentina and we are certain this agreement will only increase our industry’s contributions,” Cerda added. •

On-board concepts to be revolutionized

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IATA and Airports Council International (ACI) have launched the New Experience in Travel and Technologies (NEXTT) initiative.

With air travel demand projected to double by 2036, new on-ground concepts will be required to optimize the use of emerging technologies, processes, and design developments.

NEXTT aims to help deliver this future by developing a common vision to guide industry investments and help governments improve the regulatory framework.

This vision will support concepts that facilitate faster movement of cargo, convenient and hassle-free handling and tracking of baggage, a seamless and personalized journey for the passenger, and a fully coordinated airport turnaround process, which uses the latest in both automation and environmentallyfriendly technology. • DEC-JAN 2018

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Agenda AVSEC special Agenda:

IATA calls for governments to collaborate on security information

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The urgent need for states and aviation authorities to share information about risks, passengers and wide-ranging security issues was highlighted by Alexandre de Juniac, IATA Director General and CEO, at the 26th AVSEC World Conference in Abu Dhabi.

In his keynote speech, he called on government security organizations to overcome to their reluctance to share information when they are aware of a risk to human life.

“Our safety performance shows what can be achieved when governments cooperate among themselves and with the industry,” de Juniac said.

“Information sharing is not in the DNA of most government security organizations. But this reluctance must be overcome. And to be clear, we are not asking governments to divulge sensitive intelligence to industry.

“But if they know of a risk to human life—to innocent human life—they need to tell the people who can do something about it. Otherwise, what’s the use of having the information?”

De Juniac emphasized the industry was eager to work with governments to establish a platform for the exchange of threat and risk information He added: “Airlines have operational know-how.

Governments have the financial and intelligence resources. We must simply work together.” •

Airlines can play key role in combating trafficking Gillian Murray, United Nations Office of Drugs and Crime (UNODC) Deputy Director, Division for Policy Analysis, emphasized that training airport and airline staff to identify behaviors associated with human trafficking could play a role in stopping the practice.

“Control of the victim by the traffickers may not necessarily involve physical violence but intimidation and fear may be visible,” Murray added. “It is

important that airline staff and airport operators are aware and identify such situations so that they can report them to relevant authorities.”

The UNODC has launched a campaign— called Blue Heart 2.0—that encourages airlines to join the fight against human

trafficking. The campaign calls for airlines to distribute safety cards, which highlight signs that could identify potential victims of human trafficking.

These include: ● displaying fear or anxiety, ● having limited or no social interaction, ● being afraid to reveal immigration status, ● showing signs their movements are being controlled, and ● not knowing the address of their home or workplace.

Murray added: “Spotting these signs could result with the rescue of the victim and the prosecution of the perpetrators.” •

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Agenda: AVSEC special

TSA administrator vows to be ‘great partner’ The recently confirmed administrator of the U.S. Transportation Security Administration (TSA), David P. Pekoske, has pledged to the aviation industry “to do whatever I can to be a great partner”.

In his keynote AVSEC address, Pekoske thanked airlines for their co-operation since his appointment in August, and called on airlines to work with TSA to “raise the baseline of aviation security around the world.”

He said TSA was pursuing enhancements to screening and agreements with “new countries,” improvements to staff training and moving away from “one size fits all” assessments toward new measures that

would be “effective and flexible to handle tomorrow’s security risks.”

At a press conference following Pekoske’s talk, Nick Careen, IATA Senior Vice President, Airports, Passenger, Cargo & Security CEO, said, “I would use the word ‘encouraging’” to characterize Pekoske’s statements.

IATA’s Director General and CEO Alexandre de Juniac referenced the “difficult start” to Pekoske’s working relationship with the industry in the aftermath the laptop and travel bans, going on to say that he believed the remarks “more than encouraging; he was advocating co-operation. If he is ready to do that, it [the relationship with the aviation industry] is working.” •

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Sector specialists reveal security innovations In an AVSEC World session entitled What’s new on the radar?, a number of industry specialists discussed new innovations in aviation security.

Neil Perry, Vice President, Operations, Canadian Air Transport Security Authority (CATSA), highlighted the organization’s CATSA Plus initiative.

It uses automation, centralized image processing and remote screening to more efficiently and effectively move passengers through security screening procedures. The data gathered also provides CATSA with insights about the passenger experience that can shape the

deployment of resources at Canadian airports by charting heavy and slack travel times.

“It starts with a boarding pass scan,” said Perry, who said that the scan “gives us an actual real-time wait time.”

Elsewhere, speaker Darby LaJoye, Assistant Administrator of the US Transportation Safety Administration, said his organization has begun issuing an airport design security guide, outlining the need for features such as blast-resistant windows to be considered when airports are being newly built or remodeled. • DEC-JAN 2018

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In the feature • infrastructure • Competition • Tourism

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This year has been quite challenging.

We flew to more destinations, we flew more passengers, but revenues only grew about 6%

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HAVING THE SPACE TO

GROW

17

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Tony Concil asks Philippine Airlines President and Chief Operating Officer Jaime Bautista about infrastructure barriers and the airline’s importance to the nation

How has the airline performed in 2017 and how do you see it developing in the next 12 months?

This year has been quite challenging for Philippine Airlines (PAL). We flew to more destinations, we flew more passengers, and we took delivery of more aircraft. Capacity went up 16% and passenger numbers went up about the same amount.

But the problem is that revenues only grew about 6%. In terms of operations, revenue is going down. So, the challenge is profitability.

This represents a real increase in actual costs, and it is not just about the peso-dollar exchange rate. Fuel costs are going up, for example, and so are maintenance and engineering expenses; and, of course, the cost of providing excellent service to passengers. Basically, revenue is not growing as fast as the costs.

The hope is that next year will be a better one for the airline. There will certainly be better cost control measures that we will implement across the airline. And there will be more initiatives to improve revenue.

We are also looking at attracting a new strategic investor. But we need to spend some time improving profitability first so that we are a more attractive company to invest in. It is true that the investor is likely to be another airline.

That would help PAL in a number of ways.

Does a medium-sized carrier have a future in the modern air transport industry?

PAL will grow beyond mid-sized. The airline will have 86 aircraft by end 2017, and in 2018 four Airbus A350s, six A321neos and five Bombardier Q400s will be delivered. There will be huge growth next year in terms of seat capacity. And in 2019 there will be more A350s and A321s. By 2022, there will be 100 aircraft in the fleet.

