Airline Leader Issue 5 by Susan Tran

AIRLINE LEADER ISSUE 5 | APRIL 2011

AIRLINE LEADER

Social networking and the new customer relations paradigm

ISSUE 5 | APRIL 2011

Social

is an int media todayâ&#x20AC;&#x2122;s egral part of airline C world - any EO the oth who looks taking aer way is big risk

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Social media – and reconstructing Egypt

S WE FOCUS IN THIS ISSUE ON THE ROLE OF SOCIAL MEDIA and how airlines are likely to be affected, it is no coincidence that the effects of the new century’s media evolution are making themselves felt at a political level. There could be no more dramatic illustration of the power that these media deliver to the people than the past few months’ popular uprisings in North Africa and the Middle East. These would not have been possible without the immediacy and privacy of social media. Airlines too are very much part of the social fabric of nations, from the “flag carrier” syndrome right through to making it possible for migrant workers to see their families each year. Likewise, any airline that disregards the importance of this “fashion” will be running serious risks. At the very minimum, comprehensive reviews of customer relations strategies are essential. As risk management tools, media such as Twitter have become core, not merely an optional extra. In one way or another, the new media will also intrude more actively into the distribution and marketing sphere. Exactly where this is heading is not clear, but the sheer force and breadth of the evolution makes change inevitable. Moreover, this is a movement that – despite already vast numbers – has barely scratched the surface in emerging nations. That Facebook alone already has a theoretical market valuation five times that of the largest US and European airlines is reason to stand back and reformulate old attitudes.

Our aim is to make a difference

Meanwhile, the North African revolution has left many untied ends. One senior airline executive has said he believed Egypt would take a year to get back to normal. If correct, this presages great danger. Hotels and airlines are operating less than half full, this in a country of 80 million people whose industrial exports are less than Costa Rica’s. One in eight Egyptians depends on inbound tourism for their living. Many of them will today be unemployed – and can look forward to much more of the same. That does not augur well for a positive outcome for the political future of the country. Airline Leader believes the airline industry has a vital part to play in securing the economic future of this enormously important country. Social media can be used just as effectively in this process as it was in overthrowing the established leadership. More about this on our website AirlineLeader.com. With this issue of Airline Leader we are pleased to welcome Professor Nawal Taneja, who makes the first of what will be a regular monthly contribution. As one of the industry’s great thought leaders, we are delighted that he is going to share his experience and ideas with us!

PETER HARBISON EXECUTIVE CHAIRMAN CENTRE FOR ASIA PACIFIC AVIATION

AIRLINE LEADER | APRIL 2011

Contents APRIL 2011

www.airlineleader.com

AIRLINE LEADER 28 FEATURE The airline CEO’s guide to social networking and the new customer relations paradigm Whether it is a fad or a core social change in a state of evolution, any airline that ignores social networking is taking a big risk.

42 CEO INTERVIEW In conversation with Vueling CEO Alex Cruz The Spanish LCC’s CEO is a little different, and very pragmatic. He holds the key to a new European short-haul connecting model – and not just for Iberia.

44 AIRLINE OF THE MONTH IndiGo After making the largest aircraft order in aviation history, India’s leading low-cost airline is well placed to capitalise on the country’s booming aviation market.

52 COUNTRY PROFILE

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Japan’s airline industry How aviation can provide an economic spark to a wounded nation.

Cover: Lucy Clift

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AIRLINE LEADER | APRIL 2011

Headlines

Numbers

Inflight

8 CEO briefing 14 Asia Pacific 17 India 18 Middle East & North Africa 20 Africa 22 Europe 24 North America 26 Latin America 58 Executive changes 60 Airports corner

46 Fresh metal takes to the air

62 It could be true ...

We examine aircraft deliveries by region and by carrier.

BHP to acquire world’s listed airlines

48 Fleets An easier lending market keeps fuelling capacity expansion.

56 Capacity catching up

Britain to build lots of quite-fast trains, one day

64 Back end of the bus It’s surcharge season again, says Joe Traveller.

Demand is expected to rise a shade under the expected increase in capacity.

Opinion 12 Using new-generation technology as a driver of business strategy.

By Nawal Taneja

Editorial EXECUTIVE CHAIRMAN: Peter Harbison CHIEF OPERATING OFFICER: Derek Sadubin MANAGING EDITOR: Susan Tran SUB-EDITOR: Scott Coomber DESIGN: Lucy Clift CONTRIBUTORS: Liz Thomson, Simon Elsegood, David Bentley, Kathryn Creedy, Sharon Dai, Jason de Plater, Ksenia Dolgushina, Jackson Flint, Janet Kim, Ron Kuhlmann, Carmen Lee, David Murray, Binit Somaia, Shannon Swainston. Airline Leader is published monthly by Airline Leader Pty Ltd. Please visit the website at www.airlineleader.com or write to us at PO Box N777, Sydney NSW 2001, Australia. To notify us of a change in address or to remove your name from our mailing list, please call +61 2 9241 3200 or airlineleader@centreforaviation.com. © Airline Leader Pty Ltd. Airline Leader is printed in Singapore by Times Printers.

4 AIRLINE LEADER | APRIL 2011

AIRLINE LEADER | APRIL 2011

QUOTES

On the record SkyTeam “Today marks yet

another confirmation of SkyTeam’s growing global family. The Middle East is a strategic market for our alliance as we continue to extend the SkyTeam network to all corners of the globe. The region has seen an impressive growth in traffic over the past decade and we want to engage actively in this expansion. I am convinced that Middle East Airlines will develop into a significant and valuable player in Middle East aviation.”

Lufthansa

“With today’s application for a joint venture, we are deepening our long-standing partnership with Star Alliance member ANA. This step comes on the heels of the 50th anniversary of the first Lufthansa flight to Japan and the 150th anniversary of the signing of the first GermanJapanese treaty of friendship. The joint venture, which is subject to government approval, will send a good signal to our customers in Japan and Europe.” CHRISTOPH FRANZ, CEO AND CHAIRMAN OF THE EXECUTIVE BOARD. SOURCE: COMPANY STATEMENT, 23-FEB-2011.

LEO VAN WIJK, CHAIRMAN. SOURCE: COMPANY STATEMENT, 28-FEB-2011. COMPANY STATEMENT, 13-AUG-2010.

SkyTeam

“This year, China Airlines and

China Eastern, with its daughter company Shanghai Airlines, will effectively join us, according to plan. Garuda Indonesia, Aerolineas Argentinas and Saudi Arabian Airlines have all confirmed their membership effective 2012. We will continue to work on further expansion of our global network by looking for partners from India and Latin America.” MARIE-JOSEPH MALE, MANAGING DIRECTOR. SOURCE: COMPANY STATEMENT, 28-FEB-2011.

easyJet

ANA

“By forging this closer cooperation with one of our partner airlines in the Star Alliance, we will significantly enhance our ability to serve customers throughout Europe and offer new choice and convenience for passengers. We are looking forward to our application being approved.” SHINICHIRO ITO, PRESIDENT AND CEO. SOURCE: COMPANY STATEMENT, 23-FEB-2011.

Shannon Airport

“No commercial airport in Europe could agree to

the non-negotiable terms set out by Ryanair in relation to Shannon. As a commercial company, Shannon Airport is committed to incentivising growth, but any agreement has to be financially viable for both the airport and the airline. Ryanair’s terms would be financially ruinous for any airport.”

SOURCE: COMPANY STATEMENT, 01-MAR-2011.

“The thing about oil is it will hurt other airlines, smaller airlines, much more

than easyJet. What it could do is shake out a bit of the market going forward if oil prices are going to be sustained at this level for some months to come.” CAROLYN MCCALL, CEO. SOURCE: THE SCOTSMAN, 23-FEB-2011.

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Monarch Airlines

“We have been astonished by the soaring

demand for Monarch flights in April, which we believe is being driven by the proximity of Easter to the additional bank holiday. Bookings for April are already up 49% compared with the same time last year, with demand from customers still increasing. The addition of 31,000 extra seats into the timetable for April will cater for this demand and enable more customers to take advantage of Monarch’s great service and low fares over the long Easter period.”

KEVIN GEORGE, MANAGING DIRECTOR.

SOURCE: COMPANY STATEMENT, 01-MAR-2011.

IATA

“Governments must provide a fiscal

and legal framework that supports quick commercialisation. This is particularly important for Japan, where an algae-based biofuels industry could help Japan to meet its climate change commitments and improve its energy security.”

GIOVANNI BISIGNANI, DIRECTOR GENERAL AND CEO, ADDRESSING THE FOREIGN CORRESPONDENTS CLUB OF JAPAN, 23-FEB-2011.

Malta Government

“This is not simply a question of numbers. We are looking

at a whole re-organisation of the company, from how it does its commercial activity, the network it should operate, the capacity it requires and, therefore, the right number of personnel the company should have if it is to pass the Commission’s commercial test before approving the plan. I believe the restructuring committee’s first focus is to get it right in terms of a plan that works. If we don’t, the European Commission will not be fooled. They have now had tens of European airlines knocking on their doors. They have seen this all before and they will not be fooled. If we try to fool them, we will only fool ourselves, because if we agree to a plan that then fails, the consequences for Air Malta, and Malta as a whole, would be devastating. Then it would not be about the jobs but about not even having an airline.” TONIO FENECH, FINANCE MINISTER. SOURCE: TIMES OF MALTA, 25-FEB-2011.

Air India

“ It is certainly a difficult environment, in

the Indian environment, the stakeholder — the government — plays too prominent a role in operations. When you call someone from outside, let him work. The government should control but let him work. It should not be involved in day-to-day operations. I also need some commitment from the stakeholder that ‘Yes, you are our man.’ If you tell me that you are not the guy to do it, then tell me, but then I also want to know: ‘Why did you accept my plan? Let me work for eight months.’”

GUSTAV BALDAUF, COO. SOURCE: FINANCIAL EXPRESS, 23-FEB-2011. [MR BALDAUF RESIGNED ON 28-FEB-2011 AFTER LESS THAN 12 MONTHS IN THE POSITION]

London Heathrow

“We need to prove Britain is really open for business by getting rid of needless red tape and ensuring we don’t isolate ourselves from the emerging world. Right now, it’s far cheaper for Chinese tourists to travel to competing hub airports like Paris or Amsterdam. China’s massive expansion in aviation is a huge opportunity for the UK and small changes could have a significant impact on UK jobs by bringing in more tourists from China and elsewhere.” NIGEL MILTON, POLICY DIRECTOR. SOURCE: BAA, 02-MAR-2011.

OECD

“Russia is becoming a prominent commercial aircraft producer and China will begin production in the next few years. It is in everyone’s interest that all aircraft manufacturing countries join this new agreement so the market can function on a level playing field. The OECD export credit system provides enough flexibility to accommodate partner countries, as Brazil’s active participation has clearly demonstrated.” ANGEL GURRÍA, SECRETARY-GENERAL. SOURCE: OECD, 25-FEB-2011.

AIRLINE LEADER | APRIL 2011

HEADLINES

CEO briefing

Rising fuel prices: The constant sorrow of the airline industry ➤ THROUGHOUT THE PAST YEAR’S STUTTERING RECOVERY, oil prices have constantly loomed in the shadows. They now seem to be about to subvert the recovery agenda. The Middle East is unlikely to return to normality quickly and, although there is no real shortage of oil yet, there is sufficient nervousness – and speculators with an interest in inflated prices – to push the level unpredictably. The double jeopardy too is that uncertainty tends to push the safe-haven US dollar higher, implying even larger cost increases in many other currencies. At current prices (with Brent crude

8 AIRLINE LEADER | APRIL 2011

at about USD115), jet fuel prices are close to the tipping point for airline profitability and, while limited fuel surcharges may hold, it is doubtful the market is sufficiently resilient to absorb much more in the way of higher fares. The double impact will translate quickly to the bottom line. Price increases unfortunately stimulate an almost inverse correlation relationship, where costs increase on one side and yields soften as discretionary spending slows. Improved business travel demand has been the key to recently improved yields. That momentum should continue for the immediate term, as business sentiment generally remains positive (despite soft retail numbers), but if that turns – as it will if the present trend continues – revenues will be hit. The issue is not as simple as higher fuel prices. It is about the rate at which they increase. If they move steadily upwards, rather than spiking

as they did in 2008, airlines have the breathing space in which to adapt and, for example, adjust capacity and route structures. A negative reminder of the possibility of spiking is that oil prices had scarcely gained a mention as recently as IATA’s Dec-2010 industry forecast. The industry body had then marginally upgraded its projected price average for 2011 from USD79 to USD84 per barrel, noting that central bank liquidity and capital flows were “threatening to generate asset and commodity price bubbles, helped by improved economic sentiment outside of Europe”. This was of course before the wave of Middle East uprisings. Since then, much has changed. As demonstrated by the graph opposite, there is a tendency for the crack margin, the gap between oil and jet fuel prices, to be accentuated when oil prices rise quickly, as they did in mid-2008.

AIRLINE INDUSTRY FUEL COSTS (USD, BN) VS BRENT CRUDE PRICE (USD): 2001 TO 2011F SOURCE: CAPA – CENTRE FOR AVIATION AND IATA

200 175 150 125 100 75 50 25

FUEL EXPENSE (USD, BN)

2011F

2010F

2009

2008

2007

2006

2005

2004

2003

2002

2001

0 BRENT CRUDE PRICE (USD PER BARREL)

Even under that Dec-2010 scenario, IATA was already predicting “some slippage” in industry net profits this year, reflecting weak traffic volumes originating from the developed economies, stable yields and higher oil prices. But if oil prices stay 25% above IATA’s forecast, some USD40 billion could be added to the industry fuel bill, using IATA’s own prediction. All other things being equal, this would wipe out the USD9.1 billion in profits expected for the industry this year and create a loss twice as deep as in 2008. According to IATA’s own jet fuel price calculator, this estimate does not take into account any changes in the quantity of fuel consumed or the impact of hedging. The industry had been expected to transport some 2.54 billion passengers this year, up 5% from last year’s 2.42 billion and 12% from the 2008 figure. That translates into a lot more flying – and therefore higher fuel consumption. One knee-jerk response to these increases is to insert fuel surcharges, even where this runs the risk of dampening demand.

But pro-active airline fuel-efficiency programmes will also become crucial. With the focus on the key dimension of price (eg, the price of jet fuel, or hedging), little attention is paid to the other dimension of fuel cost, namely volume. A lot more can be done about fuel volume consumption. Significant differences exist in fuel volume consumption by airlines, reflecting fleet ages, average seating densities, weight-saving strategies and other efficiency measures. Long-haul low-cost AirAsia X’s CEO, Azran Osman-Rani, believes there are considerable competitive advantages to be gained by focussing on fuel volume “where we can get to 40%-50% lower than other airlines in terms of litre/seat/100km, or miles per gallon”. If yields do soften, this cost reduction approach will have to dominate. Fuel surcharges will not gain traction. Unrest in the Middle East could last for months. Typically in such circumstances, the oil price rise is initially generated by nervous stocking-up of fuel reserves, impacting airlines’ cost side of the

ledger. As uncertainty merges into greater clarity of outlook, that nervousness should retreat. But if there is a slowdown in business and tourism flows, the danger moves to the revenue side of the ledger. For the time being, price levels are well below the challenging times of 2008, but events are already forcing strategic changes, over and above mere addition of fuel surcharges. A “strategic change threshold” is reached when oil prices reach between USD100-120 per barrel. This becomes a tipping point for the industry and, unless stabilised, will progressively force more changes in the way airlines operate. Up to a certain level, incremental fuel price changes can be met by similarly incremental pricing adaptation. But as cost profiles of certain routes start to drop below profitability, so airlines begin to review their operating networks, redirecting or reducing capacity and even terminating some routes. If oil prices remain above USD110, that sort of restructuring will occur. Some of it may actually be healthy and, depending on where prices go next, establish the industry better to face what will inevitably be a difficult year.

Bisignani to Brazil: Take the Olympic opportunity to fix the infrastructure ➤ IT IS HARDLY CONTROVERSIAL THAT THE MAIN LEGACY of major global events such as the Olympics and the football World Cup is a host of underutilised sporting arenas and a large public debt – along with the

AIRLINE LEADER | APRIL 2011

HEADLINES

warm feeling in which some local politicians briefly bask. It took 30 years for Montreal to pay off the debt that funded the three weeks of self-glorification for the city’s mayor at the 1976 Games. From Barcelona to Athens, from Sydney to Beijing, cities are littered with largely empty stadia and wasteland, under-used areas that were briefly shrines to the mirage that the coverage would stimulate long-term inbound tourism. Most recently, South Africa lavished scarce resources on stadia for the football World Cup, with little lasting benefit for the economy. But amid this gloomy vision of the role of major sporting events, there is usually a lasting side-benefit. The strict discipline of imposing fixed dates for providing infrastructure means that large transport projects are fast tracked. Visitors have got to get to and from the events and to and from the country. Airport upgrades, new train links, road improvements and the like become uncontroversial top priorities. And, when the games are finished and the athletes have gone home, the general public benefits daily. So, when IATA’s Director General and CEO, Giovanni Bisignani, lectures Brazil on airport infrastructure and air traffic management, there is a real possibility that it is not just the airlines who stand to benefit if improvements are made. His Mar-2011 assessment that “time is running out for major infrastructure projects”, for the World Cup and the Olympics, should be a wake-up call. He believes that “Brazil’s airports will not be capable of successfully hosting the FIFA World Cup or the Olympics without major changes.” The reality is that Brazil’s recent economic growth spurt and resulting air travel boom have put

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enormous pressure on the nation’s airports and airways system. As is often the case, when it comes to government funding of the basic infrastructure, there is a substantial lag. Thus, says Mr Bisignani, “The INFRAERO model, which controls 94% of Brazil’s airports, is broken. Terminals at 13 of the top 20 airports cannot cope with current demand. Sao Paulo, which handles 25% of Brazil’s traffic, is in a critical state with insufficient capacity and services that do not meet global standards.”

“Brazil’s airports will not be capable of successfully hosting the FIFA World Cup or the Olympics without major changes.” Giovanni Bisignani, IATA Director General and CEO

And, of the airways system, Mr Bisignani says: “Airlines have invested in avionics to support more efficient flying. But the infrastructure on the ground does not match our capabilities in the air.” Since winning the Oct-2010 election, newly appointed Brazilian President, Dilma Rousseff, has impressed observers by being fiscally responsible, including taking a low-key approach to some of the mega projects which she herself designed under President Lula da Silva’s leadership. President Lula’s high-speed rail project, designed to link Rio de Janeiro and Sao Paulo, is scheduled for completion in 2016, after the World Cup and before the Olympics. But this seems optimistic. In mid Mar-2011, President Rouseff announced the outline of an airport privatisation programme, allowing private operators to develop terminals at existing

airports and to develop new greenfield airports. The International Finance Corporation, the funding arm of the World Bank, simultaneously announcing a major loan for port development, is considering extending loans for both airport development and high-speed rail projects. Brazil’s economy expanded 7.3% in 2010 and, despite inflation concerns, is continuing strong growth in 2011. Its domestic airline market ranks in the top four in passenger numbers, but Brazil is only 37th in terms of international passengers. As IATA points out, this is heavily disproportionate to the country’s economy, which ranks eighth in the world. Inserting new and essential airport infrastructure would certainly seem to be a valuable and much needed offshoot of the sporting bonanza that Brazil is eagerly anticipating. Hopefully it will arrive in time. Brazil faces some big challenges ahead.

AIRLINE LEADER | APRIL 2011

OPINION

By Nawal Taneja

Using new-generation technology as a driver of business strategy UNTIL NOW, TECHNOLOGY HAS ENABLED CHANGE. IT IS TIME TO USE IT MORE DYNAMICALLY.