We will expand our presence in the ASEAN region, but a key part of our strategy is expansion in North America. PAL serves five major cities—New York, Los Angeles, San Francisco, Toronto, Vancouver—in North America and new destinations, such as Chicago and Seattle, are being explored. There is a big DEC-JAN 2018

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CEO Interview

Filipino community in these cities. Some 90% of our passengers are ethnic Filipinos.

But there is also an opportunity to attract a larger mainstream market by developing Manila as a connecting hub. We want to capture people going from, say, Seattle to Jakarta. They could use PAL and connect through Manila. Manila can be a hub for traffic to the United States from various places in the region, including Kuala Lumpur and India.

There is already some business on the Australia-London route, so we know Manila and PAL have potential to be a solid hub if we get it right.

Work needs to be done to transform Manila into a world-class aviation hub

But can the infrastructure cope with such a strategy?

Airport infrastructure is limiting our ability to grow and this is our biggest problem. We want to fly more, but it is difficult to add even one fl ight during day time at Manila’s Ninoy Aquino International Airport (NAIA).

We hope the government will resolve this

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issue and we are doing all we can to help. We are proposing to build a new terminal to help relieve congestion and improve the passenger experience at NAIA. It will serve 15 million passengers and accommodate 12 widebody aircraft.

We also have high hopes for the construction of a new airport to serve the Metro Manila area. The Philippine President is determined to have this completed within his term of office. He has not always received a positive press, but he is doing a good job for the industry. And the specifications for the airport are encouraging—starting with two runways and the possibility of expanding to three.

In the meantime, we will have to make some space at the current Manila airport by transferring some domestic flights. There will be more fl ights out of Clark, Sipu and Kalibo.

As mentioned, the long-term aim is to make Manila a great hub. A global carrier needs a great international terminal with easy transfers. We don’t have that right now at Manila.

PAL operates out of three terminals simultaneously. Terminal 1 serves international fl ights, Terminal 2 is a mix of domestic and international and Terminal 3 is domestic. For example, US fl ights arrive in T1 but depart from T2. It is confusing for passengers but necessary for various reasons, mainly capacity constraints.

If we can consolidate international operations in one terminal it would make a significant difference.

Is IATA delivering value to PAL? PAL has been a member of IATA for more than

15 million

We are proposing to build a new terminal to help relieve congestion and improve the passenger experience at NAIA. It will serve 15 million passengers.

The long-term aim is to make Manila a great hub. A global carrier needs a great international terminal with easy transfers.

60 years. We are proud to be part of the association. The staff work closely with IATA. There are many initiatives under IATA’s umbrella and they all bring benefits. The Billing and Settlement plan (BSP), for example, has really helped the airline fi nancially, in terms of collection. IATA’s statements calling on governments to improve infrastructure or consumer protection also help our cause.

Right now, there is close cooperation on the Carbon Offset Reduction Scheme for International Aviation (CORSIA). This is a new focus for the airline and the country. One airline official has been dedicated to work on this, and the Philippine Department of Transportation is also designating someone to handle CORSIA

affairs. It is a priority to ensure CORSIA and its implications are well understood.

Is competition growing, especially from low-cost carriers?

In the domestic market, it is a very challenging situation. LCCs have the majority of the market. The Filipino passenger is very cost conscious. For a few hundred pesos difference, some will forego all the services we offer and choose to fly on an LCC. But PAL has its niche and, actually, our market is growing. We also have PAL Express, our affi liate carrier operating many domestic routes, which is low cost in terms of operations but which offers a full service product

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CEO interview

with free meals and baggage allowance. We are introducing new products as well. PAL passengers can get a lower price if they don’t take baggage but still want a meal, for example.

But we are not going to create a low-cost brand.

That is not part of our strategy.

Jaime Bautista 2014-present President and COO, Philippines Airlines 2002-present Director, University of the East 2001-present Chairman/President, Basic Capital Investments 1992-present President, Cube Factor Holdings 1994-2012 Various roles at Philippines Airlines including Chief Financial Officer and President 20

Would membership of an alliance help?

PAL is not a member of an alliance currently, but there may be some movement in the near future. Some airlines have indicated that they would support PAL’s membership in an alliance.

Being a member would certainly help. It would help us generate more passengers through greater connectivity. And it would also attract customers through features like wider access to lounge facilities. We have lounges in the main airports we serve but the cost would clearly be reduced if we tie up with alliance partners. Generally, there is more efficiency and synergy throughout a global operation if an airline is a member of an alliance.

How are you supporting tourism to the Philippines?

It is important the airline contributes to the economy. We are the national flag carrier. We fly 15 million passengers in and out of the Philippines every year and are responsible for one-third of tourist arrivals to the country.

Every year we carry more tourists from Korea, China, and Japan. Chinese tourist numbers especially are growing. In 2017, some 600,000 Chinese

A key part of our strategy is expansion in North America.

PAL serves five major There is a big Filipino community in these cities—New York, cities. Some 90% of our passengers are Los Angeles, ethnic Filipinos San Francisco, Toronto, Vancouver —in North America and new destinations, such as Chicago and Seattle, are being explored

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90%

tourists are expected to have visited the Philippines, with one million predicted to visit in 2018. PAL is contributing to this growth through increased flights and intensive promotions from various Chinese cities, such as Beijing, Shanghai, Guangzhou, Xiamen, Quanzhou/Jinjiang, Chengdu, Hangzhou, and Nanjing. These fl ights are not just to Manila but also to Kalibo, Cebu and other destinations.

There is close cooperation with the Department of Tourism to attract more passengers from destinations where PAL operates. Part of PAL’s strategy is developing new tourist markets. We are the only airline offering direct fl ights between the Philippines and Canada, New Zealand, the US East Coast, Hawaii, the United Kingdom, and certain key cities in Japan and Australia.

We are the only airline to link Korea with the popular island destination of Bohol.

So, does the government understand and appreciate the benefits of aviation?

The Secretary of Transportation understands. He came from the industry.

So, he really understands the importance of aviation and is fully supportive of IATA initiatives. The Philippine government may take action in areas like consumer protection, which can be a concern if these initiatives go for political popularity rather than sensible regulation. But I’m confident that the industry’s arguments on this and other regulatory issues will be understood and considered.

Aviation is playing an important part in supporting economic growth.

Philippine GDP is growing at more than 6% in 2017 and will be comparable in 2018.

How would you describe your approach as CEO? I hope that I am a person that anybody can talk to at any time. And a person that will listen. The aim is to be approachable and open to new ideas. I am happy to embrace change and willing to work with anyone.

The best thing about being an airline chief executive, though, is making passengers happy.

PAL should be a five-star carrier and offer a great passenger experience that is truly representative of the Philippines. Of course, the airline must be profitable, but it also has to be a source of pride.

So, we want passengers to enjoy the service we give them, but, equally, the airline must be a satisfying career for employees. •

AIRLINES INTERNATIONAL

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12/12/2017 17:10

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In the feature • Competition • Passenger charges • Privitization

22

WHY AIRLINES AREN’T FOOTLOOSE Airports with significant market power must be effectively regulated

F

ierce competition among airlines has delivered positive results. The average return airfare has come down 64% in real terms since 1996. Air cargo rates have fallen a similar amount in the same period.

Customers are benefitting.

The relentless efficiency drive is making airlines stronger too. For the third year in a row, returns are expected to outweigh the cost of capital.

At many airports, however, charges continue to rise. They did so even during the global fi nancial crisis—a clear sign of market power. Airport competition, or an alternative

mechanism that delivers comparable results, must therefore be encouraged.

But a new report by IATA, Airport Competition: Myth or Reality? notes that unfortunately, “effective competition between airports remains the exception rather than the rule” and that “major airports, in particular, continue to enjoy a dominant position.”

False theory If airports were competing, their charges would reflect the intensity of competition.

Airlines and passengers might also be expected to switch routinely, and new airports would

In Europe, between 2006 and 2016, airport passenger charges more than doubled as a share of the average passenger air fare.

Airline revenue per passenger fell 11% over the same period

AIRLINES INTERNATIONAL

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12/12/2017 16:35

Airport Competition

Average price of a one-way all-in air ticket from the EU28, 2006 vs 2016 Taxes Airport passenger charges Ancillaries and other fees Base fare €250

€200

10% 10%

€216

€220

€6 €16

€14

€18

€150

€100 82%

€176

€33

21%

€35

16%

€138 63%

€50

€0

2006

2016

23

Source: IATA Economics

DEC-JAN 2018

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12/12/2017 16:35

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Airport Competition

Route openings and closures A 2017 OXERA study reports that route openings averaged 3,000 per year between 2012 and 2016 with closures averaging 2,500 over the same period. This needs to be put in the context of a growing market in which network optimization is part of the dynamic. Route closure does not necessarily mean that an airline is switching a route to another airport.

Similarly, where an airline opens a different route at another airport, this may be an independent commercial decision and not related to route closures elsewhere. In other words,

airlines are mainly responding to passenger demand in the opening and closing of routes rather than airport competition.

Not surprisingly, therefore, a significant portion of route switching is by point-to-point carriers and on start-up routes at smaller airports.

Switching is much less widespread at larger airports and on established routes.

The OXERA analysis accepts that route switching at European airports with more than 40 million passengers per year is significantly lower than average in terms of both openings and closures.

25

enter the market where appropriate. There is little evidence for any of this. Between 2006 and 2016, for example, average airline revenue per passenger in Europe fell from €194 to €173 and shrank from representing 90% of the all-in ticket price to less than 80%. At the same time, airport passenger charges more than doubled, increasing from €16 to €33.

As for switching, airlines cannot do this lightly. “There is a lot of inertia preventing a switch at a major airport,” says Alexandre de Juniac, IATA’s Director General and CEO. “To start, the costs are high. Developing a profitable route takes time, particularly if it is part of a global network. And passengers will likely not switch with you. If, for example, an airline wanted to move operations from Rome-Fiumicino to Rome-Ciampino, it would be basically starting from scratch. And in many cases, the discussion is only theoretical as finding a slot and terminal capacity at most European airports is itself a big challenge.”

Investments include airline specific terminal facilities, such as check-in desks and airport lounges, and perhaps even maintenance facilities. Economies of scale may also be lost if operations are split across more than one airport.

And it’s not just more cost. There may also be lower revenue. Airlines get lower yields

when routes are launched until passenger familiarization develops. While these effects are temporary, the start-up period can be longer depending on airline competition on the route.

Leisure travelers, those visiting friends and relatives and business people rarely have a choice about the airport of origin. Research from Frontier Economics uses a sophisticated analysis to show that for every 1% increase in distance to a different airport, the likelihood of passengers flying from that airport declines, on average, 4%. As the travel time to an alternative airport approaches 120 minutes, the probability of passengers using that airport falls close to zero.

Finally, unlike the airline sector, where new carriers enter the market regularly, there are rarely new entrants in the airport market for obvious reasons. Compounding the problems is the fact that entry is especially difficult in those areas experiencing excess demand and a capacity crunch, such as major cities. Airlines also exit the market—Monarch being a recent example. That is rarely the case with airports.

Three-tier approach If market forces do not provide competition, then regulation must be the proxy. “The rise in airport

Airport Charges Directive The European Union Airport Charges Directive was established in 2009 and covers all airports with more than five million passengers per annum and the largest airport in each Member State.

The Directive is under review and several areas of contention have been highlighted. Financial and operational information is one such area. It is claimed transparency is lacking. Results are reported only in aggregate for all 46 AENA airports in Spain, for example.

IATA is also calling for a clear appeal mechanism to an independent regulator as a matter of urgency.

“In reviewing the Directive, regulators will have the difficult task of balancing a passionate discussion on what is revenue for airports but costs for airlines and their passengers,” says Alexandre de Juniac, IATA’s Director General and CEO. He notes, though, that airport passenger charges in Europe have doubled in the last decade. And the real cost of travel dropped 8%.

“Something needs rebalancing,” de Juniac added.

DEC-JAN 2018

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Airport Competition

€50bn

The rise in airport passenger charges over the last decade cost people who flew in Europe a collective €50 billion passenger charges over the last decade cost people who flew in Europe a collective €50 billion,” says de Juniac. “That also impacts the competitiveness of national economies.

That’s why governments need to pay attention and play a much stronger role.”

IATA recommends a three-tier approach to successfully regulate airport market power.

First, those airports with significant market power should be subject to formal economic regulation.

Second, airports with some degree of market

26

power should be subject to a formal and consistent set of processes, such as a strengthened Airport Charges Directive in the case of Europe.

And third, the remaining airports need not be subject to ex ante regulation but should adhere to ICAO principles on setting airport charges—namely, transparency, consultation, cost-relatedness, and non-discrimination.