VER A SHORT PERIOD OF TIME, TECHNOLOGY HAS EVOLVED FROM BEING AN ENABLER OF AIRLINE BUSINESS STRATEGY, INTO A VALUABLE DRIVER, AS NEWGENERATION TECHNOLOGY EMERGES. In addition, airline CTOs are not only helping in the implementation of selected business strategies, but also in their development. That is, they are meeting the needs not only of targeted customers, but also of the business itself. Let us consider the case of an airline’s business strategy to bring about a significant change in the way an airline merchandises its products and services. The first objective is, as shown in the adjacent figure, to increase an airline’s profit margin – partly by decreasing its distribution costs and partly by increasing its ancillary revenues. Typically, when passengers visit the website of an online travel agency (OTA), they see schedules and fares of many different airlines displayed via the systems also used by GDSs. When a passenger selects a particular flight, the agency makes a booking on the selected flight, using a GDS. The airline then pays a commission to the OTA and the GDS. The GDS also pays a part of its commission (received from the airline) to the OTA. If the airline was to use technology to enable the agency to connect directly to the airline’s reservation system (bypassing the GDS),

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there would be a reduction in the distribution costs. In addition, if the airline was to merchandise its products and services directly to the passenger, it could increase its ancillary revenue through the development of a broadened portfolio of products and services, enabling up-selling and cross-selling. Therefore, as the first bullet in the “Distribution Strategy” bubble shows, the desire to change distribution strategy is about money, through lower costs or higher revenues. The airline’s second objective is to gain back the control of the customer, something that airlines have been steadily losing over the years. The increase in control can be achieved by engaging directly with passengers to determine their needs and to keep track of their buying behaviour. Moreover, it is through interactive engagement and knowledge of passenger profiles that an airline can begin to merchandise personalised products and services, encompassing a process of bundling, unbundling and re-bundling. This objective would also move an airline from offering a commodity product to one offering distinctive products. This business strategy has potential to bring back some pricing power and build brand equity, not to mention the need to gain back some control (shown by the second bullet in the figure). While it is true that no one can “own” a customer in today’s environment, given that customers are now empowered by technology,

airlines can still leverage the same technology to gain access to their needs and wants, deliver the services desired, and charge according to their willingness and ability to pay.

Developing a technologydriven business strategy

UT THAT IS JUST THE BEGINNING. To pursue such a game-changing strategy, metrics and data are first needed to develop a strong and defensible business case. OTAs flourish for many of the same reasons the airline wants them removed from the supply chain: they display an array of airlines’ schedules and fares. How many potential passengers would not even come to an airline’s website and simply go through the website of an online travel agency? What incentives would be needed to encourage a passenger to use the website of an airline? What assurance can an airline provide that the passenger is getting the lowest fare? Most airlines now have partners; how would such a distribution strategy work within an alliance? The airline may, for example, be able to provide a rationale for its higher fares – such as that the flight is nonstop, the seat is

better (lie-flat, electric power for the laptop, Wi-Fi availability and so on) and there are back-up flights in case of a cancellation. These qualitative – and often highly valuable – features are usually hidden when the product is commoditised. Then, does the airline have sufficient information to build a passenger profile to offer personalised products? After all, it does not have the same volumes of internet traffic that the OTAs achieve. How much additional ancillary revenue can be generated through the sale of personalised products? Would the inventory be displayed on meta-search sites such as Kayak.com and Farecompare.com? How would products be presented on sites that provide information on price-service options, such as Hipmunk.com, and flight experience, such as InsideTrip.com? Meanwhile, other technology-driven forces are emerging, replete with social and commercial implications. They will, in one form or another, impact on the airline distribution process and the airline’s wider business strategy. How can an airline leverage its direction, driven by technology, to capitalise on

the proliferation of social media such as Facebook and Twitter? The social networks can either be considered as a challenge or an opportunity. Take, for example, Facebook’s 500 million-plus users. Suppose each member was invited to indicate his or her travel plans for the next six months. Technology could easily be used to segment this data in numerous ways, such as by day and market. Facebook could then use this information to obtain competitive bids from different airlines for the services needed by its users, once again forcing an airline back into a reactive mode. On the other hand, the airline could work proactively with Facebook to identify and provide value propositions to its members, thereby coupling social network and data mining technologies. The issue is not simply to ignore such communities, but rather seek ways to interact with them to turn the challenge into an opportunity in extracting intelligence from information. In short, the successful implementation of a game-changing distribution

Increase Profit Margins • REDUCE DISTRIBUTION COSTS • INCREASE ANCILLARY REVENUE

Distribution Strategy • REGAIN PRICING POWER • REGAIN CONTROL

Gain Customer Control • INCREASE CUSTOMER INTERACTION • SELL PERSONALISED SERVICES

strategy requires not only the use of new-generation technology, but also the direct involvement of the technology group right from the beginning. The technology group must identify the new relevant technology, its linkage with existing technical systems and the development of metrics as well as the data to evaluate the viability and sustainability of such a business strategy. Nawal Taneja is an airline business strategist with more than 40 years of wide-ranging experience in the aviation industry, academia and public policy. Encouraged by industry executives, he has written six books for practitioners in the global airline industry, including FASTEN YOUR SEAT BELT: The Passenger is Flying the Airplane; Flying Ahead of the Airplane and Looking Beyond the Runway: Airlines Innovating with Best Practices while Facing Realities. He is currently working on the next book in the series: how game-changing technology can enable different airlines to transform their business models to adapt to the fundamental and structural transformation of the global airline industry.

The issue is not simply to ignore such communities, but rather seek ways to interact with them to turn the challenge into an opportunity in extracting intelligence from information.

AIRLINE LEADER | APRIL 2011

REGIONAL INSIGHT

ASIA PACIFIC Singapore Airlines and All Nippon Airways concerned about rising competition ➤ COMING OFF A BUMPER FIRST NINE MONTHS of FY2011/12 – when it recorded an operating profit of more than USD850 million – rising fuel prices and industry capacity levels have clouded the outlook for Singapore Airlines (SIA). The carrier reported a “levelling off ” of forward bookings for the final quarter of FY2011 ( Jan-Mar). All Nippon Airways (ANA) has also expressed concern over rising competition levels. SIA, the world’s second-largest carrier by market value, reported a 58% jump in operating profit in 3Q2010 (three months to Dec2010), but a 29% reduction in net profitability as it booked charges relating to antitrust cargo fines in the US, EU and South Korea. Taking out the USD155.5 million in exceptional items, the carrier, which is 55% owned by Singapore state interests, would have reported a 20.7% increase in its quarterly net profit, as a recovery in the global economy boosted air travel. But the airline’s cautious outlook suggests a weakening, enough to cause the market to drive shares down more than 10% from Oct-2010 highs. Asia’s airline industry has enjoyed a strong rebound in recent months, but

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The Chinese market is a vital part of SIA’s future, but a subdued demand environment offers new challenges in 2011. rising competition from the region’s carriers is putting more pressure on SIA. The carrier is also facing competition from LCC revivals, such as Tiger Airways (part owned by SIA and government interests) and AirAsia, which are rapidly growing on the back of improved travel demand. Jetstar Asia has also announced plans to boost Asia capacity by 30% this year. More positively, passenger yields did increase during the period, rising 15.2% to USD9.41 cents/km, the third consecutive quarter of increases, following five consecutive quarters of declines. For air cargo, SIA noted that “regional differences will continue to be marked in 2011 with strength in Asia Pacific and uncertainties in Europe markets”, while air freight growth is expected to continue for the rest of the financial year, “albeit at a slower rate”. SIA is entering a cargo JV with former strategic investment target China Eastern. The Chinese market is a vital part of SIA’s future, but a subdued demand environment offers new challenges in 2011. The carrier has made clear it will be adding passenger capacity this year as it continually adjusts to changing conditions.

➤ ANA ALSO SEES A CHALLENGING LAST QUARTER, as the group reported a 12.5% increase in revenue for the three months ended 31-Dec-2010. Operating results turned from a USD116 million loss to a USD250 million profit in its fiscal third quarter. ANA was, however, cautious regarding the outlook.

Despite a gradual rebound in the Japanese economy, “growth is flat and concerns over the steep rise in crude oil prices, a downturn in overseas economies and fluctuation in exchange rates also result in an uncertain outlook”. ANA echoed SIA’s concerns about rising competition with other airlines, with the added factor that in Japan, competition with the Shinkansen bullet train will intensify during the fourth quarter and beyond. ANA does have one extra card in its hand, aiming to build its competitiveness through the new trans-Pacific JV with United Continental, which commences on 01-Apr-2011. The group has also announced a revamped route network and corporate plan that focusses on leveraging the expansion of capacity at Tokyo airports. Preparations are under way for the introduction of the chronically delayed B787s, expected now during 3Q2011. Until then, more B767-300ERs will be added on international routes and B737-800s on domestic routes. The carrier plans to increase capacity in FY2011/12 (commencing Apr-2011) by 17.4% for international services (strengthening its China network), 2.6% for domestic and 2.6% for freight. The international expansion programme is considerable, partly capitalising on the weakness and downsizing of rival Japan Airlines. ANA is also slowly moving ahead with the establishment of its LCC subsidiary, finalising a JV agreement with Hong Kong-based First Eastern Investment Group in Feb-2011. The new company will apply for an AOC and begin to build its brand, with the aim of beginning low-cost operations

SOURCE: CAPA – CENTRE FOR AVIATION % 35

KEY QANTAS VIRGIN GROUP* JETSTAR**

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➤ QANTAS HAS PROPOSED A TASKFORCE to look at ways of securing the Australian flag carrier’s long-term interests. In Feb-2010, CEO Alan Joyce announced he had set up a taskforce to “explore options that will invigorate the business, generate new and profitable markets and protect our jobs and assets”. Aside from its ominously protectionist undertones, this statement reflects the frustration that any long-haul airline feels today if it has to rely only on third and fourth freedom traffic. Mr Joyce concluded: “If we continue on our current path, there will be a real question mark over the viability of Qantas International. And I have no intention of letting our flagship business decay through lack

entry prevented other airlines from competing for Australian end-to-end traffic. Back in 1976, when Qantas’ international market share was 46%, Singapore Airlines was not even allowed to advertise or sell flights from Australia to anywhere other than Singapore. Back then, eight hours was a long flight, airfares were established in cartel-like fashion through IATA and capacity and frequency was fixed bilaterally – based on governmentcalculated end-to-end demand. There wasn’t much look-in there for consumer interests. Then one thing changed. Instead of all governments focussing their transport policy around what was

QANTAS, VIRGIN GROUP AND JETSTAR MARKET SHARE IN THE AUSTRALIAN INTERNATIONAL MARKET: DEC-2005 TO SEP-2010

MAR 06

Qantas faces up to the realities of geography

of action.” Other than reversing the course of liberalisation, the fact is, he has few options. If there is one handicap an airline like Qantas cannot overcome, it is geography. In the nonsense world of international aviation, paradoxically one of the most multinational activities of all, every flight an airline operates must be destined for or begin in its home country. The number of times a carrier has the right to carry revenue passengers between two foreign points is so rare as to be irrelevant. Where an airline is based defines its market access. This did not matter too much when strict regulation of route

DEC 05

in the second half of next fiscal year (Oct-2011 to Mar-2012). It is to operate a fleet of 16 aircraft (B737s or A320s) within four years and initially launch services to Chinese cities from its base at Kansai International Airport. The initial capitalisation of the new company will be JPY30.1 million (USD370 million). Prior to the start of service, additional investment will be raised from domestic investors to a maximum of approximately JPY15 billion. ANA and SIA enjoy their own special threats and opportunities in a fast changing marketplace – and will deal with them in very different ways. They share the advantage of a healthy Asian market, but as capacity returns, fuel prices rise and demand remains uncertain, the need for strategy flexibility takes on a greater importance than ever before.

NOTE: JETSTAR COMMENCED INTERNATIONAL SERVICES IN AUSTRALIA IN DEC-2005, V AUSTRALIA COMMENCED INTERNATIONAL SERVICES IN AUSTRALIA IN FEB-2009 AND JETSTAR ASIA COMMENCED INTERNATIONAL SERVICES IN AUSTRALIA IN NOV-2010 *INCLUDES PACIFIC BLUE AIRLINES AND V AUSTRALIA **INCLUDES JETSTAR AND JETSTAR ASIA

AIRLINE LEADER | APRIL 2011

REGIONAL INSIGHT

good for the flag carrier and its heavily unionised (and therefore very influential) employees, the consumer became important. By 1996, Qantas’ international market share had dropped to 39%, in line with most other flag carriers. Ten years ago, it was 35%, and today, it is just under 20%. Meanwhile, there has been a major change. As Mr Joyce describes it, Qantas has become a “portfolio airline”. The portfolio includes a highly valuable frequent flyer programme which has a member in more than half of Australian households; more importantly, it also has a wholly owned subsidiary lowcost operator, Jetstar. Set up in 2004 to protect Qantas’ domestic market share from a voracious then-low-cost Virgin Blue, Jetstar has since proliferated into several forms: a short-haul international airline, a New Zealand domestic airline, a joint venture Singapore-based airline, with a similar model established in Vietnam and, vitally, a long-haul low-cost Australian-based operation. If Jetstar’s international market share is added to Qantas’ 20%, the total is much more digestible, at just under 30% – higher than the Qantas group’s 2005 market share! With this flexible low-cost weapon in its armoury, Qantas is well placed to overcome the tyranny of geography in exploiting the anticipated explosion of Asian traffic growth. But that does not feed its full service corporate clients, who are essential to a healthy frequent flyer programme. Qantas has a stranglehold on Australia’s corporate market, with a near-90% share. And it has been successful in protecting that from an increasingly intrusive Virgin Blue. But its international route network has shrunk drastically, relying on New Zealand, Hong Kong, Singapore, Johannesburg, London and the US market.

16 AIRLINE LEADER | APRIL 2011

90%

QANTAS SHARE OF THE AUSTRALIAN CORPORATE MARKET Dailies to Bangkok and Shanghai, and a three-times weekly Buenos Aires service, hardly constitute a comprehensive global network. What also provoked Mr Joyce’s ominous words – apart from the popular refrain against the Gulf carriers and Qantas’ pilot and engineer negotiations – was Virgin Blue’s tie-up with Etihad. The full partnership, formally approved the day before the Qantas CEO’s announcement, is designed to attract precisely those corporate accounts that Qantas needs to keep. Similar deals with Delta (proposed) and Air New Zealand further expand Virgin Blue’s virtual network. Even if Jetstar is filling the gap where Qantas, with its higher cost base cannot be effective (replacing the full service airline, for example, on Japanese routes), corporate customers demand full service international connections. They don’t want to fly Jetstar – at least not yet. By effectively adopting all of Etihad’s city pairs beyond Abu Dhabi as its own, Virgin Blue has acquired a much more attractive international network than Qantas’. Undoubtedly, the corporate accounts have been telling that to the flying kangaroo. After V Australia, the Virgin Blue international brand, started flying to Abu Dhabi in its own right in late Feb-2011, and in full codeshare with Etihad, a number of travellers would have voted with their feet. That will be music to the ears of former Qantas CEOcandidate John Borghetti, who now heads up Virgin Blue. Mr Joyce aspires to more than just survival for the mainline operation.

“Qantas is a great national and international airline. It is time we looked at opportunities to become a great global airline,” he said. So, how to achieve that? Undoubtedly the full service Qantas can reduce its costs. It can also generate savings and route flexibility once the B787s start to arrive. But, in terms of a “global airline”, those are little more than marginal adjustments. They are essential, but will not reverse the fact of geography and a new world of long-haul travel over more cost effective and attractive hubs. If Qantas is to avoid the boiling frog syndrome, only one thing can achieve that extra yard: partnership. Qantas has recently explored mergers/JVs with British Airways, Malaysia Airlines and Garuda. Kingfisher recently lined up with oneworld and, once India’s restrictive foreign ownership rules soften, there is room for movement there. Qantas is far from dead. But a fundamental re-examination of how to overcome the weak geographical hand it has been dealt is most timely.

Mandala hopes to resume service ➤ INDONESIAN LCC MANDALA AIRLINES is looking to resume flights “as soon as possible” after its restructuring plan was approved by the Central Jakarta Commercial Court in Mar-2011. Under the plan, the airline’s debt, which is up to IDR2.4tn (USD272 million), will be converted into shares. Creditors would hold 15 percent of the airline’s equity, with new investors taking 33 percent. The carrier is still looking for investors, with LCNC, a Hong Kongbased aircraft leasing firm, and Jetstar among the interested. Mandala filed for creditor protection in Jan-2011.

GROWTH OF INDIAN BUSINESS JET FLEET, 2005-2010 140 120 100 80 60 40 20

SOURCE: CAPA – CENTRE FOR AVIATION AND ASCEND WORLDWIDE FLEET DATABASE

2010

2009

2008

0 2007

➤ A REPORT RELEASED IN FEB-2011 BY CAPA INDIA FORESEES A BOOMING GENERAL AVIATION (GA) SECTOR FOR INDIA. The report projects new aircraft sales – business jets, helicopters, turboprops and piston engines – of up to USD12 billion over the next decade, by which time the GA fleet is expected to reach 2000 aircraft, up from the current figure of 680. As a result, the direct and indirect economic contribution of GA could reach USD4 billion annually by 2020. But institutional and infrastructure constraints persist. As much as 75% of the value of new aircraft sales is expected to come from the business jet sector. Since 2005, India’s business jet fleet has grown from a meagre 26 to 122, with a current order book of 127 aircraft. The report spotlights a sector that has previously operated largely in the shadow of scheduled commercial aviation. Kapil Kaul, CAPA’s CEO South Asia, said: “The fact that the sector is highly fragmented, unstructured and under-funded means that it has remained under the radar. Despite the fact that the GA fleet has already become substantial, with 680 aircraft, remarkably little is known about it.”

2006

India’s business aviation sector to be worth USD12 billion by 2020

2005

INDIA

The sector is highly fragmented, a major impediment to growth. Failures among the many smaller GA companies risk undermining the safety and reputation of the sector, and, in turn, its capacity to attract significant funds. The outcome is that a small number of “industry leaders” take responsibility for the industry’s innovation and investment and development of skilled resources, all while trying to develop their own markets. The absence of a regulatory framework is another serious handicap. The report explores the “paradoxical situation of a sector which exhibits huge growth potential and yet has virtually no dedicated policy or regulatory framework nor infrastructure to support it. Aside from the operational challenges which this presents, there are significant implications for safety and security”. This is not just a problem of inadequate regulation. The lack of dedicated bureaucrat responsibility for general aviation within the Ministry of Civil Aviation, or at a

technical level within the DGCA, means GA receives limited visibility or recognition – or support. Because the sector is immature, airports are generally not equipped for GA operations. Only two airports, Delhi and Mumbai, have explicitly considered GA in their Masterplans – and they have limited capacity overall, especially Mumbai. Conversely, other metros and nonmetro cities have physical capacity but no dedicated GA facilities.

INDIA’S PREDICTED ANNUAL ECONOMIC GROWTH OVER THE NEXT TEN YEARS The report concludes that serious consideration needs to be given to developing disused, or low-traffic secondary airports for GA. There are, nonetheless, grounds for optimism. The Ministry has recently acknowledged the sector needs more attention and is to appoint a Director for GA. The DGCA will also expand safety oversight and general aviation audits. They will, however, face real challenges: a persistent shortage of qualified aircraft inspectors, the multiplicity of aircraft types and fragmentation of operators and evolving technology. But buoyed by robust corporate profitability, India’s prospects for business jet activity are highly positive. The report is also bullish on helicopters, which have versatile capabilities and low infrastructure development costs, such as helipads. India’s economic outlook is for strong growth of close to 9% per annum over the next decade. The business and general aviation sector will have no difficulty outstripping that growth rate.