To determine the appropriate level of regulatory oversight needed at each airport, a market power assessment (MPA) could be carried out.

IATA cautions that it would be impractical to undertake full MPAs for every airport but points out that other indicators can suggest the appropriate level of regulatory oversight, such as the level of congestion, whether the airport uses a dual-till charging mechanism, and whether the airport is part of a network.

“Living in a competitive world, we have seen the power of market forces drive cheaper and more efficient air travel,” de Juniac concludes. “But Europe’s largest airports are marching to their own tune. And consumers and national interests need to be protected by regulation that will act as a proxy for competition that promotes cost-efficiency.” •

To privatize or not For some, airport privatization is an answer to airport competition.

Hideharu Miyamoto, Corporate Planning, Narita Airport Corporation, says competition is not between airports but between cities, or countries. Airport business is therefore affected by governments’ aviation strategies and policies. And privatization or corporatization should be a cornerstone.

“The privatization of an airport allows for more flexible and quicker decision-making than you would get under a government decision-making system,” he says. “It develops a closer relationship between airlines and airports.”

Narita was corporatized in 2004 and has reduced landing charges twice since. It is offering incentives to airlines to increase routes, passengers and cargo. This, says Miyamoto, means it can be support the Japanese Government’s tourism strategy, which targets 40 million visitors to Japan by 2020 and 60 million by 2030.

“We are expanding our retail business and preparing the further expansion of the airport to accommodate future demand

in the region,” Miyamoto notes.

A report from the Australian Competition and Consumer Commission (ACCC) is more damning about privatization, however. It found that airlines and their passengers have paid up to A$1.6 billion too much for airport access over the past decade. Though the competition regulator has a role monitoring the airports, it has no special powers to regulate these monopolies. And the ACCC’s chairman Rod Sims has said that makes the airports a textbook example of privatization gone wrong.

“Airport fees and charges continue to increase while airlines are offering fares at levels significantly cheaper than they were over a decade ago,” Qantas CEO Alan Joyce said in response to the March 2017 report.

Virgin Australia Group CEO John Borghetti echoed this view. “Aviation is one of the greatest enablers of tourism, trade and economic growth in our region, so it’s absolutely critical that airports operate efficiently and that investment in infrastructure benefits travelers,” he said.

Between 2010 and 2016, the share of fully privately-owned airports in Europe increased from 9% to 16% while the share of mixed ownership models increased from 13% to 25% AIRLINES INTERNATIONAL

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12/12/2017 17:09

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11/12/2017 12:39

In the feature • New routes • Security • EU Aviation Strategy

28

BE BOLD AND AMBITIOUS Brussels Airlines CEO Bernard Gustin tells Graham Newton that Europe must strive for a more audacious aviation policy if it is to continue a leadership role in the industry Are you happy with the airline’s performance in 2017?

It was a year of recovery after the Brussels Airport attack in 2016.

The market is strong again and both business and leisure travel have returned to pre-attack levels.

the fleet and we are now focused on the Airbus A320 family. We added Mumbai to our network, our first steps into the Asian market.

That positions us not only towards customers on a new continent but also in new sectors such as the

Commercially, it has been a satisfying year. We are back to the double-digit growth that saw the airline have a record year in 2015. We expect figures to show that we have flown up to nine million passengers in 2017, up from five million just five years ago. Considering the terrorist attack, this is a great achievement.

We also have the “grand slam” of low-cost carriers in the market.

All the major LCCs are here.

There were some structural changes. The last AVRO has left

diamond market. Mumbai really complements our network.

It means a lot of seats have been added to our capacity, but our load factor has continued to increase nonetheless. The constant challenge, of course, is to translate that into yield. Costs must be kept under control.

What are the plans going forward?

We have taken over fl ights for Thomas Cook Belgium. So, in 2018 we expect to fly one million more

AIRLINES INTERNATIONAL

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12/12/2017 16:36

CEO Interview

29

DEC-JAN 2018

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CEO interview

Bernard Gustin 2012-present CEO, Brussels Airlines 2014-present Member of the Board of Directors, Germanwings 2008-2012 Co-CEO, Brussels Airlines 1999-2008 Several roles at Arthur D.Little including Head of Travel and Transport Practice, Partner, Member of Benelux Management Committee.

30

9m We expect figures to show that we have flown up to 9 million passengers in 2017, up from 5 million just five years ago

passengers as we add 26 new destinations to our network.

It is a very specific market segment, which will be a cha l lenge. A nd the competition will not rest while we try to meet this challenge.

Our success will depend on consolidating the business model we have developed over the past few years. Brussels Airlines is a hybrid model. We don’t want passengers having to choose between a good price and good service.

Our vision is “no compromise.” Being part of the Lufthansa Group enables this vision.

Brussels Airlines brings the speed, agility and culture of a small-medium enterprise while Lufthansa is the tiger in the engine.

Our culture, our people, are the vital ingredient, however. The airline ticket is a fastmoving consumer good. And aircraft are not differentiators from a passenger point of view.

The cabin, the lighting, the in-fl ight entertainment may all be excellent. But, it is people that make the difference. The airline strategy means nothing if one of your crew is having a bad day and a good customer has a bad day as a result. More aircraft, more products, more markets—they all become worthless.

The aim is to bring something new to the market and I think we are doing that. Our focused hub approach is working. Not only do we have Brussels as a home market, but we are also leaders in Africa. Leadership is not about size. Think about how we continued to fly to West Africa during the Ebola crisis.

We understood what the market needed.

And for our US routes, we will have pre-clearance facilities from 2018. We will also start to convert the potential of India into profitability.

What were the lessons learned about security following the 2016 incident at Brussels Airport?

The 22 March 2016 terrorism attack could have happened at any airport, station or arena where there are large groups of people. The security in place wasn’t wrong. Unfortunately, though, zero risk doesn’t exist.

So, it is about reinforcing what was already in place and questioning everything you do every day. There have been some changes.

The curb in front of the terminal isn’t used and heightened behavior screening by trained staff is in place though passengers will not necessarily notice that.

But this still doesn’t get us to zero risk. We have to continue to live.

Brussels Airlines has been flying to Africa for more than 80 years if you count our Sabena heritage, and we have a great deal of experience. The fact is, Africa is moving forward. It is the continent of tomorrow And what lessons did the airline learn about business continuity and crisis communications?

The customer-focused culture we had been developing since 2012 became a reality in March 2016. Staff focused on implementation and not on questioning the measures in place.