AIRLINE LEADER | APRIL 2011

REGIONAL INSIGHT

MIDDLE EAST & NORTH AFRICA Unrest threatens aviation growth in this crucial region ➤ NORTH AFRICAN AND MIDDLE EAST POLITICAL INSTABILITY has major short and long-term implications for economic development, tourism and aviation growth across the region. The situation remains fluid, but it appears that the military regime in Egypt is keen to respond visibly to the popular pressures of recent weeks. Meanwhile, the effects will continue to ripple across the region. For countries like Egypt, 12% of whose workforce is employed in the tourism industry, the impact is far more than political – and may eventually have the effect of generating change in the aviation strategies of some of the countries involved. There is, however, no clear proposition that social reform translates to more liberal policies in the travel and tourism sector – although stability is important for inbound travel and an enlightened regime would tend to be more open to economic liberalism. The region is strategic from global political and economic standpoints. A CAPA sample of 24 key economies reveals a combined population approaching 500 million, combined GDP of USD5 trillion (placing it fourth behind the US, China and Japan) and GDP per capita of about USD17,100 – although this is far

18 AIRLINE LEADER | APRIL 2011

from evenly distributed. But there is sensitivity to any shift away from the status quo and the global airline industry will be immediately – perhaps only temporarily – affected by these forces. The region has become very important from an aviation perspective. Overall, the 24 economies surveyed represent nearly 11% of global aviation – about double their share from a decade ago. This influence has risen on the back of the global hub strategies adopted by several Gulf region governments, accompanied by liberal aviation access policies.

COUNTRIES IN FOCUS These countries have been most affected by unrest: • EGYPT: ACCOUNTS FOR 0.8% OF GLOBAL AVIATION • BAHRAIN: 0.4% • TUNISIA: 0.3% • LIBYA: 0.2% • YEMEN: 0.1%. Egyptians have a low propensity to travel, at just 0.2 flights per 1000 population. But it is the fourth busiest market of the countries surveyed, with 31 million seats operating to/from the country in 2010, of which 86% were international, reflecting the critical role of tourism to the national economy. Algerians travel more than Egyptians, with 0.3 flights per 1000 population, but it ranked 13th in terms of market size (9.6 million seats in 2010), due to its smaller tourism sector. Non-Gulf countries such as Egypt have continued to pursue conservative policies designed to protect the flag carrier from competition, at least at its main hub. But this has been tempered by inbound tourism-friendly access for European LCCs and others to holiday destinations. The EU has

negotiated liberal entry rights for member airlines to Morocco, Tunisia and Jordan. Negotiations with other Mediterranean countries are taking place under the Euro-Mediterranean aviation project. Smaller states such as Jordan have restructured and privatised their airports and airlines. Royal Jordanian was partly privatised at the end of 2007, when 71% of its shares were sold. Saudi Arabian, Gulf Air, Middle East Airlines and Kuwait Airways are at various stages of privatisation. The global alliances are becoming more active, but they still occupy only a small presence. oneworld is represented by Royal Jordanian; Star Alliance, anchored in the region by Egyptair, will have Ethiopian Airlines in Sep-2011. SkyTeam will gain Middle East Airlines and Saudi Arabian Airlines in 2012. Air Algerie, Gulf Air, Qatar Airways, Royal Air Maroc and Etihad Airways are seen as potential future alliance members. The propensity for intra-regional travel has been rising, particularly in the Gulf states, where LCCs are establishing and fuelling price competition. This effect has overflowed to other countries. As inbound tourism gained higher economic policy status, even the more conservative governments have moved to allow more or less homogeneous airlines. For example, UAE-based Air Arabia has established minority-equity cross-border joint ventures in Egypt, Morocco and Jordan. Air Arabia and its JV airlines have been immediately affected by the unrest, with a sizable initial impact on the airline’s share price. But paradoxically, as the instability subsides, the carrier may actually be a beneficiary if other airlines withdraw. The fact that the share price rapidly rebounded as Cairo demonstrations eased suggests a strong belief in the prospects for aviation growth. Following a crisis, it has typically been the LCCs which lead the return

to the market, offering very low lead-in fares and helping maintain tourist flows. Air Arabia Egypt’s affiliation with major travel group Travco will place it well in this respect. The European LCCs that service holiday destinations are also bouncing back. The 2011 unrest has occurred in countries which have a very young age profile, a characteristic of many Middle East and north African countries, and a combination of longstanding administrations and citizens disaffected by high unemployment. The Gulf states, Qatar, Kuwait, the UAE and Bahrain, enjoy high average incomes and low unemployment, but Bahrain’s government has been severely challenged. A second tier, including Oman, Saudi Arabia and Turkey, are enjoying increasing prosperity as economic reform programmes continue. In the lower-tier nations, where incomes are below USD10,000 p/a and unemployment rates are approaching 10% or higher, concerns about the slow pace of economic progress sparked demonstrations. Jordan reacted promptly, enacting wide-ranging economic reforms. It continues to enjoy social stability. Libya, sandwiched betwen Tunisia and Egypt, acted aggressively to suppress widespread dissent and appears likely to remain a troublespot. While it is business as usual at the Middle East’s major aviation hubs, there is a risk that social unrest could have a short-term impact on overall travel to/from/via the region, as foreign travellers shy away. The UAE is the largest of these airport markets, with 86 million seats in 2010. Turkey was second largest (about 67 million seats) and is growing rapidly. Saudi Arabia (47 million seats) ranks third, followed by Egypt. Qatar rounds out the top five. There are 11 second-tier nations with 10-25 million seats p/a, including Jordan, Tunisia,

TROUBLE SPOTS: UNEMPLOYMENT RATE VS GDP PER CAPITA (SIZE OF BUBBLE) USD 45,000

Kuwait Qatar^

40,000

UAE

35,000

Bahrain

30,000 25,000

Oman

Saudi Arabia

20,000

Lebanon

15,000

Turkey Libya

Iran

10,000

Egypt

5000 $0

Israel

Cyprus

Algeria

Syria Morocco 0.0%

6.0%

Tunisia Iraq Jordan

12.0%

Yemen

Mauritania

Sudan 18.0%

24.0%

30.0%

36.0%

SOURCE: CAPA – CENTRE FOR AVIATION, INTERNATIONAL MONETARY FUND, APR-2009 (ALL GDP FIGURES ARE FOR 2008, EXCEPT SYRIA AND LEBANON, WHICH ARE 2000), WORLD BANK, JULY-2009 AND VARIOUS ^QATAR’S UNEMPLOYMENT RATE 0.4%; GDP PER CAPITA, USD85,867

Lebanon, Kuwait, Bahrain and Iran. Several of these second-tier markets offer considerable growth potential. The brightest include Qatar – with a per capita GDP of USD85,000 – Kuwait and the UAE, although all have small populations of less than five million. The large population markets include Egypt (77.5 million), Iran (71 million), Turkey (74 million), Sudan (40 million), Morocco (34 million) and Algeria (33 million). But several of these countries are undergoing significant social upheaval; southern Sudan also voted for independence in Jan-2011. For the region’s poorer countries, the coming months could prove painful. But if the transition processes are relatively peaceful, the accompanying political and economic reforms could stimulate a new era of growth and investment in the aviation sectors of those countries over the medium term.

TOTAL CAPACITY (SEATS, MILL) BY COUNTRY: 2010 Djibouti Sudan Syria Libya Jordan Tunisia Lebanon Algeria Oman Cyprus Iran Israel Kuwait Bahrain Morocco Qatar Egypt Saudi Arabia Turkey UAE

40 50 60 70

80 90

TOTAL SEATS

SOURCE: CAPA – CENTRE FOR AVIATION AND OAG FACTS

AIRLINE LEADER | APRIL 2011

REGIONAL INSIGHT

East, led by Emirates with 4.1%. Meanwhile, the battle is hotting up for the lucrative west and central African market. The sub-region’s largely untapped minerals riches are increasingly attracting attention.

AFRICA West Africa becomes an aviation target

32%

➤ THE GLOBAL ALLIANCES ARE HURRYING TO ENTRENCH their positions in mineral-rich Africa. As the continent’s economic progress continues at a faster pace than any other region, passenger capacity to and from Africa increased 32% over the past two years, according to OAG. Much of this is from nonAfrican airlines. Of the top 20 carriers serving Africa (which account for two thirds of total capacity), just eight are African. Nine are based in Europe (led by Air France, with 5% of the continent’s total international capacity) and the remaining three are from the Middle

INCREASE IN CAPACITY TO/FROM AFRICA OVER THE LAST TWO YEARS Although often a cause of instability, as warring factions contest the financial power on offer, these resources offer a path to greater affluence for the impoverished nations. Nigeria is the biggest petroleum and longest-established producer in the sub-region, with Lagos and capital Abuja well served by air – indeed it is domicile to the only airline thereabouts which has serious international credentials, privately owned Arik Air. Cameroon, Gabon and the Congo also have oil reserves. But much of the new attraction is for iron, as China’s

TOP 20 CARRIERS SERVING AFRICA TO NON-AFRICAN POINTS* *SEATS PER WEEK FOR WEEK COMMENCING 31-JAN-2011 SOURCE: CAPA – CENTRE FOR AVIATION AND OAG

Egyptair Royal Air Maroc Ethiopian Airlines Air France South African Airways Emirates Kenya Airways Air Algerie British Airways Tunisair Ryanair Saudi Arabian Airlines Lufthansa KLM Aigle Azur Turkish Airlines Qatar Airways easyJet Afriqiyah Airways Thomson Airways

KEY AFRICAN EUROPEAN MIDDLE EASTERN

50,000

20 AIRLINE LEADER | APRIL 2011

100,000

150,000

200,000

insatiable thirst for steel grows. Most of the continent’s iron is in the west, in Gabon, Guinea, Liberia, Mauritania, Nigeria, Sénégal and Sierra Leone. The scope of the opportunity has been likened to the massive reserves of the 1970s in Australia’s Hamersley ranges. The most substantial investment has come from a Brazilian group, Vale, which invested USD2.5 billion in a major iron ore project in Guinea. Fast growing nations need iron ore. Chinese investors have been showing great interest too. Last year, one of China’s biggest mills, Shandong Iron and Steel Group, agreed to pay USD1.5 billion for a minority interest in an iron ore deposit in Sierra Leone and that deal is nearing completion; this will be the first investment of this scale for Chinese interests. Indeed, the prospects for Chinese airlines to operate into Africa are growing. Air China has talked about establishing a hub in the liberal UAE to service African points. SkyTeam leaders Air France and KLM have moved to maintain their dominance in the west. Combined, they offer about 54,000 seats a week from Paris and Amsterdam into west Africa. Over winter 2010, the group increased capacity by 3.5% year on year, with the addition of two new non-stop destinations – Kigali (Rwanda) via Entebbe, as well as to Bata (Equatorial Guinea). The group also increased frequencies to Pointe Noire (Congo), Libreville (Gabon) and Malabo (Equatorial Guinea). And this summer, Air France adds another two new west African destinations: Freetown (Sierra Leone) and Monrovia (Liberia). SkyTeam partner Delta has also commenced a non-stop service from Atlanta to Lagos in oil-rich Nigeria. Alongside SkyTeam’s hold in this growth market, Star Alliance – with 25,000 seats weekly from Europe – considers itself under-represented in west Africa and is taking steps to establish a local force to support its cause. Apart from Lufthansa’s own

WEST AFRICA: MAGNET FOR MINERS

Senegal

Gambia Guinea Bissau

Niger

Mali

Burkina Faso

Guinea

Sierra Leone

Liberia

Benin Cote D’ivoire

Nigeria

Ghana Togo

AIRLINES SERVING WEST AFRICA TO NON-AFRICAN POINTS* SOURCE: CAPA – CENTRE FOR AVIATION AND OAG Air France

*SEATS PER WEEK FOR WEEK COMMENCING 31-JAN-2011

services, supplemented in Europe by Swiss and Brussels Airlines, soonto-be-Star member Ethiopian has expansive plans, with 34 aircraft on order, and will be a part of the strategy; South African Airways is expanding its coverage on the west coast, this year adding or restoring routes to Cotonou (Benin), Cameroon and Ghana; Egyptair serves Abuja and Lagos as well as Kano and Accra over its Cairo hub; and United Airlines now flies from Washington to Lagos via Accra. oneworld’s impact in the region is more modest. It relies heavily on British Airways, with 12,000 weekly seats, whose presence in the Englishspeaking former colonies is strong – but not so good in the French ones. And American does not venture into the continent from across the Atlantic. The Gulf airlines are also establishing a strong African presence. Although the European majors still dominate connecting services, following the lines of their vestigial colonial routes, the Gulf hubs are well positioned to service Asian points. Emirates has west African non-stops to Dakar, Lagos and Luanda, as well as a co-terminalised Lagos-Accra service. Emirates’ neighbouring airlines are not so well established, but Qatar Airways has aspirations to be a substantial African feeder, flying over 3000 seats weekly to west Africa. Overall, the numbers are still small, but with high yields and still-limited competition, interest is high. Sooner or later, and irrespective of global alliance support, locally established airlines must emerge. It is a sad indictment of the levels of corruption and instability that the region is unable to generate home-grown operators. The regionally based Air Afrique, supported by former French colonies, is long gone, but where the global alliances have a direct interest in imposing a footprint, a new force is at work which may help provide a platform for local establishment – one which supersedes the old colonial associations.

Emirates Brussels Airlines British Airways Lufthansa KLM Arik Air Air Austral TAP Air Portugal Delta Air Lines Virgin Atlantic Airways Iberia TACV Cabo Verde Airlines Turkish Airlines Max Air Qatar Airways Thomson Airlines Gabon Airlines 0

8000

16,000

24,000

32,000

40,000

48,000

TOTAL SEATS

AIRLINE LEADER | APRIL 2011

REGIONAL INSIGHT

‘Incomplete recovery’ and sluggish growth for Europe’s airlines ➤ EUROPEAN AVIATION ENDURED A CHALLENGING YEAR IN 2010 and the clouds appear to be gathering again. The outlook across the continent is best described as cautious for the short and medium term, according to ACI-Europe and IATA. And capacity reductions are emphasised among network airlines. Europe’s airports generated a 4.2% increase in passenger throughput in 2010, despite bouts of extreme weather, labour unrest, passenger taxation in some markets and lingering economic problems in many parts of the continent. Freight traffic at Europe’s airports recovered by 18.7% last year off depressed levels in 2009, while aircraft movements were flat, dropping 0.2%. ACI-Europe noted the sustainability of air traffic growth in Europe is likely to be affected by several external factors, including the ability of the EU to tackle the continent’s debt crisis, inflationary pressures, further surges in oil prices and additional aviation taxes in Germany and Austria. According to the association’s Director General, Olivier Jankovec, 2010 was characterised by a “gradual yet incomplete air traffic recovery”. It was “not the kind of bounce-back you would expect following the worst economic and financial crisis.” He added that while the volcanic ash crisis early in the year took a heavy toll, the pace of air traffic growth was also held down by a “jobless economic

22 AIRLINE LEADER | APRIL 2011

SOURCE: ACI-EUROPE

EUROPE

recovery throughout most of Europe, mounting sovereign debt crises and sweeping harsh austerity measures”.

“2010 was not the kind of bounce-back you would expect following the worst economic and financial crisis.” - OLIVIER JANKOVEC, DIRECTOR GENERAL, ACI-EUROPE

Passenger traffic in 2010 was still 1.2% below 2008, though freight levels are now 2.2% above 2008 levels, thanks to last year’s bounce-back. Ominously, Mr Jankovec observed: “There was no reversal of network contraction, as airlines have yet to fully restore frequencies and destinations cut during the crisis.” Russian and Turkish airports were among the fastest growing (led last year by Antalya and Moscow Domodedevo, with close to 20% increases), while several airports in the mature market of Italy also did well, namely Milan Malpensa and Rome Fiumicino. London-area airports suffered and there was slow growth at the major hubs of Paris CDG, Frankfurt, Madrid and Amsterdam. Barcelona, Copenhagen, Vienna and Stockholm reported moderate growth among the airports handling more than 10 million passenger p/a. The medium-term traffic outlook for Europe is also sluggish. Whereas

global aviation is expected to achieve compound annual growth (CAGR) of 5.9% by 2014 (producing 313 million additional international passengers for a total of 1.3 billion), Europe is expected to grow by just 4.7% (CAGR), according to IATA. IATA’s outgoing Director General and CEO, Giovanni Bisignani, said: “The shadow of the global economic recession is expected to remain over parts of the industry for some time to come. Sluggish growth rates in Europe and North America are not only the result of being mature markets. Lingering consumer debts, high unemployment and austerity measures

The unrest in North Africa/ Middle East is also of concern to several European carriers. will dampen growth rates.” IATA expects four of the top five countries for international travel to remain in Europe in 2014, but growth rates will be slower than the world average: • United Kingdom: 198 million passengers by 2014, an increase of 33 million – second largest behind the US (at 215 million); • Germany: 163 million – an increase of 29 million; • Spain: 123 million – an increase of 21 million; • France: 111 million – an increase of 21 million.

International freight demand in Europe is projected to grow 6.5% annually to 2014, with Germany, the UK and the Netherlands leading the region in size. The Russian Federation will see the fastest annual growth rate of 11%, according to IATA.

SELECTED EUROPEAN AIRPORTS PASSENGER NUMBERS AND PASSENGER NUMBERS GROWTH: 2010 SOURCE: CAPA – CENTRE FOR AVIATION AND COMPANY REPORTS

London Heathrow

Paris CDG Frankfurt

Madrid-Barajas Amsterdam

Rome Fiumicino London Gatwick

Paris Orly

Barcelona El Prat Zurich

MILLIONS

Dusseldorf

Palma de Mallorca London Stansted

Brussels

-10

-5

Domodedovo

Vienna Milan Malpensa Stockholm-Arlanda Berlin Tegel

Oslo

Manchester

Copenhagen

Antalya

PERCENTAGE PASSENGER GROWTH (2010)

But flag carriers in Europe are expressing concern over near-term profitability due to weather-related events and rising capacity levels, which threaten recovery in traffic and revenues. The unrest in North Africa/Middle East is also of concern to several European carriers such as Air FranceKLM and Lufthansa, which have considerable exposure to the region. Air France-KLM, which reported a EUR46 million net loss in the three months ended 31-Dec-2010 (an improvement on the EUR295 million loss in the previous corresponding period, as revenues rose almost 14%), declared that unit revenues in January and February have been affected by the “overcapacity situation created by the increase in offer by our competitors during the winter season”. The airline added: “In this context, we maintain an objective of a positive operating result for full-year 2010/11, but it will

be below our previous target of over EUR300 million.” SAS Group snapped a run of 12 consecutive quarters of losses in 4Q2010 as it cut costs and passenger traffic increased. The company expects results for 1Q2011 to turn “negative” again, but is predicting a full-year pretax profit “assuming continued recovery in the home market ... and no unexpected events”. Rival Finnair’s losses eased in 4Q2010 and, while the 1Q2011 result is expected to be “significantly loss-making”, it too is predicting an operating profit for the full year. The low-cost segment has also found conditions challenging, but carriers are generally more optimistic. After a shock third quarter loss (to 31-Dec-2010), Ryanair is expecting traffic and average fares to benefit from a better mix of new routes and bases and competitor fuel surcharges. Said Ryanair: “We are now confident that our Q4 (to 31-Mar-2011)

and full-year results will be towards the upper end of our previously guided range of a net profit after tax of between EUR380 million to EUR400 million.” easyJet stated that over 65% of the available seats in 1H2011 are now sold, meaning forward bookings are in line with the prior year. But the LCC added: “A slowdown in bookings during the recent severe weather combined with poorer-than-expected performance of checked bags has meant that total revenue per seat on a reported basis is likely to be down a couple of percentage points compared to the first half of last year.” European aviation remains devoid of the dynamism of the Middle East and Asia, as its constituent nations struggle to recover from the effects of the financial crisis. This year appears to be another one of low growth and weak margins, notably for network airlines, many of which will be looking (far) east for their salvation.