That is important.

But in a situation like this, it was not just dealing with customers. Brussels Airlines had 70 staff affected by the attack and four of our people were seriously injured. An airline must remember that this might be part of the equation too. We have a duty to our staff.

The fi rst day wasn’t perfect. We had some long queues as some 15,000 customers were due to fly. But we didn’t even have an airport.

The customers could see we were trying though and we did deal with everybody.

Can good security be balanced with a better passenger experience?

It can never be a trade-off. It is the same as safety. Security can’t be compromised just so passengers can get through the airport five minutes faster.

Technology will enable a better balance though. Brussels Airport is investing in biometrics, for example. This will help smooth the process. And you do get more efficient.

The fi rst week after the attack, the checking and screening as people entered the airport was obvious. Now, as I mentioned, this isn’t the case. The screening is still there but it is not delaying anybody.

Is operating in Africa getting any easier in terms of infrastructure and costs?

There is a real misperception about Africa.

Every continent has its problems and challenges.

Operating in Europe is not easy either.

Brussels Airlines has been flying to Africa for more than 80 years if you count our Sabena heritage, and we have a great deal of experi-

AIRLINES INTERNATIONAL

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12/12/2017 17:10

CEO interview Adding Mumbai to its network opens up new possibilities for Brussels Airlines, including customers in the diamond sector

ence. The fact is, Africa is moving forward.

It is the continent of tomorrow. A new airport opened in Dakar, Senegal in early December and Brussels Airlines was the fi rst international carrier to land there. The standards there are now at global best practice levels.

Kinshasa in the Democratic Republic of Congo is another good airport. A new Star Alliance lounge has just opened there, which Brussels Airlines is operating.

Overall, yes, Africa is a challenge. But it is not alone in that.

What are your thoughts on the EU Aviation Strategy?

As a past President of the Association of European Airlines and being in Brussels means I have developed a good understanding of European politicians.

So, I know it is difficult for them to develop a bold, ambitious vision. But that is exactly what aviation needs. The industry has been fi rst in so many things but both aviation and the politicians forget that. The Aviation Strategy is a fi rst step, but it cannot be the last.

We need to work at three levels. First, there has to be a level playing field within Europe.

Social costs for airlines differ from country to country, for example. Airlines can fly to and from any country in the European Union (EU) but have completely different cost bases.

Second, we need to look at the infrastructure. This is not just airport congestion and charges. I include the Single European Sky. This is the biggest environmental and economic project in Europe, bar none. Why isn’t this being moved forward? It will generate economic benefits and reduce carbon emis-

The industry has been first in so many things but both aviation and the politicians forget that. The Aviation Strategy is a first step, but it cannot be the last sions. But like airports, there continues to be a “not-in-my-backyard” approach.

Third, we need European champions to move everything forward. When Brussels Airlines became part of the Lufthansa Group, we had five routes in common with Lufthansa. It took nine months for the approval process. Consolidation needs to be allowed to happen. It is the best possible way to add value for the European consumer.

Specifically, what about EU261, dealing with passenger rights? Do you agree with the proposed amendments?

All airlines want to provide a perfect service to their customers. And it is right that there is regulation to ensure airlines deliver on their responsibilities.

Our Thomas Cook fl ights mean we are serving the holiday traveler. These customers are spending a large portion of their money for their vacation and it is our task to ensure they get to where they want to go. We do not

take that responsibility lightly. But the regulation must look at this area. An airline cannot be responsible for everything. It is not an insurance company. Sometimes, other players in the supply chain and even external factors like weather are to blame.

Regulation cannot be set up to encourage claims. It’s like coming out of surgery and the fi rst person to check if you’re okay is not a doctor but a lawyer. That’s not right.

And the regulation must also be proportionate. There is no link between the damage and compensation. I know what irregular operations cost and, believe me, it is why all airlines try to provide that perfect service.

I am pro-European, but the EU does make life so difficult sometimes. You cannot have a dispute over Gibraltar holding up these fundamental issues.

31

In general, are you optimistic about aviation’s future or do you see constraints on growth in terms of congestion, environmental issues, and terrorism?

I am an optimist. Aviation is not alone in having many challenges. Many other industries are facing problems. But this is an industry that is growing every year. Once, you asked people if they have ever flown. Now, you ask “how many times a year do you fly?”

I do believe that Europe must get its act together though. In 50 years’ time, do you want major hub airports to be museums because everybody in Europe is flying pointto-point and all the major global hubs are in the Middle East or elsewhere? How would you explain that missed opportunity when Europe was the leader for so long? • DEC-JAN 2018

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12/12/2017 17:10

In the feature • CEIV Pharma • Data tracking • Certification

Aviation value chain compliance with global standards will ensure the pharmaceutical industry relies on airlines for high-value, time and temperature-sensitive deliveries

32

COMING IN FROM THE COLD AIRLINES INTERNATIONAL

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Analysis

ransporting pharmaceuticals is big business, set to be worth $86 billion in 2019, $15 billion of which will relate to cold-chain products.

T

best practices. “The comprehensive 290-plus point checklist covering everything from Quality Management System documentation to on-ramp handling activities is also updated to reflect the

But aviation risks not getting its fair share of the market. As it stands, only 0.5 million tons of pharmaceutical products are transported by air compared with 3.5 million tons using maritime trade lanes.

The main reason for this discrepancy is the lack of trust in the aviation value chain’s handling of vaccines and medicines. It is estimated that 25% of vaccines degrade by the time they reach their destination, with temperature excursions attributable to airline and airports above 50%.

The issue is the lack of global certification standards that are internationally recognized and implemented, says Ronald Schaefer, IATA’s Assistant Director, Cargo, Ground Operations and CEIV Consulting.

“When differing standards are used by the various participants in the supply chain, the integrity of pharma shipments can be compromised, resulting not only in the loss of potential lifesaving products but also in the loss of trust in the pharmaceutical handling supply chain itself,” he says.

latest technologies as well as industry and regulatory requirements,” informs Schaefer.

CEIV Pharma certification is becoming globally recognized by the pharmaceutical industry.

“Companies that achieve CEIV certification have seen a rise in the quality of the delivery of their pharma handling services, which is a direct benefit to their customers,” says Schaefer. “Even if only one station is certified, the knowledge gained from the training courses and a gap analysis report and implementation plan always provides benefits.”

The pharmaceutical industry backs up these claims. Manufacturers see standardization, certification, and transparency across the supply chain as a necessary step forward for aviation.