AIRLINE LEADER | APRIL 2011

REGIONAL INSIGHT

NORTH AMERICA US airlines report a USD2.9 billion profit for 2010 – but there is more to the story ➤ THE US INDUSTRY – LEGACY AND LOW-COST CARRIERS (LCC) – has posted a profit of USD2.9 billion for 2010, a remarkable turnaround from 2009 when the legacies – American, Delta, United and US Airways – posted severe losses. LCCs weathered the storm somewhat better. But Southwest chairman and CEO Gary Kelly put the good news in perspective when he said: “While 2010 was a very satisfying year, it was an upbeat end to what I think most would agree has been a lost decade for the airline industry.” The turnaround is not the story, however. Last year can be characterised by two issues: (1) Remarkable discipline in holding down costs, despite strong headwinds; and (2) Revenue increases which not only covered cost increases, at least for the legacies, but also far surpassed them. A crucial element was that such was done without adding a lot of capacity. Fortunately, the strong demand and revenue picture are continuing into 2011. In short, traffic continues to outpace capacity by a long margin. The capacity discipline has given airlines pricing power, evidenced by their ability to raise fares last year and, notably, in the early weeks of 2011. Airlines have also been able to successfully impose fuel surcharges,

24 AIRLINE LEADER | APRIL 2011

which United CEO Jeff Smisek candidly indicated was an easier sell than a fare increase. Even so, managements across the board said that they would rely on a fare solution to rising fuel prices, supported by capacity control. For the most part, legacies held capacity increases below 2% year-onyear in 2010. AirTran (+3.3%) and Hawaiian (+4.4%) posted modest gains on strategic ASM increases, while JetBlue (+6.7%) outpaced the industry, taking advantage of the departure of US Airways and American at Boston and in the Caribbean, respectively. Beyond that, the modest capacity increases were more than offset by double-digit revenue gains across the board – with the singular exception of Alaska. The double-digit revenue gains, however, were met with double-digit cost increases. JetBlue managed a small margin on its costs. AirTran’s costs rose 15.8%, far outweighing revenue gains. Its profits dropped 71.4% year-on-year, which compounded what is perhaps the biggest concern amongst the airlines.

USD22.6 BILLION

US AIRLINES’ ANCILLARY REVENUES IN 2010 Ancillary revenues are still booming, a beacon in the night. The 10 carriers shown in the table on page 25 earned a whopping USD22.6 billion in ancillary/other revenue, up from USD7.8 billion in 2009, signalling once again that without them, the industry would still be mired in losses. Ironically, the carrier where bags fly free – Southwest – earned half a billion dollars in ancillary revenues, for the largest increase of any carrier, at 44.1% year on year. JetBlue expects to increase ancillaries by 20% this year. There are already rumblings in

Washington that Congress may be interested in taxing such revenues for the Aviation Trust Fund, meaning the USD20 billion already paid by the airline industry will rise, again putting the economic boost of airline travel on par with “sin taxes” such as tobacco. Last summer, the General Accountability Office made no recommendation on whether ancillary fees should be taxed. But it reversed itself in early Feb-2011 by saying that taxing such services would make up for “lost” revenue, as headline fares stayed flat. The industry is also facing a 3% rise in the passenger facility charge should the FAA reauthorisation bill pass. One sniff of profit and the wolves gather. The industry is, meanwhile, taking full advantage of a recovery that has been stronger than the broader economy, allowing fares to rise last year as well as, apparently, fuel surcharges. That, of course, is thanks to the capacity discipline shown. If airline managements are prepared for fuel, it is worth noting the differences in their strategies. US Airways (which sees hedging as prohibitively expensive) and Allegiant prefer to address fuel price rises by steep capacity cuts. JetBlue and Alaska continue to hedge, but they are also replacing older aircraft with more fuelefficient equipment. Movement on aircraft orders in 2011 is worrying investors who fear history is repeating itself, ordering as the cycle rises but taking delivery when it reverses. Delta recently issued an RFP to worldwide manufacturers, while Alaska’s recent order and the capacity plans for JetBlue are poignant examples. Delta, however, made it clear that, despite still sitting with no order book, it was completely flexible. Yet it does recognise there will come a fuel price touchpoint when increasing fuel efficiency becomes unavoidable. Delta has also been eager to point out that most of its merger costs are

behind it, while United is at the front end of its merger with Continental. In addition, Southwest’s merger with AirTran remains unapproved by Washington and AirTran shareholders. Even so, analysts expressed their disappointment in the overall merger contribution, suggesting the promised synergies have not materialised at Delta and questioning whether United will realise its harmonisation objectives. Delta has undergone no less than six labour representation votes since its merger with Northwest and employees opted overwhelmingly for a direct relationship with management. But Delta’s success may mean more activity at other carriers. The rest of the pack, except perhaps Southwest, continues to struggle with labour.

Oft repeated last year is the fact that a single quarter does not make a recovery in the airline industry. The same can be said about a single year.

Some observers believe the election of Delta Captain Lee Moak to lead the Air Line Pilots Association should result in a more reasonable labour management relationship. One of the least unionised workforces, Delta will be one to watch in an industry that is expected to experience more organising activity in 2011. Oft repeated last year is the fact that a single quarter does not make a recovery in the airline industry. The same can be said about a single year. Managements are all on the same page about capacity and the necessity to shed it as fuel prices rise. They are also on the same page about recovering the fuel increases from passengers. The question is whether greed will replace logic as fares rise.

US AIRLINE RESULTS: 2010 VS 2009 SOURCE: CAPA - CENTRE FOR AVIATION

UNITED SOUTHWEST CONTINENTAL US AIRWAYS AIRLINES GROUP HOLDINGS

2010 VS 2009

AIRTRAN HOLDINGS

ALASKA AIR GROUP

AMR

DELTA AIR LINES

HAWAIIAN HOLDINGS

JETBLUE AIRWAYS

Profit

38.5m 71.4%

251.1m vs 121.6m

471m loss 67.9%

593m vs 1.2b loss

110.3m vs 116.7m

97m vs 61m

459m vs 99m

854m vs 718m loss

502m vs 205m loss

65.7m 13.9%

Op Revs USD

2.6b 11.9%

3.4b 14%

22.1b 11.3%

31.7b 13%

1.3b 10.7%

3.7b 14.8%

12.1b 16.9%

34b 18.9%

11.9b 13.9%

663.6m 18.9%

Op Exp USD

2.4b 15.1%

2.9b vs 2.7b

21.8b 4.5%

29.5b 4%

1.2b 13.3%

3.4b 14.6%

11.1b 10.2%

32.1b 12.5%

11.1b 7.6%

558.9m 28.3%

ASMs

24b 3.3%

24.4b 5.6%

153.2b 1%

232.6b 1%

10.1b 4.4%

34.7b 6.7%

98.4b 0.4%

253b 1.1%

85.8b 0.9%

6.2b 14.6%

Load Factor

81.4% 1.6 pts

83.3% 4 pts

81.9% 1.2 pts

83% 1 pt

85.5% 1.6 pts

81.4% 1.7 pts

79.3% 3.3 pts

83.2% 1.9 pts

81.1% 0.6pts

87.5% 0.1 pts

Yield cents

12.03 7%

13.58 2.3%

13.36 8.7%

14.11 12%

13.33 4.4%

12.07 6.8%

14.72 10.8%

14.20 15.2%

15.04 11.2%

8.21 6.2%*

PRASM cents

9.79 9.1%

11.31 7.3%

10.94 10.4%

11.71 13%

11.40 6.4%

9.82 9%

11.67 15.7%

11.81 17.9%

12.20 12.1%

7.45 6.6%*

CASM cents

10.35 11.4%

10.96 1.7%

12.78 3.2%

12.41 3%

12.01 8.5%

9.92 7.4%

11.29 9.7%

12.72 11.3%

12.97 6.7%

8.95 11.9%*

CASM ex fuel cents

6.75 5.8%

7.85 5%

8.84 3%

8.27 flat

8.83 3.2%

6.71 5.9%

7.61 5.8%

8.65 3.6%

9.27 1.1%

5.05 1.6%*

Anc/Other Revs USD

264m 4.7%

253.2m 22.2%

2.4b 5.3%

3.6b 5%

155.1m vs 143.1m

367m 2.6%

490m 44.1%

2.9b 13.1%

1.2b 17.2%

196m 19.2%

*CONSOLIDATED OPERATIONS EXCEPT AMR, ALASKA AIRLINES ALLEGIANT YIELD FOR SCHEDULED SERVICE ONLY, PRASM # IS ACTUALLY RASM, CASM #S ARE TOTAL SYSTEM

ALLEGIANT AIR

AIRLINE LEADER | APRIL 2011

DOWN

REGIONAL INSIGHT

LATIN AMERICA Consolidation and alliances reign: Big shifts in the landscape will have global ramifications ➤ THE TECHTONIC PLATES OF LATIN AMERICAN AVIATION are well and truly colliding and the evolving landscape is sending ripples around the world. In the north, Mexicana is aiming for an imminent rebirth, a land-grab is under way in the strategic central part of the continent, while in the south, the merger of titans LAN and TAM is taking some interesting turns. In late Jan-2011, LAN ran up against the Chilean antitrust regulator, TDLC, less than two weeks after announcing binding agreements in its plan to merge with Brazil’s TAM. The merger will create the world’s 11th largest carrier by passenger numbers. The TDLC, which is investigating the competitive implications of the move, suspended further action on the USD3.7 billion acquisition of TAM by LAN Airlines, as it studies a petition filed by the consumer group Conadecus. The TDLC cited the fact that not only would the combination affect trunk routes in South America, but that the acquisition would also have ramifications for routes to and from the continent. Shares in LAN and TAM fell sharply as investors reacted to the TDLC’s move.

26 AIRLINE LEADER | APRIL 2011

The merger would give LATAM 43% of the Brazilian domestic market in Latin America’s largest economy, and USD4.9 billion in annual sales. Together the airlines have 40,000 employees and more than 280 aircraft providing transport services for passengers and cargo to more than 115 destinations in 23 countries. TAM is already the largest Latin American carrier by revenue. LAN is one of the world’s few investmentgrade airlines, with USD737 million in cash, no short-term debt and low interest rates on long-term debt needed to maintain its fleet of 131 aircraft, including 13 more added in 4Q2010. The carriers’ controlling shareholders had expected to close the transaction within the next six to nine months, according to a statement by LAN on 19-Jan2011, the same day two binding merger agreements were signed. The merger, announced in Aug-2010, also depends on approval by Brazil’s civil aviation agency, market regulators in Brazil, Chile and the US, antitrust authorities in Brazil, Spain, Germany, Italy and Argentina and shareholders for both companies. The merger comes in the context of an increasingly buoyant outlook for aviation markets in South America. TAM forecasts traffic growth of 15-18% in 2011, noting: “We believe that much of the growth will come from middle-class Brazilians that will fly for the first time. In 2011, the demand shall remain strong, driven by both passengers flying [for] business purposes, as for the leisure travellers.” Rival GOL is predicting strong traffic and margin growth in 2011, with operating margins of between 11.5% and 14.5%. LAN expects its capacity (ASK) growth in 2011 to surge by 20-22%, mainly driven by the delivery of new passenger aircraft and the incorporation of Colombian airline Aerovías de Integración Regional’s

(AIRES) operations (see below). LAN expects to receive 20 A320family aircraft to operate domestic and regional routes, as well as three B767-300s for long-haul routes, while five A318s will be disposed. Meanwhile, the global alliance landscape across Latin America has been thrown into uncertainty by the consolidation moves. Should TAM remain with Star, that group’s influence would stretch from Texas to the Argentine border. However, if the LATAM group all has oneworld ties, the power axis will shift east to American’s Miami hub and include the major economic powers in the region. There is much at stake for the US carriers, which are themselves in the grip of consolidation. Clearly, there will be some significant house cleaning and rearrangement of network furniture. SkyTeam airlines could continue to lag as their competition in the region further organises itself, and the addition of Aerolineas Argentinas will provide limited consolation. In terms of Star and oneworld, a final assessment will only be possible after the sorting is done at LATAM. ➤ CENTRAL AMERICA IS AN INCREASINGLY CRUCIAL BATTLEGROUND. Pre-emptively, current and future Star Alliance members have announced their intent to embark on a codesharing initiative that will strengthen the alliance in the region. The partners in this effort are United Continental, Panama’s Copa, Copa Colombia and Avianca/TACA. Geographically, this grouping encompasses the primary carriers in Central America and the most dominant airline in the northern region of South America. Copa and Continental have a long history together, which will significantly aid the group as it integrates service and benefits.

One of the primary goals of the cooperation is to provide a seamless connection between the burgeoning markets of Asia and Latin America. The graph below shows how the two regions are becoming more intertwined. Copa’s broad regional network, linked to Asian members of Star that might serve Panama, is seen as a good way for travellers to avoid the complex visa requirements of travel via the US. Colombia’s Bogota is also a favourably located future hub and is attracting much strategic attention. In Nov-2010, LAN acquired AIRES for USD12 million in cash, in addition to assuming net liabilities of USD87 million. The Colombian market is the second largest in South America, with more than 12 million annual domestic passengers. AIRES is the second largest domestic operator, with about 22% of the market. LAN is awaiting approval to finalise its purchase. Copa, through subsidiary Copa Colombia, is the third largest carrier in that country. It hopes to begin codesharing with Avianca-TACA, the number one carrier in the market.

➤ MEANWHILE, MEXICANA DE AVIACION IS HOPEFUL OF A REVIVAL OF SERVICES. The carrier has reportedly made progress in its debt restructuring negotiations, and a slimmed-down operation would fly seven aircraft and 11 routes. The carrier aims to build towards 40 aircraft and more than 40 routes by 2H2011. The deal would resurrect Mexicana – but not subsidiaries Click and Link – with 30 A320s compared with the 100 that once constituted its fleet. Its planned network is a significant downsizing from the 65 domestic and international destinations in 2009 served before bankruptcy, when it carried 6.86 million passengers, with another 4.25 million carried by Click and Link. After joining Star in 2000, Mexicana left the grouping in 2004 before joining oneworld in Nov2009. Bankruptcy in 28-Aug-2010 left a large hole in the alliance’s representation in the region. A local private equity firm, PC Capital, is restructuring the airline under a USD155 million (MXN1.9 billion) bailout proposal that has been approved by unions and creditors.

The carrier has also passed US Federal Aviation Administration and Mexican DGCA certification tests. Mexicana is expected to emerge as a low-cost carrier and could be a good target for consolidation of the lowcost-carrier segment in the country which also has Interjet and Volaris. Speculation now centres on Aeromexico and whether it chooses to link to the south with Copa, or possibly GOL. As LAN now expands its footprint in Colombia and towards Panama and Central America, a powerful axis is being created that carriers in the north will have to counter. Having for decades been an aviation backwater, with a series of failed carriers, Latin America is emerging with strong, world-class airlines, and a level of innovation, creativity and consolidation that is setting a new global standard. The final configuration is still unclear, but the process keeps revealing surprises.Undoubtedly there will be more to come, as the global alliances press to gain coverage of what promises to be a valuable long-term market.

EAST ASIA FOREIGN TRADE WITH LATIN AMERICA 1998-2008 SOURCE: COPA HOLDINGS USD BILLIONS

1998-2008 CAGR

$280.40 billion in 2008

300

Other Latin Am 18.3%

250

Argentina 15%

200

Panama 11.6% Chile 18.5%

150

$56.48 billion in 2002

100

Mexico 16.7%

Brazil 20.9%

0 1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Trade between major East Asian economies and Latin America has more than quadrupled between 1998 and 2008.

2008

AIRLINE LEADER | APRIL 2011

FEATURE

THE AIRLINE CEO’S GUIDE TO SOCIAL NETWORKING AND THE NEW CUSTOMER RELATIONS PARADIGM Whether it is a fad or a core social change in a state of evolution, social networking is very much a part of today’s world. Just ask Hosni Mubarak or Muammar Muhammad al-Gaddafi. Any airline that looks the other way is taking a big risk. The core issue is customer relations – but don’t just follow the pack with your social media strategy.

HE SOCIAL MEDIA SCENE IS JUST A FAD. It’s for self-promoting kids who have attention spans of 30 seconds. They have nothing better to do than waste their whole lives telling their virtual “friends” about themselves. If that’s your starting point, reassessment may be in order. Perhaps where we are now is just a fashion, but social media will continue to evolve. Just as low-cost airlines were once a “fad”, they became mainstream, while diverting the main stream along the way. As the character playing the Facebook founder Mark Zuckerberg said in the movie Social Network: “Fashion is never finished.” As it evolves, social media’s opportunities are changing the way many hundreds of millions of people communicate and share information. The behavioural change now under way is irreversible. A lot of that information is about your airline and you won’t be controlling it – or, often, won’t even know about it. For the industry, as this two-part Airline Leader report addresses, the main uses of social media today are in enhancing customer relations and in crisis management (from mini to major). This is not a breathless and

AIRLINE LEADER | APRIL 2011

FEATURE

Social media: Key points for airlines ILLUSTRATION: MATT HAMM

➤ SOCIAL MEDIA’S OPPORTUNITIES ARE CHANGING THE WAY MANY HUNDREDS OF MILLIONS OF PEOPLE COMMUNICATE and, vitally, share information. The behavioural change now under way is irreversible. It substantially shifts the information power balance towards consumers. There is more to come. ➤ SOCIAL NETWORKS TAKE VARIOUS FORMS, EACH WITH INDEPENDENT ORIGINS and usually with different target markets. Hence the value of connections between the different media forms. Each has very different potential uses (and risk profiles) for airlines. ➤ ONCE AN AIRLINE ENGAGES FULLY IN SOCIAL MEDIA, IT BECOMES A PARTICIPANT, not automatically a leader. It discards the levels of control over output that it has been used to. But it will usually be in a stronger position than if it does not participate. ➤ SOCIAL MEDIA OFFER ONE-OFF OPPORTUNITIES FOR INNOVATORS. First movers can be rewarded disproportionately, by using the media in a coordinated way. But there can be no 10-year strategy. Actions will need to be flexible and open

30 AIRLINE LEADER | APRIL 2011

to adjustment, as the media evolve. Five years ago Facebook and Twitter barely existed. They too will change rapidly, or be replaced. ➤ FOR AIRLINES, NEW CUSTOMER RELATIONS STRATEGIES ARE NOW ESSENTIAL, REGARDLESS OF ENGAGEMENT WITH SOCIAL MEDIA OUTLETS. The pointed end of social media is Twitter and instant messaging – positively, for its potential use in customer relations, marketing and selling and – negatively, for its ability to magnify problems which are not well handled. ➤ TWITTER IS A WAKE-UP CALL TO IMPROVE MINI-CRISIS COMMUNICATIONS. This medium allows the communication process to be followed back up the communicationsoperations chain (and across an airline’s “silos”). That trail can then be retraced back down the line – keeping frontline staff in the picture. ➤ PASSENGERS FEEL EMPOWERED IF THEY KNOW WHAT’S GOING ON – and best they hear it directly from the horse’s mouth than from other dissatisfied passengers sitting around in the informational dark. Every “crisis” becomes a great opportunity to shine with sensible use of the new media.