Johnson & Johnson Logistics Manager, Gino Vleugels, says the company “fully appreciates the commitment IATA has demonstrated” in looking to set industry standards in this area.

“We look forward to working closely with IATA in further enhancing the CEIV Pharma program and promoting the program to ensure its worldwide adoption,” he adds.

The European Shippers Council, Merck Sharp and Dohme (MSD) Asia Pacific, Baxter, and Zoetis are among the many other manufacturers that endorse CEIV Pharma.

Constant updates IATA’s Center of Excellence for Independent Validators (CEIV Pharma) aims to resolve the problem, creating a network of globally-certified trade lanes. CEIV Pharma sets global standards and regulations, and ensures compliance through a process of independent validation.

The result is quality services delivered in a harmonized and globally-consistent manner.

Program components are updated on a yearly basis and training echoes the latest industry

$1.12 trillion According to the World Health Organization, the total pharmaceutical market will be worth $1.12 trillion by 2022, up from $800 billion today

33

Community approach CEIV Pharma certification applies not only to airlines and airports but also to all supply chain partners. The program is expanding rapidly.

DEC-JAN 2018

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12/12/2017 17:12

Analysis

How does CEIV Pharma work?

The CEIV Pharma certification process varies from one organization to another but, based on experience, implementation takes on average six-to-seven months.

The process begins with the training component. This consists of two multipleday courses that cover a variety of topics regarding temperature-controlled cargo operations as well as the audit, quality and risk management of temperaturecontrolled cargo.

An assessment of an entity’s cool chain/pharmaceutical processes and facilities against international standards, guidelines and regulations follows. Prior to the assessment, the comprehensive CEIV Pharma Audit Checklist is provided so an organization can self-determine any potential gaps before the Independent Validator’s (IV) onsite visit. The resultant

34

Pharma Certified”. The process, however, does not end with certification.

Recertification takes place every three years and includes an assessment as well as one refresher training course, plus a validation if necessary. This ensures that program participants maintain their high standards in transporting pharmaceutical products and are able to adjust to new best practices for years to come.

gap analysis report identifies the critical elements in non-compliance with national and international regulations.

An appropriate implementation plan to close the gaps and meet CEIV Pharma requirements is the end result of the assessment.

The final stage of certification, the validation phase, ensures any shortcomings have been rectified. During the validation, IATA’s independent validators go through the checklist one more time and at the end recommend whether all requirements have been fulfilled and an entity can be “CEIV

As of end November 2017, there were 218 stations CEIV Pharma certified in total

Data tracking from start to finish has become indispensable for temperature-sensitive drug product In July 2017, Amerijet became the first US all-cargo airline to earn IATA’s CEIV Pharma certification. “As an airline, our role in the supply chain is to provide safe handling for all pharmaceutical shipments and we demand the same standards from our business partners, including our customers,” says Pamela Rollins, Senior Vice President of Business Development at Amerijet. “Data tracking from

transport start to fi nish has become indispensable for temperature-sensitive drug product integrity. Amerijet is aiming for full transparency in the supply chain.”

To meet CEIV Pharma’s exacting standards, Amerijet has invested heavily across the board. At Miami International Airport, for example, there is new custom-built cooling facility equipped with active alarm

systems, temperature data recorders and 24/7 CCTV monitoring.

Meanwhile, there has been a rapid growth in the establishment of CEIV Pharma communities—groups of stakeholders centered on an airport hub or a particular supply chain that decide to undergo CEIV Pharma certification together. Forwarders, handlers, truckers, and airlines all participate, as long as they are committed to providing quality pharmaceutical handling services.

Although pharma shippers and regulators cannot be certified, they can participate as observers and even attend training sessions to get a better understanding of the CEIV Pharma program.

Brussels Airport was the first to go down this route. It invited a group of ten local stakeholders to undergo CEIV Pharma training to assure cold-chain integrity to their clients.

Steven Polmans, Head of Cargo, Brussels Airport says the strength of CEIV Pharma lies in the fact the criteria were set by the shippers and “ignoring this program is ignoring the interests of the pharmaceutical industry.”

To date, 12 communities have taken this approach and an additional nine airports are in the process of creating their own community. Beyond providing clients with global best practice in the community’s handling of pharma products, the community idea allows stakeholders to share information and understand each other’s requirements. This furnishes even greater efficiency among the participants.

Industry benchmark Looking ahead, CEIV Pharma will be promoted in regions where it has not yet made strong inroads, such as Africa. The plan also calls for strengthening the relationship with pharma shippers and increasing the database content available to better facilitate trade lane evaluations.

“It has been a year since AirBridgeCargo Airlines gained IATA CEIV and we were able to demonstrate our ability to protect the quality, integrity and consistency of temperature-sensitive pharma products,” concludes Fedor Novikov, Pharma Director, Global, AirBridgeCargo Airlines.

“Being perceived as an industry benchmark, CEIV raised the bar of our performance, encouraging our customers’ level of credibility and increasing our volumes, which constitutes 3% of total cargo carried for nine months of 2017,” he adds. “That is a significant twofold increase as a confirmation of our competency and expertise in the pharma sector.” •

AIRLINES INTERNATIONAL

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15

IATA.Jan18.035.indd 35

11/12/2017 12:41

In the feature • Market dynamics • Maximizing materials • Environmental pressures

36

END OF LIFE REVELATIONS Aircraft recycling is set to take on greater importance for both economic and environmental reasons

T

he Bombardier CSeries first took to the commercial skies in July 2016. Like any next generation aircraft, it features a host of improvements over older models, including reduced fuel burn.

But what really makes the aircraft stand out is the fact that is has been designed with its obsolescence in mind. It is the first in the industry to be awarded an Environmental Product Declaration, a standardized way of quantifying a product’s life cycle environmental impact.

Though end-of-life is now part of the design process, there are still issues for the industry to resolve, including breaking down composite material and the need—or not—for regulation.

Aircraft recycling is a nascent part of the industry compared with other aspects of the aviation value chain. But market dynamics are forcing the sector to grow up quickly.

According to the Boeing Market Outlook, more than 40,000 new aircraft will be deliv-

85% On average 85% of an aircraft is recycled, 15% is sent to landfill

ered in the next 20 years. Added to this, aircraft will be retired at an increasing rate. By 2023, one estimate anticipates annual retirements of aircraft will surpass 1,000. It means aircraft recycling will become big business.