➤ DON’T USE SOCIAL MEDIA TO TRY TO CHANGE YOUR IMAGE WITHOUT CHANGING YOUR FUNDAMENTALS. What works for a fresh young LCC often won’t work for a long-established legacy airline, even where it has recognised that Twitter or Facebook are for real. And the old maxim applies – don’t overpromise and under-deliver. Upscaling some of the current initiatives will become impossible as one-to-one communications propositions. ➤ FACEBOOK (AND OTHERS) WILL BECOME A RESERVATIONS MEDIUM, WITH POTENTIAL FOR PRECISE TARGETING OF CUSTOMERS. How fast and how extensively it will be used is controversial. Google and ITA is another unknown. But one thing seems certain: the status quo will be rocked – and possibly quite quickly. ➤ EMERGING NATIONS’ USE OF SOCIAL MEDIA IS STILL IN ITS INFANCY. They are fast catching up, with massive numbers, both for Facebook and Twitter, as well as local variants. International airlines will need to be informed of, and participate in each, recognising their special features. For innovators, this offers significant offshore marketing opportunities. ➤ NEW COST-BENEFIT EQUATIONS ARE NEEDED IN ESTIMATING A STRATEGIC COURSE IN INVESTING SOCIAL MEDIA. Convincing cynical boards will be difficult. The benefits are often “soft” and harder to account. Accumulating a body of other companies’ experiences becomes an executive necessity as social media evolve. At this stage of any new phenomenon, learning from the mistakes and successes of others is key.

uncritical account, although there are some vital long-term shifts in play. But this is a fast-evolving process. For example, some observers suggest the channels will completely rewrite the distribution process. That is still a story in the making. Meanwhile too, although the US is at the vanguard of the changes, many other countries and their airlines are becoming more engaged, either reactively or as part of promotional strategies. The phenomenon is expanding, not just incrementally, but algebraically. Nearly a fifth of all Twitter users have more than 100 followers – try taking that five steps along the chain! The report also indicates that, whatever strategy you adopt, the new pressures on customer relations means that this area will have to be handled differently in future. That will add cost, one way or another. Airlines that already have a customer-sensitive focus and image are best positioned to respond.

HE BIG PICTURE: SOCIAL MEDIA HAVE CAUSED A GIANT SHIFT IN HOW INFORMATION IS PASSED AROUND. THIS IS IRREVERSIBLE. The airline which continues to rely only on traditional communications, such as media releases and press conferences, is assuming the old dynamics: that a source transmitter can still issue information to a large body of passive receivers – the few-to-the-many. This sort of control of information is not dead yet – and never will be – but there has already been a shift in where the information power lies. Now there is the opportunity for the many to communicate with, and learn from, the many. With transparency, the “many” often does not even need to listen to you. The result is that it can dictate to you. The impact of social media seems to have been sudden, but in fact it is just another step along a road. Key components of the new social media have been influential for some time and they are wide ranging. Ever since the internet arrived as a popular mode, individuals and

consumers have become greatly empowered. Consumers have been sharing first-hand travel information on sites such as TripReport.com for years. What happened next was simply that these open for a evolved into closed – and more powerful – “social” media.

With transparency, the “many” often does not even need to listen to you. The result is that it can dictate to you.

550 million USERS OF FACEBOOK

200 million PEOPLE WITH TWITTER ACCOUNTS

For airlines, those early changes quickly imposed greater transparency, most importantly, making competing fares visible. This transparency has also meant, for example, over-simplification and commoditisation of airline products, without regard to distinguishing quality features. Price has become the overriding travel selection criterion, regardless of other factors. But, rightly or wrongly, the consumer gained market power each step of the way. For an industry that survives only on the ability to price discriminate (yield manage), such transparency has been a shock to the way business is done. Facebook has more than 550 million users and Twitter accounts doubled in 2010 to about 200 million today. With some five billion mobile phones in use (and developing countries feature heavily – see box on p32), you ignore the power of these institutions at your peril. Any resource that can potentially talk to a couple of hundred million people within minutes, directly into their home or their hand, is a force to be reckoned with. And each time that power is demonstrated, as with the “Arabian Spring”, so the force becomes more powerful (and reaction stiffens).

AIRLINE LEADER | APRIL 2011

FEATURE

Mobile phones promise expanded change in emerging nations COUNTRIES WITH MORE THAN 100M INTERNET USERS SOURCES: CAPA – CENTRE FOR AVIATION AND VARIOUS; AT FEB-2011

ost of the data and thinking about social media comes out of the US and Europe. But the big explosion, numerically, is coming in the world’s most populous countries — China, India, Indonesia and other parts of Asia — along with fast emerging nations such as Brazil, Russia and Turkey. These markets have typically skipped a generation in telecommunications, so hand-held devices dominate internet connectivity, allowing greater mobility and instantaneous information. The rising penetration in these countries prefaces sharp changes in the likely shape of airline dealings in those parts of the world. At Feb-2011, among a global population of seven billion, approximately five billion mobiles are in use. This is not all good news for Facebook and Twitter though – nor will it make life easier for global airlines responding to social media needs. China, for example, with its nearly half-a-billion internet users, is not fertile territory for US giants. There, Baidu Inc dominates search, with three-quarters of the market and a capital value of USD53 billion; Sina Corp owns the country’s Twitter-like leader and Youku.com covers the YouTube territory. Stiff censorship – the “Great Firewall of China” – is one plank of the government’s strategy, while the other is to invest in the scene at state level. Official news outlets Xinhua and the People’s Daily are investors; Xinhua in search with Panguso.com, jointly with China Mobile; and the Daily has its own search engine, Goso.cn, as well as a Twitter lookalike. RenRen occupies Facebook’s role – which meanwhile can only be accessed through proxy servers – greatly limiting its reach, except for the Special Administrative Region of Hong Kong, where usage exceeds 50% of the population.

32 AIRLINE LEADER | APRIL 2011

COUNTRY

NUMBER OF MOBILE DEVICES (MILLION)

China

850

India

760 (adding 17m/month)

USA

300

Russia

215

Brazil

205

Indonesia

170

Japan

108

Germany

107

India’s democracy is more hospitable to social media, notably to Facebook, although less than 2% of the population is signed up so far. More importantly, that proportion has doubled in the past year, with some 22 million today. Sixteen million of those are males, outnumbering females by a factor of almost three (in the US, females exceed males). Finding a bride is still a high priority. Indonesia already has 35 million on Facebook; Turkey has 26 million; and Brazil (where there is stiff local competition in the Portuguese-speaking country) has 13 million, double the number only six months earlier. Russia’s leader at present is Facebook lookalike, VKontakte, with 28 million users. Facebook is still small there, but growing; Mark Zuckerburg has specifically stated he wants to penetrate that country’s market, as a prelude to invading China. And Indonesia and Brazil top the stats for market penetration by Twitter, each with 21%. The US, by comparison is a humble 12%, while Japan sits at 17%. For a phenomenon in its early stages, these are remarkable figures. Local dynamics are important; Japan, for example, has US-level Twitter usage, but only tiny penetration by Facebook. Homegrown medium, Mixi, which allows greater anonymity, has about 15 million members, with a market cap of USD1 billion.

Each of these users by definition has access to a computer or a mobile device. While they may not yet be wealthy or regular flyers, they have already gained a certain level of income and education. They are potential or actual customers of yours – and of your competitors. The new environment brings threats – but also opportunities. There are two very distinct strategic threads here to address. For the directive minds of an airline, any solution may appear just a mirage. The return on investment of getting involved in new social media activities is not easily measured (an issue we deal with in Part Two of this report), so embarking into commercial dealings in this networking environment requires a whole different mindset. Once an airline engages fully, it becomes a participant, not necessarily a leader. It discards the levels of control over output that it has been used to. This can be alarming for more conservative managers, used to tight-lipped pronouncements from the podium and carefully evading difficult questions. But one-off potential advantages are there for innovators. Airline use of these media is still immature, generally without substantial

OCIAL MEDIA ARE NOT STANDALONE; THEY ARE INCREASINGLY INTEGRATED AND EFFECTIVE USE OF IT MEANS RECOGNISING THAT CHARACTERISTIC. In this changing world, the newspaper is dead, just like magazines and books. They are for old style “transmission”, with no interactivity. Just a minute - not so fast! There are plenty of newspapers out there and still plenty of people reading them, online and print. In the US, a 2010 survey performed for the Newspaper Association of America found 57% of the sample identified local newspaper websites as their “top online source for local information”. This was considered clear evidence “of newspapers’ successful multiplatform transition”. Newspapers also contain an affluent demographic. Another US survey, from Scarborough Research, used by the media

c-level buy-in, leaving room for first movers to gain disproportionately. For example, a KLM programme of highly publicised airport giveaways was done on a shoestring, relying largely on a group of enthusiastic employee believers. They gained the carrier vast exposure for very little cost. Assuming – and it is still an assumption – that exposure converts to goodwill, and in turn sales, is harder to prove. Just like online sales, you must take your clothes off to get the maximum value from the interaction. Transparency – at least from the producer – becomes a highly valued characteristic (meanwhile, paradoxically, the participants on the other side can often choose to hide behind anonymity).

USD 50bn

FACEBOOK’S CURRENT MARKET VALUATION (OVER FIVE TIMES THAT OF LUFTHANSA OR DELTA)

Once an airline engages fully, it becomes a participant, not necessarily a leader. It discards the levels of control over output that it has been used to. planning and buying community, showed 80% of adults in US households earning USD100,000 or more had read a newspaper in print or online each week. (This is not quite as dramatic as it might sound; casting the net to include as little as one read in the past week, online or print, can hardly be described as obsessive use.) A 2010 Canadian Nadbank survey, however, found that about a third of those aged 18-34 had read a newspaper (online or print) the previous day. This increased to half for the 50-64 age group and nearly two thirds for those over 65. Meanwhile, US Twitter users’ demographics include nearly 40% in the 25-34 age group,

PERCENTAGE OF TWITTER USERS IN THE 25-34 AGE DEMOGRAPHIC

AIRLINE LEADER | APRIL 2011

FEATURE

about twice as many as in any other age grouping. Facebook users are typically younger; 21% are still in high school and only 23% are in the 25-34 category. But the movement is not all about Gen X and Gen Y (or the even younger “Millennials”). Change is afoot. Younger users are restless and seek constant new applications, helping destabilise evolutionary paths. At the other end of the spectrum, according to Pew Research, again in the US, “Some of the areas that have seen the fastest rate of growth in recent years include older adults’ participation in communication and entertainment activities online, especially in using social network sites such as Facebook.” The Dec-2010 report found that in May of that year, 50% of 45-55 year olds and 43% of those aged 56-64 use “social network sites”. The startling thing about these data is the change since Dec-2008. The 45-55s increased from 20%, a 250% expansion. But the “older boomers”, in the 55-64 bracket, grew over 400%, from 9% 18 months earlier. This alone sends an important message about where airlines’ customer relations opportunities – and challenges – may come from in the next five years. Cross-tabulating this increased tech-usage trend with other demographics such as income levels and leisure time raises all sorts of interesting scenarios. These data also highlight the fact that each communications mode forms part of a whole – a part of which includes the print media. Each of them

450%

GROWTH IN 55-64 YEAR OLDS USING SOCIAL MEDIA BETWEEN 2008-2010 gains strength by linking into the others. The most effective media – and the most effective way of using them – is by building linkages. That much has never changed. One example of crossover: over a third of television viewers in the US are also plugged into social media while watching, so any commercial which appears on TV will attract social media commentary – and, typically, many writers will vie for the funniest or most outrageous comments. They will also be open to instant tweeting, to take up a competition or fare offer, another form of instant interactivity.

THEY ARE DIFFERENT! SOME GLOBAL SOCIAL NETWORK MEDIA WHICH ARE USED FOR BUSINESS SOCIAL MEDIUM

SOCIAL MEDIUM

USERS AND INCOME PROFILE ROLE ROLE

NATURE

2004

550 million Median age 26 55% earn > $50k

Social contacts, sharing content, networking, interacting with favourite brands

Closed – internal communications. Airlines have their own page to win “likes”

Brief, issue-related communications limited to 140 characters

2006

200 million Median age 31 51% earn > $50k

Good for eg customer relations, managing events, delays, cancellations, crises

Professional networking, job search and recruitment

More personal, professional info, discussion for a and job placements

2003

90 million, about half in the US Median age 40 (one of the few to have IPO’d) 70% earn > $50k

Google-owned (paid USD1.65 billion in 2006, “almost profitable” – Mar-2011), open community, integrated with the search engine

Recorded video, anyone can freely upload. Increasingly used as business media tool

2005/06

Two billion videos viewed daily Some videos exceed 10 million views Age range, 18-55, evenly divided between males and females 56% earn > $50k

Yahoo-owned (paid USD35 million) Sharing (eg travel) experiences. Mostly used in US and Europe

Users upload photos eg of holiday destinations. Can link to other sites

2004

About 5 billion photos and videos uploaded to date 53% earn > $50k About 200 independent airline blogs

Information exchanges/news

Exchange of opinions, news and analysis

34 AIRLINE LEADER | APRIL 2011

Real time, urgency

NATURE

For the airline industry, the message from the Qantas A380 ‘crash’ is that Twitter must now be an essential part of any comprehensive crisis management strategy.

OCIAL NETWORKS TAKE VARIOUS FORMS, EACH WITH INDEPENDENT ORIGINS and usually with different target markets. As their inter-connections grow, they become increasingly valuable for each of the components. For this reason, they are constantly being redesigned to allow easy connectivity across the different platforms. Each has very different potential uses (and risk profiles) for airlines. When they converge, they become a community of communities, a sort of loose federation that greatly increases their collective profile. For the media, combining strengths generates more custom all round in this virtuous circle. They need to be flexible and open, as users will not be satisfied with closed systems that confine their behaviour. Users want to be able to communicate between Twitter and Facebook, or YouTube, as a minimum. So, to be effective, an airline’s social media strategy should mirror this structure, working flexibly across the different platforms, looking closely at their respective attributes. And because of their interconnectedness, if an airline adopts one medium independently of the others, it cannot gain maximum advantage. Also, specific to the travel area, the derivative, Facebook Places – which provides a platform for friends to share travel experiences – has potential to become a driver of flight and destination choices, adding in commentary which intrudes into areas previously the domain of sites such as TripAdvisor. MySpace, an antecedent of Facebook, was overwhelmed by the latter’s expansion and can be disregarded as a player in this game. It was too rigid in its design and didn’t facilitate others to make money. At News Corp’s Feb-2011 earnings announcement, the company made clear it wanted to divest

its once-strategic buy. As it paid USD580 million in 2005, News will sell at a substantial loss. Even the best-equipped experts can make wrong calls in this volatile field.

Gone viral … an eyewitness posted this picture of a Qantas “crash” on Twitter. Source: Vanya Bolung/ Twitter

For airlines, the pointed end of these media is Twitter – positively, for its potential use in customer relations, marketing and selling and – negatively, for its ability to magnify problems which are not well handled. Twitter user numbers doubled (!) in 2010. A handful of active leaders drive change. A recent survey by Sysomos found that 23% of users were responsible for 90% of all tweets last year. But more significant is that 21% of twitterers now “follow” more than 100 people – many of whom will be influential opinion leaders. A year before, only 7% achieved that level. In turn, 16% of Twitter users have more than 100 followers of their own. It is obvious from this that the interconnectivity of the linkages spreads exponentially, like a massive three dimensional spider web – or perhaps even a global airline network! Qantas’ serious incident of 4-Nov-2010 provides the best recent example of the havoc misreporting can wreak to an airline’s image. That morning, Qantas CEO Alan Joyce was speaking at a lunchtime event, among other things listing the numerous

AIRLINE LEADER | APRIL 2011

FEATURE

events that go wrong in the airline business, from volcanoes to bird flu. As he returned to his office, all hell broke loose. Millions of people had already heard a Qantas aircraft had crashed. Only Qantas senior executives and a handful of others knew it wasn’t true. On climb out from Singapore, a Rolls-Royce engine on one of its A380s had exploded over the nearby Indonesian island of Batam. A large, intact part of the engine cowling, unfortunately emblazoned with the airline’s distinctive flying kangaroo emblem, landed in a school playground during the day. Within minutes, reports of the Qantas “crash”, along with pictures of the engine part, were flashed around the world. People on the ground, armed with mobile phones, heard an explosion, saw the large part fall from the sky and understandably concluded there had been a mid-air explosion. Anxious to tell the world, they tweeted vigorously. The news was almost instantly posted on Facebook too, then picked up by wire services – and the media flashed the word across the world of “reports of ” a crash of a Qantas plane. In reality, there had been a particularly serious incident, which miraculously had not brought the aircraft down.

But as a result of the Twitter/news relay, the incident imprinted an indelible safety concern about this previously invincible airline. It took Qantas a considerable time to hose down the story. By then the damage had been done. It was an awful experience for the airline and terrifying period for anyone who had friends or relatives on the flight. Until then, Qantas had been a relatively passive user of social media. It had a nominal Facebook page, but no “appropriate Twitter accounts”. After this event, Qantas’ whole attitude changed. For the airline industry, the message from the Qantas A380 “crash” is that Twitter must now be an essential part of any comprehensive crisis management strategy (see box). The sequence also illustrated the interactivity between different media types.

Qantas and the ‘crash’ of A380 Flight QF32; 4 Nov 2010

s Qantas CEO Alan Joyce described it to Airline Leader, “The reports from Batam Island sparked a lot of activity on Twitter, with people asking what had happened, seeking information and also retweeting conversations. Several media outlets also reported on the tweets and indicated that there were reports that a Qantas jet had crashed after leaving Singapore. This included several reports on wire services. This information and reporting happened very quickly and it was difficult for Qantas to correct the record immediately, due to the volume of misinformation on Twitter.” Two-and-a-half hours later (by which time the aircraft was back on the ground in Singapore) Reuters was still freshly reporting to the world that “Qantas says crashed plane an Airbus A380 … Qantas told CNBC television that a plane that crashed near Singapore was an Airbus A380. No other details were immediately available.” By now, a combination of wrong tweets combined with a misquoted, incomplete report of a CNBC TV statement, made the crash seem authentic. Says Mr Joyce, the big problem at that time was, “Qantas had no instant way of getting the message out to the world in its own words.” Despite the fact that “within minutes” Qantas officials had “provided information to the media that no aircraft had crashed and that the A380 was making a return journey to Singapore”, the damage had already been done. Because of the long tail of news (eg via news wires, which are picked up and often repeated by online and hard copy conventional media with very little change or cross-checking), the incorrect reports were reverberating across time zones faster than the correcting news

36 AIRLINE LEADER | APRIL 2011

“Social media channels are now integrated into our crisis communication plans, alongside the more traditional media and communication platforms.” could reach. “Regular updates followed and mainstream media started to report correct information, rather than rumour reported on social media channels,” says Mr Joyce. But the “mainstream” media also took time to percolate and redirect the original wrong material. As a result, the bad news hung out in the media much longer. As Mr Joyce candidly admits, “The challenge for Qantas on the day of the QF32 incident was that we did not have the appropriate Twitter accounts to either provide information or respond to the many questions which were

being asked about this incident.” The same is still probably true of most airlines. Not so Qantas. Not any more. After this initial firefighting exercise, Qantas then “fast-tracked the establishment of a number of channels, including @qantasmedia. This was set-up within 48 hours [of the A380 incident]. This account is set up purely for the provision of factual information for the media (and others) during normal operations and also crisis situations.” “We had this up and running very quickly to ensure we could provide updates on the grounding of the A380 fleet, as well as other delays, incidents or news which would be of interest to the public. We also used other social media platforms during the next 19 days to provide updates to the public. This included a message [from the CEO] on

YouTube when we announced that the A380 would recommence services for Qantas.” And, as Qantas now recognises, these media are not just useful for communicating with the world at large: “A link was provided to our Frequent Flyers, as well as employees.” As a consequence of this experience, “social media channels are now integrated into [Qantas’] crisis communication plans, alongside the more traditional media and communication platforms. Twitter provides a good vehicle to broadcast a message, as well as provide a platform for two-way communication. The latter is a challenge in our day-to-day operations. The next challenge we’re working on is using social media as a platform to improve our customer service and integrate these channels into our model, alongside email, telephone and the website.”

Facebook and Twitter: ‘Joining the conversation’ Facebook too has enormous and varied popular appeal. It is increasingly a tool for information exchange and a valuable supplement for the airline’s own website, where it can win new “likes” and provide a focus for special offers. It is also potentially (and controversially) a source of evolving distribution capability, containing as it does, massively detailed personal data, along with access to more than half a billion consumers (see for example, Professor Nawal Taneja’s article in this issue, and below). Many Facebook users are in the more attractive market segments, with disposable income and mobility. Despite a slowing in growth, Facebook is still highly popular, with extensive social relevance. As one Egyptian activist, a local google marketing executive, said on CNN in Feb-2011: “I want to meet Mark Zuckerberg and thank him personally.