Composite breakdown There are hurdles to overcome before aircraft recycling can come of age though. Composite material is one. A safer, lighter material it may be, but breaking it down is pushing scientific expertise and economic justification to the limits.

Both the Boeing B787 Dreamliner and Airbus A350 utilize significant amounts of composite in the airframes as well as 3D printed parts that minimize production waste.

James Cobbold, Global Sales Manager, Air Salvage International Ltd. (ASI) accepts carbon fibre is a challenge, especially when “dirty”— riveted, painted or otherwise impure.

“Composite recycling is still in its infancy,”

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Aircraft Recycling

he says. “Both Airbus and Boeing have funded research into recycling processes and applications for various products but there is still a long way to go. Technically, 100% recyclability of carbon fibre alone could be achieved but the critical issue is the cost of implementing such processes. Given the average age of an aircraft is 20 years, can our understanding catch up before these latest models start reaching their retirement age?”

There are four main technologies being developed: pyrolysis, solvolysis, pulsed energy and steam thermolysis, all of which break down the composite. According to Pierre Bonnichon, Business Development Manager, Tarmac Aerosave, all these processes are used in a variety of recycling projects but, so far, they remain limited in terms of industrial applications.

“While technological solutions exist, the issue also relates to the low volume of recovered fibres from recycled aircraft,” he notes.

As of mid-September 2017, Tarmac Aerosave had recycled 100 aircraft and 90 engines.

But the fact is, there is no real market yet for recycled composite material and won’t be for years. Even when something does develop, an airframe won’t yield vast quantities. After all, the whole point of composite is that it is thin and light.

Best practice There is also the question of regulation. The industry has established strong best practice approaches through the Aircraft Fleet Recycling Association (AFRA) and such initiatives as Airbus’s Process for Advanced Ma nagement of End-of-Li fe-A i rcra f t (PAMELA). Nevertheless, there is increased talk of impending regulation in this area.

“If carefully designed this could encourage further efforts on recycling, but it’s a case of the devil being in the detail,” says Mark

Sleeping giant The first Airbus A380 has been put into storage. The Singapore Airlines aircraft, code 9V-SKA, entered service between Singapore and Sydney on 25 August 2007, under the specially created flight number, SQ380.

In June 2017, the aircraft—owned by the leasing company, Dr Peters Group of Dortmund—was grounded and flown to Tarbes Lourdes Pyrénées in France. Its final fate has not yet been determined.

“Storage doesn’t automatically mean that these aircraft will not fly again,” says Thomas Roetger, IATA’s Assistant Director, Aviation Environment – Technology.

“Roughly half of stored aircraft are brought back into service, normally after less than two years. The others are permanently retired and dismantled.”

AUG-SEPT 2017

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Aircraft recycling

An airframe worth $200,000 two years ago could easily be worth $400,000 today, according to James Cobbold of Air Salvage International

38

Watson, Head of Sustainable Development, Swire Pacific, the parent company of Cathay Pacific Airways. “What form would the regulation take, and would it lead to best in class approaches, or a minimum standard? Airlines and OEMs already have strong incentives to innovate, given the importance of reducing waste, promoting recycling and supporting a lifecycle approach to aircraft. But, of course, there may be a valid place for regulation in this space in the future.”

Thomas Roetger, IATA’s Assistant Director, Aviation Environment – Technology, points out that aircraft owners are legally responsible for any pollution or incident arising out of aircraft decommissioning activities. “National waste regulations of course apply to aircraft once they are decommissioned, in the same way as to any other waste,” he says.

Prior to 2006, however, there was no industry-recognized accreditation system in place. To fi ll the gap, AFRA created “Best Management Practices” (BMP) to form an accreditation programme and engage new members. “The aim was to return quality components to the supply chain, address environmental issues, maximize the recycling of materials and deal with the evolving nature of aircraft construction,” says Cobbold.

To date, AFRA has over 70 members and covers a huge spectrum of this industry sector including OEMs, airlines and end-of-life service providers. One of AFRA’s goals is to increase

4-6 weeks

It takes about 4–6 weeks to completely strip an airframe

awareness and recognition of its BMP as the leading voluntary industry standard, to promote environmentally responsible, safe end-of-life aircraft disassembly and recycling practices.

AFRA is also part of IATA’s Aircraft Decommissioning Industry Group. The aim is to develop a best practices document providing guidance for airlines and other aircraft owners to manage aircraft decommissioning in a controlled process, considering environmental, safety and economic aspects.

Business model As environmental pressures intensify and more aircraft both enter and leave the industry fleet, the need to fully appreciate the impact of aircraft recycling grows commensurately.

The business model varies. An airline or lessor may sell the aircraft or it may ask a third party to part out a plane—dismantling the aircraft for parts. The airline may sell the parts, ask the third party to sell them on the airline’s behalf or add the parts to its own inventory.

“All parts must be properly certified and have full traceability to have value and that

is usually the case,” says Tim Zemanovic, President, Jetyard.

Zemanovic says airframes are generally holding their value at the moment. Older Boeing 747 models are not so much in demand any more but the Airbus A320 is still in widespread use and so prices for its parts are holding up well.

If a specific aircraft model has flooded the market, Cobbold adds, obviously the sale price is reduced, but this does come in cycles and an airframe worth $200,000 two years ago could easily achieve $400,000 in today’s market if the demand is there. “With regard to next generation (NG) aircraft, more and more newer aircraft are being disassembled due to the high value and desirable parts and assemblies so values at this time seem to be increasing across the NG market,” he says.

Once all reusable parts have been removed and delivered to the last owner, “the dismantling facility will then take ownership of the remaining wreck, so it is treated as waste and additional segregation processes will occur for recycling purposes,” informs Bonnichon. •

AIRLINES INTERNATIONAL

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HOST CLOSER TO PREMIUM GUESTS Norbert Kettner, Managing Director, Vienna Tourist Board Having hosted over 14.9 million overnight stays in 2016, Vienna is not only considered to be an international magnet for tourism, art and culture, but also a global player in its capacity as a conference location. Almost 80 % of Viennaâ&#x20AC;&#x2122;s conference visitors arrive by plane. It is for this reason that Vienna Airport is a key strategic partner for the Vienna Tourist Board, as both are hospitable, global, smart and premium.

viennaairport.com/closerto

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Data

IATA 20-YEAR

PASSENGER FORECAST For more visit www.iata.org/passenger-forecast

Growth by region The largest 10 passenger markets

ASIA-PACIFIC Annual average growth: 4.6% Additional passengers: 2.1 billion Overall market size: 3.5 billion

(ranked by passenger numbers to, from, and within each country) 2016

2036

1.

USA

China

2.

China

USA

3.

UK

India

4.

Japan

Indonesia

5.

Spain

UK

6.

Germany Japan

7.

India

Spain

8.

Italy

Germany

9.

France

Turkey

NORTH AMERICA Annual average growth: 2.3% Additional passengers: 452 million Overall market size: 1.2 billion

EUROPE Annual average growth: 2.3% Additional passengers: 550 million Overall market size: 1.5 billion

LATIN AMERICA Annual average growth: 4.2% Additional passengers: 421 million Overall market size: 757 million

MIDDLE EAST Annual average growth: 5.0% Additional passengers: 322 million Overall market size: 517 million

10. Indonesia Thailand

AFRICA Annual average growth: 5.9% Additional passengers: 274 million Overall market size: 400 million

2022

The point at which China will displace the United States as the world’s largest aviation market (defined as traffic to, from and within the country) is forecast to occur around 2022.

Country pairs with the biggest changes in passenger numbers (International only)

Country pair

Additional million pax per year by 2036

Annual growth

India – UAE

20.2

5.9%

China – Thailand

19.1

4.3%

China – Korea

17.7

3.6%

China – Singapore

15.0

7.0%

USA – Mexico

14.9

2.3%

Indonesia – Malaysia

12.6

5.8%

USA – Canada

12.3

2.0%

China – Chinese Taipei

11.2

3.4%

China – USA

11.0

4.2%

India – USA

10.5

5.6%

AIRLINES INTERNATIONAL

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Data

The five fastest-growing markets in terms of annual additional passengers in 2036 compared to 2016 will be: 1.

2.

3.

4.

5.

China (921 million new passengers for a total of 1.5 billion) USA (401 million new passengers for a total of 1.1 billion) India (337 million new passengers for a total of 478 million) Indonesia (235 million new passengers for a total of 355 million) Turkey (119 million new passengers for a total of 196 million).

Alternative scenarios for passenger traffic (Global passengers O-D basis, billion) 10 Policy stimulus and market liberalization 9 Constant policies scenerio 8 A pick-up in protectionism 7 6 5 4 3

2016

2020

2025

2030

2036

Sources: IATA/TE

Many African states will experience a compound growth rate of more than 7.2% per year, meaning their markets will double in size every 10 years.

41

If trade protectionism and travel restrictions are put in place, growth could slow to 2.7%, meaning 1.1 billion fewer passenger journeys annually in 2036. If moves towards liberalization increase, growth could be more than two percentage points faster, leading to a tripling in passengers over the next 20 years.

7,800,000,000 IATA expects 7.8 billion passengers to travel in 2036, a near doubling of the 4 billion expected to fly this year.

The biggest driver of demand will be the Asia-Pacific region. The region will be the source of more than half the new passengers over the next two decades.

DEC-JAN 2018

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Soapbox

IS FURTHER CONSOLIDATION ON THE CARDS? The financial results for many airlines have peaked and attention has now turned to ‘what’s next?’

42

Chris Tarry, Founder of specialist aviation consultancy company, CTAIRA

C

onsolidation is not only the result of merger and acquisition activity but also business failure.

Such consolidation has been evident over the last 12 months and it is reasonable to expect that it will continue into 2018 and beyond as the operating conditions become more challenging. The price of fuel is now back to levels last seen in 2014 and appears to be rising along with other costs, while yields continue to fall.

It is also important to keep a sense of perspective.

Industry profit at record levels is now history and the reality is that this outcome was the result of a relatively small number of airlines doing exceptionally well. Furthermore, given the skewed nature of the results, it is what happens at a company level that is important. Investors and lenders invest in a company and not the industry.

We have two lists of airlines. The fi rst one has some 40 airlines on and contains those where there will be “corporate action” and investment activity, including merger and acquisition. The second one is an “at risk” list, which identifies fi nancially weak airlines that have limited or no strategic value to an acquirer.

Acquisition is often a response to a mature or maturing market and the opening up of new opportunities, particularly related to revenue but including cost-related benefits too. A “horizontal” merger, which is what technically occurs when two airlines get together, should result in “more for less” and the eradication of duplicated activities and offices—something that has not been apparent in the case of cross-border consolidation in Europe.

Merging with or acquiring another business is gener-

ally about size. For the acquirer, drivers generally relate to market access and offering a wider network. But it can also be about acquiring aircraft. Given the lead times between orders and deliveries, there are a number of cases where this could provide part of the rationale.

For the “acquiree”, it provides a route to crystallize a value higher than might be reached by trading alone. It may even be the only option for all or part of the business to continue to operate.

The outstanding issues would appear to be timing and valuation, which almost by definition are interrelated. A common feature is that the seller will inevitably have a higher view of their business worth than the buyer. The price has to be right. There are many examples in history, across all industries, that show that combining two weak businesses will never be a recipe for success.

Given that we are now past the point where the fi nancial results for many airlines have peaked, attention will inevitably turn to ‘what’s next?’. With an even greater gap between the “haves” and “have nots”, and an operating environment that is becoming more challenging, consolidation resulting from both merger and acquisition and also through failure is inevitable.

As results deteriorate and the vendor’s views of value become more realistic, the only real question, in a number of cases, is when?

Airlines should be asking why, why now, how, and how much? And they would do well to remember that if something looks too good to be true, it generally is. In such cases, no deal is better than a deal at any price. •

AIRLINES INTERNATIONAL

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Advancing aviation standards worldwide through social enterprise.

Benefiting people everywhere. Those who choose to fly and those who do not.

The aviation industry connects millions of people around the world. At CAA International, part of the newly formed UK CAA International Group, we are committed to improving global aviation standards and supporting affordable, sustainable development goals. We continue to advise governments, fellow aviation authorities, agencies and organisations, having assisted in more than 140 countries around the world.

Today we are evolving to become a social enterprise, with a commitment to reinvest a substantial part of any profit we make back into the global aviation community – and where it is needed most. By making positive advancements in global aviation standards happen today, we can help secure the future of aviation and raise standards across the globe – protecting those that choose to fly as well as those that do not.

www.caainternational.com Part of the UK CAA International Group

IATA.Jan18.043.indd 43

Together for better aviation

11/12/2017 12:43

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11/12/2017 12:44