Listen, don’t shout ... Airlines need to engage in their customers’ conversations when using social media.

AIRLINE LEADER | APRIL 2011

FEATURE

Twitter users are all idiots

PHOTO: WIKICOMMONS

This revolution started online. This revolution started on Facebook. This revolution started in June 2010 when hundreds of thousands of Egyptians started collaborating content.” Any self-respecting tyrant will take this to heart and block access to social media, just as Iran, Libya (and China) have. But that does not apply for most airlines, which will have to live the foreseeable future with these forms of media, immediately a challenge – but also an

Servicing the Twitter market LCC Jet2Go announced in Jan-2011 that it was “cancelling” its Twitter account because it didn’t have the resources to service it. The lean, low-cost northern England-based carrier had in fact outsourced most of its Twitter dealings to an agency in London and clearly the cost equation didn’t match its management’s return expectations. Blogs queried whether the airline needed to announce that it was cancelling. The consensus was it was better to do so than to have a dead service. In other words, to play the game, you need to be committed. Otherwise, don’t pretend to be something you are not.

38 AIRLINE LEADER | APRIL 2011

opportunity to understand more about target markets first hand. Twitter materials talk of “joining the conversation” with other users. The expression is an interesting metaphor in understanding how a commercial company might participate in that “conversation”. If your airline’s promotion is seen as an individual joining a group of friends talking about things that interest them, then they are unlikely to be impressed by a “suit” barging in and shouting loudly about a great fare sale. Attracting attention in this group is one thing. But doing it in an empathetic way, sensitive to the others in the room, is more likely to win lasting friends. Facebook has been very shy of advertising as a basis for its financial model, a feature which was key to its widespread adoption in the US and internationally. One aspect now emerging is that, as they become more sophisticated in the new forms of communication, consumers are beginning to recognise the value of their own information profiles. They (we!) are also increasingly resistant to having marketing materials thrust at them. Facebook’s founder recognised that from the start; for the platform provider to intrude into a “private” conversation by inserting ads is a serious negative. Commercial considerations are now eroding this position, but stiff controls remain. Conventional promotions are thus unlikely to work in this forum. Shouting about low fares won’t make you loved if those in the conversation are more interested in talking about music or TV shows – especially if your fares really aren’t always that low, as you pretend. For that, your branded Company Facebook page can be used. Don’t use social media to try to change your image without changing your fundamentals. Here, more than anywhere, if you are a well-known brand, your voice will grate if the message conflicts with your popular image and performance. Try walking into your 17-year-old son’s birthday party and shouting, “Hey guys, how about we all go out and do some damage!” Some of his friends might be mildly amused, but most will cringe at your trying to derail their

private fun. Importantly, you come across as a fake by trying to appear to be something you aren’t. You are the father image and fathers don’t behave like that – or the teenagers don’t want them to. What works for a fresh young LCC often won’t work so easily for a long-established legacy airline - even where it has recognised that Twitter or Facebook are for real. One example: Delta, a genuine social media pioneer in the legacy sector, has recently gone to lengths to cultivate an image of super-receptiveness to Twitter account management. A breathless report in Business Week (16-Aug-2010) described how Delta was monitoring Twitter messages to solve customer complaints on the spot – such as quickly rebooking a tweeting passenger who didn’t want to wait in line at the airport to do it after

missing his connection. The airline clearly had committed resources to provide an undoubtedly useful Twitter system, with a small team monitoring and responding to customer issues during the main US east coast travel window. But the Business Week article became a magnet for negative responses, mostly citing bad experiences. This is hardly a surprise for an airline that carries more than 160 million passengers each year, but that also had not been renowned for providing a stellar – or cheap – domestic product. That same statistic also suggests that using Twitter in this way is unlikely to provide a realistic solution to customer responses of the kind talked about, once it became mainstream. Numerous bloggers suggested it was more likely a piece of PR that the airline could not deliver on.

TOP 10 AIRLINES ON TWITTER AT 01-MAR-2011 RANK RANK

AIRLINE AIRLINE

OF FOLLOWERS # OF #FOLLOWERS

OF TWEETS # OF# TWEETS

JETBLUE AIRWAYS*

1.8M

6056

SOUTHWEST AIRLINES

1.1M

6170

TAM AIRLINES

171,415

9355

VIRGIN AMERICA

168,665

2551

UNITED AIRLINES

161,848

2356

AMERICAN AIRLINES

160,916

3585

DELTA

140,594

2852

CONTINENTAL AIRLINES

116,944

2077

AIRASIA

111,458

3558

PHILIPPINE AIRLINES

94,769

785

5 6 7 8 9

10 *INCLUDES JETBLUE AND JETBLUE CHEEPS

AIRLINE LEADER | APRIL 2011

NORTH AMERICA LATIN AMERICA ASIA PACIFIC EUROPE

TOP AIRLINES ON TWITTER BY REGION AT 01-MAR-2011 SOURCE: CAPA – CENTRE FOR AVIATION, AIRLINE SITES, AIRLINESONTWITTER.COM

*INCLUDES JETBLUE AND JETBLUE CHEEPS

Beware of creating unrealistic “rock star” expectations. Direct Messages (DMs) can be hazardous to your (financial) health. The bloggers’ judgment may have been unfair. Delta has actually thought through the issues well, introducing a well constructed Social Media Lab, with two or three social media specialists and a cross-section of operational people to assist in responses. But, if just 1% of Delta’s 160 million annual passengers started to rely on DMs through Twitter to resolve hands-on instant rebooking issues, the resources needed and the duplication of effort (with conventional customer relations staff ) would quickly make this just another source of frustration for travellers. Scaling up to handle Twitter’s one-on-one communication process patently cannot work, where every person who wants to jump an airport queue finds out he or she can do it by pulling out a mobile phone. Unless there is a strategy for evolving the capability, promoting this service can simply create expectations that exceed realistic long-term capabilities. When offered the chance, customers (and non-customers) become conditioned to getting answers and solutions as soon as they ask a question. The immediacy of Twitter doesn’t expect to wait a day, or even an hour, for a reply, so someone has to be at the airline end to field and answer questions within a few minutes. This can require a high level of commitment. Under-servicing can backfire, if Twitter users feel they are merely being manipulated. And the responses must be useful. London’s Heathrow Airport, badly affected by snow and cold weather in Dec-2010, tried valiantly to use Twitter (@HeathrowAirport) to inform travellers on developments. Staff attempted to respond to individual enquiries, but the airport in fact had little information about airline schedule changes, which were well beyond its purview – but were what customers wanted.

40 AIRLINE LEADER | APRIL 2011

Media reports instead talked of information loops, where the Twitter response suggested calling the airline, which in turn sent them back to the airport. Or the direction was to the airport’s website, which contained little useful information and apparently crashed frequently.

1.8m

NUMBER OF TWITTER FOLLOWERS OF JETBLUE Every business is still very much in the learning phase of social media understanding. It is clear that airlines’ customer service practices are going to have to be updated, but aside from that, gleaning and seizing opportunities is more elusive. This “fashion” is here to stay, but it won’t stand still.

NEXT MONTH: We continue with a closer look at what some airlines have done and how effective they have been. In this fast-evolving market, what worked last week won’t necessarily bear repeating. But there are some useful leads.

AIRLINE LEADER | APRIL 2011

IN CONVERSATION WITH VUELING CEO

Alex Cruz

SOURCE: VUELING

CEO INTERVIEW

No short-haul fundamentalist

PANISH LCC VUELING’S CEO IS A LITTLE DIFFERENT, AND VERY PRAGMATIC. HE HOLDS THE KEY TO A NEW EUROPEAN SHORT-HAUL CONNECTING MODEL – AND NOT JUST FOR IBERIA.

In Feb-2011, Vueling’s fleet expansion plans for the year once again rose, to embrace another 14 aircraft, which, with retirements, will take the aggregate to 47 by the end of the year. Spain’s leading home-grown lowcost airline has bases at Barcelona El Prat and Madrid-Barajas Airports, operating its fleet of 36 A320 aircraft on domestic and regional services in Spain and across Europe. For its personable CEO, Alex Cruz, there are no rules that define how an LCC must operate. His attitude is that the airline needs to be in the “traditional” market, but with much lower costs. Sounds good, but not so easy to implement. However, Vueling, after enjoying some torrid times prior to merging with Iberia’s subsidiary Clickair in 2008, is now 46% Iberiaowned, well entrenched and looking “carefully yet firmly ” at expanding to new bases in Europe. But Vueling’s biggest asset and differentiator lies in its alliance with Iberia – and through it to the new BA-IB’s International Airlines Group. Here Mr Cruz recites the Jetstar precedent. Vueling is picking up a larger proportion of the legacy airline’s intra-European feeder traffic – part of the “traditional” element – while operating off a considerably lower cost base. In the quarter to 30-Sep-2010, Vueling reported a cost per ASK of EUR5.25 cents, well below Iberia’s EUR7.54 cents per ASK (containing a large proportion of less expensive long-haul operations). Using Vueling as a short-haul surrogate looks an easy choice. With Iberia establishing El Prat as a long-haul hub for its Latin American services from summer 2011 (complete with antitrust immunity to fly in partnership with British Airways and American Airlines over its Miami hub), Vueling would appear to be sitting on real upside potential in connecting traffic flows. And, as Iberia’s pilots frown on the flag carrier’s suggestions of starting up a new wholly owned short/long-haul subsidiary, Vueling’s role (along with the regional Air Nostrum) takes on an even greater value. It gets better. At Iberia’s invitation, five of Vueling’s new aircraft are to be based at Madrid-Barajas Airport, under a Feb-2010 agreement with Iberia for the LCC to also assume part of the parent airline’s connecting and short-haul operations there for “at least” eight months. But it would be wrong to think Vueling is having it all its own way. One new challenge has been Ryanair’s assault on Vueling’s base at Barcelona’s El Prat Airport, having previously focussed on Barcelona Girona and Barcelona Reus. Here, Mr Cruz isn’t prepared to take a backward step, asserting that “we already have low fares”. We asked him a few questions .

42 AIRLINE LEADER | APRIL 2011

“From the start, we knew that we would not be short-haul fundamentalists and that we would continue to break outstanding product myths which would bring us straight into the traditional airline world, but at a fraction of the cost base.”

How are you responding to Ryanair’s new push into Spain?

We knew [Ryanair] was coming, so we took a long time to prepare prior to their arrival. When they confirmed their arrival, we had our planned evening meeting to update our plans and we went home satisfied that we were not in any panic. More targetted campaigns on overlapped routes, an increasingly better business product, very few downward fare changes (we already have low fares) and continuous monitoring have probably been some of the actions that we have been taking. Oh, all that while we were lowering our cost base. Lowest costs always win.

Can Vueling be a beneficiary of the IB-BA merger (and how)?

We have a very successful relationship with Iberia and we draw substantial (and remunerated) benefit from some of the commercial agreements, like the IB sales channel and the frequent flyer programme. I am sure that we will continue to look for ways to strengthen our win-win relationships, both with Iberia and its partners.

IB is talking in terms of focussing on long-haul. In Dec-2010 you announced a Barcelona connection for some of IB’s Americas routes. The European full service airlines have a major cost problem in competing on short-haul with Ryanair, easyJet and the regional LCCs. Does Vueling offer the BA-IB (and AA) combination a special opportunity to feed their longhaul operations cost effectively? Is that something that could give the oneworld group a home advantage – as well as being very good for Vueling?

We have been seeing the evolution of Jetstar and we very much believe that we have the right foundation to follow in similar steps. From the start, we knew that we would not be shorthaul fundamentalists and that we would continue to break outstanding product myths which would bring us straight

into the traditional airline world, but at a fraction of the cost base. Assigned and blocked middle seats, flexible fares, a worldwide frequent flyer system, all-points distribution, connecting flights, etc have all been mastered by Vueling while retaining cost leadership. This combination of business-approved product with our cost base and flexibility must surely be interesting to any carrier that does not have it.

What are your plans for hub expansion? With new bases opening in Amsterdam and Toulouse, do you see Vueling becoming more of a pan-European carrier?

Barcelona is our main hub and will continue to be for the foreseeable time. We are planning to continue adding destinations and frequencies to strengthen the connection proposition, including new routes and nearly 900,000 additional seats this summer (2011). At the same time, Vueling is now prepared to make careful, yet firm, incursions into Europe – the Toulouse and Amsterdam bases are indeed part of that strategy and we hope that trend will continue over the coming years.

How have you dealt with the expansion of high-speed rail in Spain and elsewhere. Is there room for coordination or is it simply competition?

We are not overly concerned for two reasons: 1) we don’t have a lot of overlap with the train – only the BarcelonaMadrid route is affected; and 2) ever since the high-speed train arrived on that route, we have increased significantly the number of flights, up to 13 daily at the moment. We believe that the combination of price, punctuality and fare flexibility make it a tremendously competitive proposition even to train travellers.

Do you see the Vueling model evolving much further? And, if so, in what ways?

At Vueling, we have proved time and again that it is possible to be a verylow-cost profitable carrier and at the

same time continue to evolve its model. Particular areas of focus for this year are likely to be continuous business product enhancements and more partnerships with other airlines.

Are you interested in the A320neo, CSeries or any of the other nextgeneration narrowbodies/regional jets?

Yes.

How do you see the company’s media, advertising and social media strategy evolving? Is social media a revenue generator for you?

Vueling is a natural major online player; its award-winning website continues to lead in conversion rates in the industry. And social media has not escaped us. We have a solid strategy in place, with some incredible recent achievements, including a four-fold increase in Facebook fans in three days, and media-recognised customer service during disruptions (thousands of Twitter flight rebookings during weather and ATC problems in 4Q2010). But revenues are revenues and the next step of this strategy will only be conceived if we are able to define and actively measure what this Web 2.0 presence means in terms of income. We are modelling all the activity of the recent months and we will make further investment decisions based on that. Alex Cruz today carries the aura of a happy man. As a keen strategist, he will be highly aware of his airline’s tasty partnership opportunities. They give Vueling a seat at the table of any European network airline whose shorthaul cost profiles make competition against LCCs prohibitive. But the greatest potential for intra-European feeder operations will be in offering connections to the new International Airlines Group. Navigating the union carriers will be more difficult.

AIRLINE LEADER | APRIL 2011

AIRLINE OF THE MONTH

IndiGo The little airline that plans to Go far

Big plans ... IndiGo president Aditya Ghosh.

SOURCE: INDIGO

HEN AN UNKNOWN INDIAN AIRLINE - at least outside its home market makes the largest aircraft order in history, something important is happening. IndiGo, India’s leading low-cost airline, didn’t even exist five years ago. Today, it still only operates 35 aircraft in the nation’s explosive-growth aviation market and where the formal projection for national annual GDP growth is just under double figures for the next decade. In Jan-2010, IndiGo signed an MoU to acquire 180 A320s. That is roughly one third of the fleet of Southwest Airlines, the US’ largest carrier, all in one bite. It is enough to occupy the entire Airbus production line for six months – although, as Airbus general director Fabrice Bregier noted, this is “spread out over several years, of course”. Meanwhile, EADS president Louis Gallois, in something of an understatement, called it the “deal of the year”. The airline is no stranger to big numbers. At the Paris Airshow in 2005, the previously unannounced IndiGo audaciously declared an order for 100 A320s. About half of these have already been delivered. However, as the dust settles on the order excitement, two important factors emerge. The first is that the longstanding issue of a replacement for the low-cost airlines’ workhorses, the B737 and the A320, is partly resolved. The bulk order establishes IndiGo as the launch customer for the (almost) next generation A320neo, to be a substantially more fuel-efficient successor to the current model. The type constitutes 150 of the total. Deliveries of the neos won’t start until 2016 and are spread right through to 2025. As a result, the European manufacturer, with this new concept, has managed to establish an edge over Boeing’s competitive B737NGs. It is not the quantum leap in

44 AIRLINE LEADER | APRIL 2011

aircraft design that the airline industry was seeking, but it does deliver considerably more than a nominal improvement in efficiency and is probably as much as could be hoped for, where neither major manufacturer can afford to embark on a whole new airframe development programme. The second and more important point is that the order firmly places the spotlight on the massive growth potential that many airlines – and others – now see in the south and southeast Asian market. And the potential role that the sleeping elephant of India can play in the way that evolves. Over the 10 years to 2020, CAPA forecasts India’s market will reach 450 million passengers. Over the past decade, passenger numbers handled by Indian airports tripled, from 39 million per annum to 123 million. Based on the CAPA forecast, India will become the third largest aviation market in the world within 10 years, behind the USA and China. Only two things can prevent this level of expansion: infrastructure and policy inadequacy. India’s aviation policy has, in the past, been extremely effective in shackling innovation in the cause of protectionism, but that has now changed. A well-funded IndiGo is well placed to capitalise on the growth. It is certainly a time for the bold to make their play and capture the lead role. Now, after serving the required prefatory five years of domestic operations, the LCC is about to spread its wings internationally. It will start with the most popular markets. IndiGo president Aditya Ghosh, in Feb-2011, stated the carrier had secured approval to commence international services to Singapore, Bangkok, Dubai and Muscat from “several” Indian cities. These are well-travelled routes, at least from the prime cities of Mumbai and Delhi, but part of the new wave of LCC operations has been to open up more frequent links to regional airports. The Asian ones – AirAsia (from Kuala Lumpur and Thailand), Tiger and Jetstar (both from Singapore) – have, however, hit headwinds with their introductory services into India, as many new services have been axed for lack of patronage. Meanwhile, Gulf LCCs like AirArabia and flydubai are prospering.

ANNUAL PASSENGERS HANDLED BY INDIAN AIRPORTS 2000-2010 AND CAPA FORECAST TO 2020 Annual Airport Passengers (millions)

500

CAPA FORECAST

450 400 350 300 250 200 150 100 50 ‘00

‘01

‘02

‘03

‘04 ‘05 ‘06 ‘07

‘08 ‘09 ‘10

‘11

‘12

‘13

‘14

Year

NDIGO HAS PEDIGREE. Owned by India’s major travel and technology group, InterGlobe Enterprises, and Rakesh Gangwal, a former chief executive of US Airways, IndiGo is India’s third largest domestic airline after Jet Airways and Kingfisher. It is expected to have a fleet of around 75 aircraft by 2016, when the A320neos start to arrive. The new aircraft will partly be used to phase out the earlier models, but on current trends even these fleet numbers may appear inadequate by then. One thing is certain: IndiGo will quickly start to attract partner and investor interest as it expands. Powerful Indian domestic coverage is an attractive asset and, for an airline with substantial backing – and lots of synergies through its travel side – there will be many with an interest in getting in at the ground floor. This makes it a useful partner for one of the global alliances too. Sooner or later, India must also relax its foreign airline ownership rules; when it does, there will be plenty of hopeful investors ready to enter. The usually media-shy Mr Ghosh has talked recently of an IPO for the private company, while maintaining it did not need additional capital for its orders. Also, mindful of the numerous cross-border joint venture

‘15

‘16

‘17

‘18

‘19

‘20

SOURCE: CAPA INDIA OUTLOOK 2011 REPORT

operations now permeating the southeast Asian market, IndiGo may well be looking to establish in other countries across the region. The Indian international market undoubtedly has enormous upside, but it is new and still unpredictable in the short term; it is also typically low yielding in the leisure sector. IndiGo looks to be well equipped to exploit that to the full. And it has the financial backing to make people listen.

INDIAN DOMESTIC MARKET SHARE: DEC-2010 18.6%

17.1%

13.8% 18.6% 7.7% 17.7%

6.4%

SOURCE: CAPA – CENTRE FOR AVIATION AND INDIAN DGCA

Air India SpiceJet JetLite GoAir Jet Airways Kingfisher IndiGo

AIRLINE LEADER | APRIL 2011

NUMBERS

AIRCRAFT FLEETS

Fresh metal takes to the air

2011 AIRCRAFT DELIVERIES SHARE (%) BY REGION

2011 WIDEBODY DELIVERIES SHARE (%) BY REGION 2% 3%

36%

12% 45%

11%

31%

29%

Asia Pacific Europe Middle East Africa Latin America North America

SOURCE: CAPA – CENTRE FOR AVIATION AND ASCEND

ORE THAN 1400 AIRCRAFT ARE SCHEDULED FOR DELIVERY THIS YEAR, up from 1213 in 2010. Fleet expansion will be led by Ryanair, Air China and Turkish Airlines – each adding more than 30 aircraft this year, according to Ascend. LCCs and carriers in emerging markets are driving the expansion trend. Aircraft utilisation rates are also returning to pre-crisis levels, which is likely to push up rates of capacity growth even further in the year to come. This, in turn, is fuelling concerns at several major airlines that too much capacity could hamper yields in coming quarters. All regions are scheduled to take delivery of more aircraft in 2011, with the exception of North America, which is scheduled to receive 157 aircraft in 2011 compared with 164 in 2010. Asian carriers will take delivery of the most aircraft in 2011 with a 32% share of the worldwide total of 1416, or 452 aircraft. Europe follows closely with a 31% share. North America has a much smaller 11% share of total orders, accentuating its diminishing global role. The picture changes for long-haul/twin-aisle aircraft

46 AIRLINE LEADER | APRIL 2011

deliveries, as Asia (42% of global widebody deliveries) and the Middle East (12%) airlines grow their intercontinental roles. The regions account for more than half of all widebody orders – that is – the aircraft which mostly operate longhaul routes. North American airlines account for just 1% of widebody deliveries this year. However, this will likely change in the years ahead, as US carriers renew their ageing fleets and streamline their mixed fleets – often as a result of consolidation activity. North American fleets are among the oldest in the world (at an average fleet age of 17 years), trailing only Africa and Latin America/Caribbean, but equal to Europe (which also includes developing nations in Eastern Europe). Ryanair, with the biggest increase, moves from 256 B737800s to 299 of the aircraft type by Mar-2013. The carrier is now the biggest international airline in the world by passenger numbers, handling a record 72 million in 2010, up 10% year-on-year. Ryanair is continuing its growth trajectory, at least over the next couple of years. Turkish Airlines also extends its rapid growth trend. Two Russian carriers, Moskva and Aeroflot, also feature. Of the airlines recorded on the list, 22 are from Asia and the Middle East, while 11 are European.

150

CHINESE AIRLINE DELIVERIES FOR 2011

US PASSENGER AIRLINE DELIVERIES FOR 2011

AVERAGE FLEET AGE BY REGION SOURCE: CAPA – CENTRE FOR AVIATION AND ASCEND

REGION

AVERAGE AGE

Africa

Latin America & Caribbean

North America

Europe

Middle East

Australasia

Asia

Based on Jan-2011 data (includes aircraft in storage)

Ryanair Air China Turkish Airlines ANA Alitalia easyJet China Southern Air France Lufthansa LAN Airlines Moskva Air Company Aeroflot Russian Airlines Azul China Eastern Korean Air airberlin Cathay Pacific American Airlines JAL Qatar Airways Xiamen Airlines Garuda Indonesia IndiGo Airlines UPS Airlines Air Nostrum KLM Royal Dutch Airlines Lion Air Norwegian Southwest Tianjin Airlines Emirates Airline Hainan Airlines Malaysia Airlines US Airways Continental Lufthansa CityLine NIKI Saudi Arabian Airlines Sichuan Airlines Virgin Blue Airlines Copa Airlines flydubai Polet SpiceJet TAM Linhas Aereas WestJet Frontier Airlines JetBlue Airways Okay Airways Shenzhen Airlines

TOTAL

WIDEBODIES 39 35 32 28 26 24 22 20 20 19 19 18 17 17 17 16 16 15 15 15 15 14 14 14 13 13 13 13 13 13 12 12 12 12 11 11 11 11 11 11 10 10 10 10 10 10 9 9 9 9

8 14 18 6 7 7 7 3 4 3 11 16 13 7

6 2

12 1 7

2 1

4 2

AIRLINE LEADER | APRIL 2011

SOURCE: CAPA – CENTRE FOR AVIATION AND ASCEND

in 2011 by carrier ^

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

2011 DELIVERIES

^ based on the greatest number of aircraft on confirmed delivery

TOP 50 AIRCRAFT DELIVERIES

OPERATOR

NUMBERS

Fleets

An easier lending market keeps fuelling capacity expansion

COMMON THEME IN THIS EDITION OF AIRLINE LEADER is a concern about rising industry capacity levels against the backdrop of rising oil prices and lingering economic uncertainty. Indeed, as fleets expand, 2011 is shaping as a bumper year for airports, aircraft manufacturers and their suppliers, including IFE and avionics companies – as well as for consumers hunting low fares.

Manufacturers are poised to deliver close to 1200 aircraft in 2011, including more than 800 narrowbodies, 240 widebodies and 145 regional jets. Airbus and Boeing are each likely to exceed 500 deliveries for the year. But this falls short of certainty, as production issues continue. As Ascend noted in Feb-2011: “The outlook for 2011 continues to be clouded by the uncertainty over how many B787s, B747-8s and A380s may be delivered.”

2001-2010 JET COMMERCIAL DELIVERIES SOURCE: ASCEND ONLINE

1200 1000

1200

AIRCRAFT SCHEDULED FOR DELIVERY IN 2011

800 600 400 200 0.0 2001

2002

2003

2004

2005

2006 Narrowbody

2007

2008

2009

Regional Jet

2010 Widebody

SO WHAT ARE THE FACTORS DRIVING THE CAPACITY RESURGENCE? Demand is back. Traffic has certainly exceeded pre-crisis levels in emerging markets – and is getting close in many mature markets. FACTOR 2: Profits are up. 2010 was a surprisingly profitable year for the global industry, especially in Asia and North America. FACTOR 3: Credit conditions have improved. Reflecting the improving earnings picture – and the thaw in credit markets – money is cheaper and easier to come by again, so that expansionminded airlines are able to finance new equipment rather than pay the higher operating and maintenance costs of older aircraft. FACTOR 4: Oil is still (relatively) cheap (1). The reasons airlines made (and continue FACTOR 1:

48 AIRLINE LEADER | APRIL 2011

to make) money are that fuel prices remain 30-40% below the mid 2008 peak. Fare increases are sticking and fuel surcharges are apparently being applied with relative ease, helping airlines offset the cost impact of recent increases. FACTOR 5: Oil is getting expensive (2). The corollary also holds – as oil prices rise, airlines look to buy or lease more fuel-efficient aircraft. FACTOR 6: Old habits die hard. Battles over market share will intensify again in 2011, as competition heats up in the post-crisis environment. In these circumstances, the new aircraft delivery demand is understandable.

2001-2010 JET FIRM ORDERS PLACED (NET) SOURCE: CAPA – CENTRE FOR AVIATION AND ASCEND ONLINE FLEETS

3400 3000 2600 2200 1800 1400 1000 600 200 -200

2001

2002

2003

2004

2005

2006

2007

2008 Airbus

2009 Boeing

2010 Other

Overall share of aircraft deliveries covered by government guarantees more than doubled to 34% in 2009. LCCs and carriers in the emerging markets will continue to lead global fleet growth in 2011, based on the number of aircraft on confirmed delivery for the year. Turkish Airlines, LAN, Garuda Indonesia, Lion Air and Copa are expanding rapidly in 2011, while a number of the major network carriers in established markets continue to acquire aircraft as they add capacity back into their networks and replace their ageing fleets. There has been a definite trend in “upgauging”, as noted by Ascend, considering the sizes of aircraft being ordered, and the swaps from previous orders to different types/ variants. The B737-800 (398 net orders in 2010) and A320 (330 orders) were the favourites for new orders, but each also gained 41 and 36 orders respectively from swaps, mainly from the smaller B737-700 and A319. According to Ascend, 123 orders for these smaller types were changed to larger aircraft during 2010. The A321 gained 49 orders

from swaps but the rival B737-900ER lost five. In the widebody sector, the B787-9 saw 38 orders switched from smaller -8s and the A350-900 gained 24 from the smaller -800. Most popular widebody types for new (gross) orders were the A350-900 (72), A330-300 (52) and B777-300ER (60). Significant financing requirements exist for many airlines – but the money is there. Emirates, which has 12 confirmed deliveries for aircraft in 2011 and some 200 on order, stated in Feb-2011 it had raised USD4.6 billion in aircraft financing over the past two years despite tight lending conditions following the global downturn. The Dubaibased airline has successfully lined up credit to finance 30 widebody aircraft delivered during the period. Emirates, which will take delivery of two aircraft per month on average over the next six years, is reportedly seeking to borrow USD1 billion through a revolvingcredit facility.

AIRLINE LEADER | APRIL 2011

NUMBERS

BLOOMBERG AIRLINES INDEX: JUN-2005 TO DEC-2010 SOURCE: IATA SOURCING BLOOMBERG

300

250

13%

PROPORTION OF EMIRATES’ AIRCRAFT FINANCING SOURCED FROM THE US EX-IM BANK

Asia airlines

200 European airlines

150

100 Worldwide airlines

US airlines

Emirates has been forced to hit back at its European rivals who claim the region’s airlines have expanded through global subsidy. The overall share of aircraft deliveries covered by government guarantees more than doubled to 34% in 2009, according to Airbus and Boeing. Air France has stated the US Export-Import Bank arranged USD2.3 billion worth of financing agreement to Middle East airlines, a 200% increase from 2006, as export credit agencies stepped up assistance to foreign airlines during the global financial crisis. More than 100 airlines receive this sort of funding. ECAs are still a small part of the story. According to Emirates, in its “Subsidy – Myths and Facts” document, of the USD22 billion in aircraft financing over the past 14 years, only 13% (or USD2.9 billion) has come from US Export-Import Bank financing, with EU ECAs contributing 10% of the total financing amount (or USD2.3 billion). That ratio was “likely to

50 AIRLINE LEADER | APRIL 2011

DEC 10

SEP 10

JUN 10

MAR 10

DEC 09

SEP 09

JUN 09

MAR 09

DEC 08

SEP 08

JUN 08

MAR 08

DEC 07

SEP 07

JUN 07

MAR 07

DEC 06

SEP 06

JUN 06

MAR 06

DEC 05

SEPT 05

JUN 05

remain in this range in the future”, according to the carrier. US Ex-Im Bank chairman and president, Fred Hochberg, similarly commented that “about 20% of the Emirates and Etihad fleets have been provided by export credit agencies both in Europe and the US. Some airlines have used us to a lesser extent and many have used us to a far greater extent.” Also in the Middle East, Etihad has issued requests for proposal (RFPs) to finance seven aircraft for delivery this year. The carrier, which plans to nearly triple its fleet within 10 years, will require USD13.3 billion from financial institutions. Other carriers and/or lessors, such as Air Nostrum, Lion Air, AerCap and Air New Zealand, have recently secured ECA financing for their aircraft. Air Nostrum secured financing for five Bombardier regional jets with ECA-funded Spanish operating leases (SOLs), the first ECA SOLs arranged for regional aircraft. AerCap has mandated Citi

for the export credit-guaranteed financing of three A330-300s, while Lion Air closed ECA financing for the first of six ATR72-500s, for operation by its subsidiary, Wings. Air New Zealand, also in Jan-2011, secured a USD170 million term loan backed by the Ex-Im Bank. Several airlines have also tapped equity markets to fund their orders, apparently without great difficulty. Carriers with large aircraft orders, Flybe, IndiGo, Spring Airlines, Webjet, Interjet, Volaris, Lion Air and Garuda, have all conducted or are conducting IPOs, to help diversify funding sources as the economic environment and equity market conditions strengthen. AirAsia X, part-owned by Virgin interests, is planning a European and Asian listing to fund its fleet expansion, intending to triple its fleet to 35 aircraft over the next six years. Improved financial results are helping in the quest for funds â&#x20AC;&#x201C; and debt is also available. Global airline share prices rose

strongly during 2010, on aggregate ending the year up 28% over the 12 months, according to IATA. Share prices for US airlines were up more than 31% over this period; those in the Asia Pacific rose by 27%, while for European airlines it was 21%. These are much greater rises than the 12% seen in the broader market Global All-Cap index, indicating that financial markets were taking a positive view on airline financial prospects. Many full-service carriers have shored up their balance sheets through a mixture of institutional capital raisings and stock issuances, as well as securing large amounts of reasonably inexpensive debt amid the global financial downturn. Consequently, it does appear that there will be sufficient fuel (funding) for the feast this year. This is not necessarily good news. If the recovery slows or stutters, the result could lead to system overheating, although grounding costly older and environmentally unfriendly equipment may be the positive spinoff.

AIRLINE LEADER | APRIL 2011

COUNTRY PROFILE

Japan’s airline industry How aviation can provide an economic spark

F JAPANESE AVIATION IS A WINDOW TO THE ECONOMIC SOUL OF THE NATION, then there is cause for some hope of renewal and rejuvenation. Demoted to third place by China in the world economic rankings, the Japanese economy has been gripped by low growth and deflation for two decades. Now seeking to recover from a devastating earthquake and tsunami, described by Prime Minister Naoto Kan as the country’s “worst disaster since World War II”, the challenge takes on a new dimension. The aviation sector’s equivalent of deflation, in terms of its impact on blunting growth and dampening innovation and vitality, has been the lack of growth in Tokyo-area airport capacity, under-development of regional airports and the strangulating effect of policies previously designed to protect the failed flag carrier, Japan Airlines. A little over a year on from JAL’s bankruptcy and commencement of its restructuring process, positive signs had been emerging that the country’s aviation sector can help lead its economy into a better place. While not itself a major piece of the economic picture, aviation is a highly visible and symbolic area of activity, with very substantial flow-on effects for the wider economy. Internationally Japan had been, until 2008, Asia’s biggest aviation market, with well over 70 million seats p/a. China overtook it to become the largest (although it, like Japan, contracted in 2009), surging ahead in 2010. South Korea and Thailand follow, well behind. Japan will not recover the leadership mantle, but a new focus could do much to stimulate higher growth. While Japan waited passively for the 2010 “big bang” (of long-awaited new capacity at Narita and Haneda), in this heavily Tokyocentric airline system, domestic aviation in Japan had stagnated. Domestic capacity in 2010, at 126 million seats, was 4.2% below

52 AIRLINE LEADER | APRIL 2011

the level of 2001. International capacity rose a modest 9.6% above 2001 levels. ANA and foreign carriers have been responsible for this increase, as JAL contracts rapidly. Paradoxically, after restraining entry to safeguard JAL and ANA’s position, all the new airport capacity at the Tokyo airports eventually arrived simultaneously with JAL’s downsizing, freeing up even more space for expansion by others. However, over the past 12 months, a new broom has swept though. JAL is finally being restructured in a meaningful way, and the new Haneda and Narita capacity is being taken up. And a more open attitude appears now to be entrenched at the Ministry. This national aviation revival began when the desperately troubled JAL was not simply bailed out in late 2009, a course which would have been followed under previous regimes. Thanks to keen intervention by the Finance and Transport Ministers in the then-recently appointed Kan government, the flag carrier was pushed to seek bankruptcy protection in Jan2010, with the support of interim financing to help it through. The deep restructuring programme was the quid pro quo. The desire for All Nippon Airways, supported by JAL, to achieve antitrust immunity (ATI) to operate in partnership with their US alliance partners, simultaneously prompted the Japanese government to conclude an open skies agreement with the US. This laid a strategy platform for renewal and for a different, less-protectionist policy internationally. The newly available capacity at Haneda and Narita, along with JAL’s downsizing, conveniently now made expansion and new entry possible. Subsequently, a more enlightened policy posture has been taken, enabling numerous new initiatives that would have been unthinkable only five years earlier.

ASIA’S BIGGEST INTERNATIONAL AVIATION MARKETS (MILLION ANNUAL SEATS): 2001 TO 2009 SOURCE: CAPA – CENTRE FOR AVIATION AND OAG 80.0 70.0 60.0 50.0

KEY

40.0

CHINA JAPAN SOUTH KOREA THAILAND INDIA HONG KONG TAIWAN AUSTRALIA

30.0 20.0 10.0 2001

2002

2003

2004

2005

2006

2007

2008

2009

JAPANESE DOMESTIC AND INTERNATIONAL AIR CAPACITY VS GDP INDEX (2001 = 100) SOURCE: CAPA – CENTRE FOR AVIATION, OAG FACTS AND WORLD BANK 140

130

120

KEY GDP INTL DOM

110

100

90 2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

AIRLINE LEADER | APRIL 2011

COUNTRY PROFILE

The stage was therefore set for a synchronised recovery, as economic conditions appeared more positive than for several years. The persistent challenge of overcoming deflation still hung over the longer-term outlook, but the strength of China’s growth continued to overflow into its neighbours’ backyards. A Bank of Japan spokesman noted in late Feb-2011: “Japan’s economy appears to be getting out of the pause for the time being, and on the price front, the deflationary situation is improving.” However, he added, “There will be twists and turns until overcoming deflation is in sight.” The central bank was not expected to move on interest rates (still near zero – and the lowest in the western world) until at least 2013, in a bid to tackle deflation. The devastating impact and massive loss of life from the 11-Mar-2011 earthquake and tsunami will cause an enormous setback, both in human and economic terms, but assuming no major nuclear disaster, the outlook for the Japanese economy over the medium term should remain relatively solid. In the immediate aftermath of the disaster, views were mixed on just how far-reaching the impact would be. Several major companies were temporarily shut down and there will undoubtedly be an immediate and wide-ranging short-term slowdown in domestic production. Power supplies will need to be reinstated and industrial production may well be inhibited for some time. But looking further ahead, the inevitable rebuilding programme could actually have a positive impact on economic activity. Some of the worst affected airports, notably Sendai, which is relatively small, but had been growing into a more significant regional role, with international services, will be temporarily curtailed. But, as was seen after the 1995 Kobe earthquake, the Japanese people are enormously resilient and committed to restoring normality. Continuing along a path of aviation regulatory relaxation could contribute effectively to aiding that recovery. The aviation sector issues will not only be practical ones. Japan’s arcane political system is never far from the surface, with many reactionary voices ready to turn back the clock.

54 AIRLINE LEADER | APRIL 2011

The architect of JAL’s redirection, former Transport Minister Seiji Maehara, was forced to resign (from his later position as Foreign Minister) shortly before the earthquake and Prime Minister Kan will come under heavy pressure to avoid unpopular measures as part of the inevitable recovery programme. Always uncertain, Japan’s post-earthquake political scene could become more complex than ever. It appears, however, that this aviation egg has already been scrambled. As ANA and JAL start to benefit from the effects of their alliance partnership ATI (and ANA seeks extended partnership with Lufthansa), they will have little interest in turning back the clock. By now, it is obvious too that further protectionism designed to support JAL will only be counter-productive. The venerable flag carrier still has a long way to go to secure a sustainable future and there will be many more difficult negotiations with unions along that track. Meanwhile, the likely flurry of new entry and of LCC, Skymark’s, expansion should help contribute in renewing Japan’s claims as a leading aviation power in the region. If allowed to, this renewal could also go some way to aiding economic recovery in what will inevitably be a very difficult year ahead for Japan.

TOUCHPOINTS FOR JAPAN’S AVIATION EVOLUTION ISSUE

DEVELOPMENTS

JAL RESTRUCTURING

Reduced international and domestic capacity by JAL. To date, this downsizing has not been effective in reducing unit costs, although in the more hospitable 2010 market, JAL was able to return to profitability. The carrier is not out of the woods yet though, with key unions reluctant to accept cutbacks and a persistent culture that is inconsistent with today’s operating conditions. Post-tsunami conditions may make the process of change more difficult for management.

ANTITRUST IMMUNITY AND AIRLINE JVS

The joint venture operations with Star Alliance (ANA-United Continental) and oneworld (JAL-American) begin in earnest with the Spring 2011 schedules and should stimulate new traffic flows and flexibility of service.

ANA-LUFTHANSA JV

ANA and Star Alliance leader Lufthansa have applied for effectively the same type of immunity from competition laws to combine their Japan-Europe operations. This would give a boost to ANA (and Lufthansa), but EU competition authorities have not yet ruled on the application. The EU approvals had been expected mid-2011. However, Lufthansa’s CEO suggested in Mar-2011 that “current developments” might affect the planned alliance.

THE B787

ANA was the launch customer for the B787 and much of its international growth strategy was focussed on receiving the long-haul aircraft over two years ago. This has been fortuitous for JAL’s competitive standing, but, assuming the first aircraft begin arriving later this year, ANA will be able to take advantage of a wider range of international service opportunities.

LCC SUBSIDIARIES

Out of step with most of their international rivals in the Asia Pacific region, neither JAL nor ANA has previously adopted an LCC subsidiary. Japan’s powerful airline unions make this form of low-cost entry difficult, but ANA will launch a low-cost subsidiary JV with its Hong Kong-based partner, First Eastern, later this year. JAL has, however, said it will not go along this course, perhaps to avoid upsetting sensitive restructuring negotiations.

SKYMARK EXPANSION

Japan’s largest – and only true independent low-cost airline – has been profitable and is expanding quickly. The privately owned carrier shook the market with orders for four A380s in Nov-2010, confirmed in Feb-2011. The successful domestic low-cost operator operates a fleet of 18 B737NGs on domestic routes.

FOREIGN LCCS

Recent rumours point to foreign airlines, Australia’s Jetstar and China’s Spring Airlines among them, possibly establishing joint ventures with Japanese interests to operate domestic and international low-cost services. The current limit of foreign airline ownership is 30%, but this may (should) be under review. Otherwise, foreign carriers, including AirAsia, Tiger Airways and Cebu Pacific, are either operating into Japan, or plan to. Jetstar has been operating long-haul services from Australia for some time.

GAME-CHANGING DEVELOPMENTS AT HANEDA AND NARITA AIRPORTS

Tokyo Haneda Airport opened a new international terminal and an expanded second terminal in Oct-2010. Haneda will now take on more long-haul international services, reversing the previous understanding that Haneda handled only domestic and regional (intra-Asian) flights, while Narita handled international flights. Narita has since reported plans to increase its domestic air service network.

REGIONAL AIRPORTS AND HIGH LANDING CHARGES

Many airports in Japan were built without consideration for demand or cost of construction. Combined with an aviation policy that made international operations to Japan’s regional airports difficult, this has left a major cost/debt overhang that is reflected in very high landing fees. It will be politically complex to allow these charges to be reduced, but the benefits to regional development if the airports become more attractive to new entry should add weight to the supporting arguments.

AIRLINE LEADER | APRIL 2011

NUMBERS

Capacity catching up Striking a balance between supply and demand

IRLINES MADE UNEXPECTEDLY GOOD PROFITS IN 2010, as demand rebounded ahead of supply, pushing load factors and yields up. But 2011 is looking less buoyant. About 2.54 billion passengers will take to the skies this year and 46 million tonnes of freight will be carried by the world’s airlines. But combined passenger and cargo demand (+5.3%) is expected to rise by a shade under the expected increase in capacity (6.1%). The likely outcome: lower load factors.

56 AIRLINE LEADER | APRIL 2011

The Middle East, Asia Pacific, Latin America and Africa, however, are projected to grow their share of worldwide aviation again in 2011, as North America and Europe trail the global average. A key ingredient in determining global profitability will be what happens to yields. If a projected 0.5% increase in passenger yield (following last year’s 7.3% surge) and steady cargo yields are achieved, higher total revenues will result. Average passenger revenues are expected to edge up to USD182 per passenger – still some

7% below the pre-crisis peak. But higher fuel costs are a threat, potentially shaving operating margins from 5.1% in 2010 to 3.4% in 2011. If fuel surcharges could be added in – as happened when yields peaked in 2008 – the financial balance might still be restored. But today has little in common with the heady economic conditions of 2008.

Combined passenger and cargo demand is expected to rise by a shade under the expected increase in capacity.

AIRLINE CAPACITY (ATK) TRENDS BY REGION: 2007 TO 2011F SOURCE: IATA AND CAPA – CENTRE FOR AVIATION 16

% year-on year change

KEY MIDDLE EAST ASIA PACIFIC LATIN AMERICA AFRICA GLOBAL NORTH AMERICA EUROPE

-4

-8 2007

2008

2009E

2010F

2011F

AIRLINE PASSENGER REVENUES PER PASSENGER: 2000 TO 2011F SOURCE: IATA AND CAPA – CENTRE FOR AVIATION

200

170

155

2011F

2010F

2009

2008

2007

2006

2005

2004

2003

2002

2001

140 2000

USD

185

AIRLINE LEADER | APRIL 2011 57

HEADLINES

Executive changes As last foreign recruit resigns, Air India plans new management

Aviation was unimpressed. With these exits, all international management recruitments have now resigned or departed from the company.

➤ AIR INDIA PLANS TO REBUILD its management team following the departure of three executives in late Feb-2011. Air India appointed chief operating officer, Gustav Baldauf, chief training officer, Stefan Sukumar, and Air India Express chief operating officer, Pawan Arora, in 2010 with a combined salary package of about INR80 billion (USD1.8 million) p/a. The services of Mr Arora were terminated, while Mr Sukumar and Mr Baldauf resigned amid allegations of non-performance and high salaries. Mr Baldauf, who has 25 years’ industry experience, has previously worked in senior positions for Austrian Airlines and Jet Airways. He was appointed in Apr-2010 to help restructure the ailing flag carrier and was the first expatriate in its management. During his tenure, he drew up a turnaround plan that included moving excess staff onto other business units, increasing fleet size and setting up network hubs in the country. Mr Baldauf ’s appointment has been mired in controversy. Before he started, Air India’s board and employees expressed concern about the hiring of “expensive” international executives. In Feb-2011, Mr Baldauf was served a show-cause notice for reportedly violating the code of conduct after publicly commenting on political interference in the airline’s day-to-day affairs. In those comments, Mr Baldauf stated: “It is certainly a difficult environment, in the Indian environment, the stakeholder – the government – plays too prominent a role in operations.” The Minister of Civil

AirAsia X’ new chairman pledges to realise expansion goals

58 AIRLINE LEADER | APRIL 2011

➤ MALAYSIAN LCC AIRASIA X has appointed Malaysia’s former Minister of International Trade and Industry, Y.B. Tan Sri Rafidah Aziz, as its independent and non-executive chairman. She replaces Datuk Kamarudin Meranun, who is also AirAsia Berhad’s deputy group CEO. Y.B. Tan Sri Rafidah aims to facilitate the carrier’s expansion plans and has identified the commencement of new routes as a priority. “I will try my best to help the AirAsia X team realise the goal and vision to be a global leader in the low-cost long-haul airline industry. The team has already achieved successes and can build on those as well as expand the business further, particularly in respect of new profitable routes,” she said. Y.B. Tan Sri Rafidah was Malaysia’s longest-serving Minister of International Trade and Industry and was renowned for her tough and pragmatic approach to international trade negotiations. Known as “Rapid Fire Rafidah” and the “Iron Lady” from Kuala Kangsar, she worked hard at attracting foreign direct investment, inking deals with multinational companies such as Intel, Western Digital, Panasonic and Samsung to set up manufacturing and research and development facilities in the country. AirAsia X intends to capitalise on Y.B. Tan Sri Rafidah’s economic expertise, as well as her negotiating skills. Her independent status will also strengthen the corporate governance of the carrier, which is considering an IPO this year.

ON THE MOVE p Etihad Airways has appointed Kevin Knight as chief strategy and planning officer. Mr Knight joins Etihad from United Airlines, where he was senior vice president planning. The carrier also appointed Juliana Kfouri as its senior vice president corporate strategy and special pro jects. Ms Kfouri was formerly CIO and director of information technology, processes and projects with TAM Linhas Aéreas. p Ryanair’s director of commercial revenue, Sinead Finn, has resigned. Ms Finn, who worked with Ryanair since 1998, is establishing a consultancy practice. p The European Commission has welcomed Matthew Baldwin as its director for air transport, replacing Daniel Calleja. Mr Baldwin was previously director in the EC’s Directorate-General for Trade. He has worked for EC President Jose Manuel Barroso as advisor for all issues relating to trade, energy, development and climate change, and former EU Trade Commissioner Pascal Lamy (now WTO Director-General). p Qantas appointed Paul Jones as CIO, effective Apr-2011, and flagged the departure of Chris Seller, its chief architect and head of operations. Mr Jones’ most recent position has been as CIO at Mars Incorporated. p KLM has appointed Camiel Eurlings and Erik Varwijk to the carrier’s statutory managing board, effective 01-Jul-2011. The new directors will join KLM president and CEO Peter Hartman and CFO Frederic Gagey on the board.

AIRLINE LEADER | APRIL 2011

HEADLINES

Airports corner AFRICA Nigerian airports hopeful of ICAO certification ➤ The International Civil Aviation Organisation (ICAO) will carry out an extensive audit on the Nigerian aviation industry in May-2011. Federal Airports Authority of Nigeria plans to receive ICAO certification for the 22 airports under its management. The last ICAO audit was in 2006.

AMERICAS GAP expresses interest in Brazilian airport privatisations ➤ Grupo Aeroportuario del Pacifico (GAP) has expressed interest in participating in the privatisation of several airport terminals in Brazil. It has established a partnership with an unnamed Brazilian construction company to pursue opportunities in the country. Mexican airport operator ASUR has also indicated its interest in joining Brazil’s airport privatisation process.

ASIA PACIFIC Narita to consider feasibility of LCCT ➤ Japan’s Narita International Airport Corporation (NAA) is considering the feasibility of an exclusive LCCT at the airport. NAA held discussions with eight Asia Pacific LCCs in Jan-2011 about operating services to/from Narita.

60 AIRLINE LEADER | APRIL 2011

China to invest USD230bn in aviation ➤ The General Administration of Civil Aviation of China (CAAC) stated China will add more than 45 airports over the next five years for a total of more than 220 airports. The government will invest CNY1.5 trillion (USD230 billion) in the aviation sector in the period to 2015 as it expects passenger numbers and fleet size to almost double. CAAC expects China to have about 5000 aircraft and handle 450 million passengers p/a by 2015. Mr Li encouraged private participation in the industry to help meet demand for more services and infrastructure.

EUROPE Spain approves AENA stake sale ➤ Spain’s government has approved a proposal to create a new holding company responsible for managing the country’s airports. The decision was made ahead of a 49% sale of AENA, which manages the country’s airports and air traffic control system. The government is reportedly valuing the 49% stake at EUR30 billion (USD41 billion) and plans to split AENA into two parts: a partially privatised Airport Division and a state-owned Air Navigation Division.

BAA loses legal bid to avoid sale of two airports ➤ BAA announced it will have to break up its network of airports after a court rejected its bid to challenge a sale order by the competition

watchdog. In Mar-2009, the Competition Commission ordered BAA to sell London’s Stansted Airport and either Glasgow or Edinburgh airports within two years. BAA successfully challenged this motion, however, the Supreme Court has since reconsidered it.

Shannon Airport cannot agree to Ryanair’s ‘unreasonable’ demands ➤ Ireland’s Shannon Airport has stated that it cannot agree to Ryanair’s “unreasonable demands” for financial support tied to the carrier’s possible expansion of services. Ryanair claims the airline’s current operation at Shannon handles 300,000 passengers per year – a figure the airport says is more than 100,000 below the carrier’s current traffic levels – and wants the airport to waive all charges and pay the airline for every passenger above that level. The carrier also requested that checkin desks, office and communications be provided free of charge. The airport says 90% of its traffic decline over the last 12 months is due mainly to Ryanair’s reduction in services following the end of its previous agreement with Shannon.

MIDDLE EAST ADAC releases tender for mid-field terminal ➤ Abu Dhabi Airports Company (ADAC) has released a general contractor tender for the construction of Abu Dhabi International Airport’s Midfield Terminal Building (MTB). ADAC has issued the tender to a list of pre-qualified firms for the construction of the main building, which will have an initial capacity of 27-30 million passengers p/a.

Fact file

462 510 BOEING’S TOTAL DELIVERIES FOR 2010, DOWN 4% FROM 481 IN 2009

AIRBUS’ TOTAL DELIVERIES FOR 2010, UP 2.4% FROM 498 IN 2009

530 574 AIRBUS’ NET ORDERS FOR 2010, UP FROM 271 IN 2009

BOEING’S NET ORDERS FOR 2010, UP FROM 142 IN 2009

159 250 3443 3552

ATR’S BACKLOG OF AIRCRAFT AS AT 31-DEC-2010

EMBRAER’S BACKLOG OF AIRCRAFT AS AT 31-DEC-2010

BOEING’S BACKLOG OF AIRCRAFT AS AT 31-DEC-2010, UP 2.0% FROM 3375 AT 31-DEC-2009

USD800 billion

THE ESTIMATED COMBINED VALUE OF THE PRODUCTION BACKLOGS OF BOEING, AIRBUS, EMBRAER, BOMBARDIER AND ATR AT THE END OF 2010. THIS IS EQUIVALENT TO THE WORLD’S 16TH LARGEST ECONOMY, THE NETHERLANDS

AIRBUS’ BACKLOG OF AIRCRAFT AS AT 31-DEC-2010, UP 1.8% FROM 3488 AT 31-DEC-2009

520-530 THE NUMBER OF AIRCRAFT AIRBUS EXPECTS TO DELIVER IN 2011

AIRLINE LEADER | APRIL 2011

INFLIGHT

It could be true … BHP to acquire world’s listed airlines

➤ BHP BILLITON HAS LAUNCHED A HOSTILE TAKEOVER OF THE ENTIRE LISTED AIRLINE INDUSTRY. The announcement was contained in a footnote at the mining giant’s recent AGM. When questioned on the sidelines about the transaction, a spokesman for BHP, I. Ron Steele, advised that the decision to buy all 90-odd listed airlines in the world was an afterthought and would not have a major impact on the company’s core strategy. “This is a relatively minor transaction for us,” said Mr Steele, before adding: “No, we have no intention of entering the airline business.” Senior analyst Saul D Mysole, of Fatbank, which engineered the deal and will be receiving its modest standard 15% commission, said: “The move was a logical one. BHP’s market cap is USD258 billion and the entire airline industry’s listed value is only USD200 billion. So it is not a big deal for BHP really. The key to the transaction is that this way, the company can get its hands on vastly more debt than it could ever dream of otherwise. Nowhere else can a company make a regular return on investment of less than 1% and borrow the amount of money these suckers can. The airlines obviously have some special magic. And BHP wants in.” BHP’s core business is digging holes in the ground. In Feb-2011, the

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company announced it made a profit of USD10.5 billion for the first six months of its financial year. The full-year profit is expected to be more than USD22 billion. A spokesman for the airline industry burst into tears when he heard the news. “I am so excited,” he said. “I’ve always wanted to work in an unregulated industry for a company that digs stuff out of the ground then puts it on ships and actually makes money. I’ve always felt there was a missing ingredient in the airline model.”

Britain to build lots of quite-fast trains, one day ➤ BRITISH PRIME MINISTER DAVID CAMERON HAS ANNOUNCED THAT, INSTEAD OF ENCOURAGING AVIATION, his government will build lots of fairly quick trains “as soon as we can”. “We are working on funding for them

and will announce details as soon as we can think of something. I know my mum has some savings in a plastic bag in the back of her freezer and we are holding talks with some jolly nice Scottish bankers who say they’ll lend us as much as we need if we let them have their bonuses back,” said Mr Cameron. The new trains, which look really good in the pictures released for comment this week, are expected to travel between London and Glasgow in just over 15 minutes. Mr Cameron was addressing a conference last week on transport dreaming, against a background of supporters chanting, “Steel wheels good, contrails bad.” Quite-fast trains have become a central plank of Britain’s transport dreaming policy. Mr Cameron said: “They take a long time to build and so we don’t have to commit to delivering anything during the current government’s term. In the meantime, the Greens and those silly Liberal Dems won’t allow us to say anything about more aeroplanes, so drawing up plans and launching studies is an easy way out. Once we’ve had another election and we can start making sensible decisions again, we will get serious. No, definitely not. I certainly didn’t say that. I was quoted out of context.” Asked about plans to build a transAtlantic quite-fast train tunnel, the PM confirmed negotiations were under way with a consortium of former Lehman Brothers experts. “The tunnel will go straight into Heathrow Airport, so we can maintain the airport’s hub role and we won’t need another runway. That would be far too costly,” said Mr Cameron.

AIRLINE LEADER | APRIL 2011

INFLIGHT

Back end of the bus Happy surcharge season! It’s all on again, says Joe Traveller. It’s fuel surcharge season again. Great. What is it about oil prices that makes us all so gullible that we simply swallow up this nonsense about paying “surcharges” on fares? OK, oil prices have gone up, but is fuel the only input cost that goes up? Of course not. Food prices are doubling, but there’s no sign yet of inflight food surcharges. Then there could be pilot salary increase surcharges, landing fee surcharges, volcano surcharges, snowed-in surcharges, GDS surcharges, having to compete with other airlines surcharges. What does a “surcharge” mean anyway? Surely fuel’s just another variable input cost. I have a suggestion. Everyone’s transfixed by the startling “new” phenomenon of unbundling fares. For US airlines that means, “Let’s start charging them for bags and make a killing [that’s not unbundling, it’s repackaging!].” So anyway, why not extend this unbundling thing to everything? Then we could have zero fares. No-one would pay any fares at all. This would achieve lots of things in one blow. For a start, passengers would love it (apparently). It would cut out all the middlemen who chew up profitability. No more GDSs, no more online travel agents. They wouldn’t have anything left to sell. It would simplify the whole game of trying to make a profit. In this model, all the airline’s costs would become surcharges. Unbundled and totally transparent pricing! “Wow, your pilot surcharge is bigger than mine”, “Hey, I like your snow surcharge” and all those other big boys’ games. OK, let’s get serious. We all know there are some quite complex and apparently valid reasons why fuel surcharges are useful tools. Customers know, so do travel agents (who

don’t like missing out on commissions on “surcharges” that aren’t fares) and so do frequent flyers. Of course, fuel surcharges disguise the fact that fares are going up, by not increasing the headline price. But even if it’s legal, isn’t that intentionally deceptive? There is something intrinsically unwholesome about fuel surcharges. For one thing, when everybody does it together, how competitive is that? Isn’t it a throwback to the old ugly days of cost-plus charging, with all the fares agreed between airlines? What happened to using challenges to become more efficient? Just whacking back an extra cost doesn’t have the ring of a competitive industry that has thrown off the apron strings of maternal protection. One other thing all this silliness does expose is the schizophrenia that airlines have over loyalty programmes, torn between capturing passenger “loyalty” and then exploiting it in ways that make money, but can only generate customer hostility. You go to great lengths to generate customer loyalty, then squeeze them when they try to redeem their frequent flyer points. Fuel surcharges also get added on to the price when a frequent flyer burns his or her points. Maybe there are some internal accounting practices that make it more valuable to charge actual dollars, but there can be no “headline price” problem here that would prevent increasing the number of points needed. After all, these “loyal” customers are captive by this stage. They can’t get put off by an increase in the number of points needed. So why not simply charge more points (and make some seats available)? Gosh, this business is complicated. No wonder airline managements can’t work it out either.

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AIRLINE LEADER ISSUE 5 | APRIL 2011

AIRLINE LEADER

Social networking and the new customer relations paradigm

ISSUE 5 | APRIL 2011

Social

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