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Airlines - International - June 2009

INTRODUCTION
Key findings
Abbreviations
Definitions
DATA SOURCES
OVERVIEW
 OUTLOOK FOR GDP GROWTH
Private credit to contract
Sharp downward revision in the forecast for world trade
Some chance of a rebound in 2010
Figure 1: Forecast GDP growth by region and major country, April 2009
Air transport link to economic trends
 EXCHANGE RATE TRENDS
Commodity-based currencies have fallen
Impact of currency moves on air travel
 OUTLOOK FOR SPENDING ON TRAVEL AND TOURISM
Figure 2: Travel and tourism expenditure worldwide, 2009-19
Spending to contract in 2009
Figure 3: Real growth in worldwide travel and tourism expenditure (% per annum), 2009-14
 TREND IN THE PRICE OF JET FUEL
 TREND IN AIR TRAFFIC VOLUMES (PASSENGERS AND FREIGHT)
Market downturns usually last three years
Long-term growth rate declining
Figure 5: IATA forecasts for global air transport volumes, December 2007-13
Slumping demand hits European airlines
Passenger numbers drop 10.8% in Asia Pacific
Air cargo down 25%
Measures to combat the crisis
Figure 6: International scheduled services of AAPA* member airlines, 2008-09
Cost-cutting/capacity reductions
US carriers quick to cut capacity
Slump in premium passengers and freight to hit profits
Figure 7: Trend in air passenger volumes and capacity (includes passenger and cargo by weight), 2006-09
Premium travel normally 8% of passengers but 15-20% of total revenues
Figure 8: Premium traffic growth by route, YTD February 2009
 CUTBACKS IN BUSINESS TRAVEL
Business travel spending down 20-25% worldwide
Sabre sees no rebound in 2010
BCD notes a slight uptick
Business class being reduced
Air France/KLM launches ‘premium economy’
Not originally intended for the corporate market
Internal travel policies the focus of cost reductions
Lowest-logical-fare policies
IMPACT OF THE WORLDWIDE CRISIS ON AIRLINE FINANCES
 AIRLINES TO CUT 14 MILLION FLIGHTS OVER NEXT SIX MONTHS
 LOSSES TO BE DOUBLE THE MARCH FORECAST
Industry hit by economic meltdown
Consumers stand to benefit, however...
Current state of the industry
Fuel cost
Efficiency gains
Stronger cash reserves
Declining load factors
Profit outlook by region
 AIRLINE RESULTS EVIDENCE FINANCIAL DISTRESS
Financial crisis narrowly averted due to the drop in fuel prices
Air France/KLM records operating loss of ‘only’ €129 million
Capital spending being reduced by €3.1 billion
Business model remains intact
AMR’s losses deepen in Q1/2009
AMR credit rating downgraded to ‘CCC’
Downgrade due to drop in demand
Cash losses projected to continue
Refinancing risk
Assets that could be liquidated
Declines in premium passenger traffic impacting RASM
Transatlantic business at risk
Higher non-fuel operating costs
All 2010 aircraft deliveries have been financed
AMR has breached original debt covenants
Unsecured bond-holders could be at a disadvantage
Air Canada on the brink of bankruptcy?
BA has announced a record loss
Premium traffic plummeting
Easter holiday timing and snowfall impact
The immediate concern is to conserve cash
BA predicts a loss for fiscal 2010
But a weak Pound offers some benefits
Cathay Pacific posts a record loss of US$1 billion in 2008
Cutting capacity
Chinese airlines seek government assistance
China Eastern Airlines has negative equity
Air China has also lost on hedging
China Southern Airlines also in line for a handout
Delta results better than expected
Combined passenger revenue down 18% year on year
Figure 9: Comparison of combined Delta/Northwest operations, Q1/2009 compared with Q1/2008
JAL to receive JPY200-billion rescue financing
Lower landing fees and more slots
JAL lost almost half a billion Dollars in fiscal year 2009
Lufthansa lost €44 million in Q1/2009
Lufthansa has a diversified business mix
Figure 11: Breakdown of revenue and operating profits, by business segment Q1/2009
Lufthansa has several passenger transport subsidiaries
Still very much a European airline
Figure 12: Lufthansa Group revenues breakdown, by region, Q1/2009
Moderate capacity cuts
Sharper cuts in cargo capacity
Still increasing the network in growth markets
Expansion in Eastern Europe going forward
Lufthansa Italia
Middle Eastern carriers still basking in the sun – at least for now
Over 100 aircraft deliveries in 2009 and 2010
Airbus increasingly dependent on the Middle East
Most carriers are 100% government-owned
Emirates Airline
Not immune to the downturn
Fleet set to more than double
Figure 13: Emirates’ current fleet and orders, January 2009
Etihad Airways
Fleet set to more than treble
Figure 14: Etihad current fleet and orders, January 2009
Qantas slashes profit forecast, capacity and jobs
Yields crashing
Load factors also slump
Capacity being reduced
Staff reductions
Jetstar vital to group health
Reaching its limits?
Figure 15: Qantas Group capacity (ASKs), by carrier: March 2008 vs March 2009
Singapore Airlines (SIA) still profitable but outlook deteriorating
Passenger traffic worsened in March
Cascading passenger volumes, cargo in a trough
Capacity cuts not sufficient
Figure 16: Singapore Airlines year-on-year percentage point change in passenger and cargo load factors, by region, March 2009
United Airlines has made deep capacity cuts
No major carrier has made steeper cuts
Operating loss halved
Major redundancies
Historically high operating costs
A fighting chance to survive the downturn
THE MAJOR PLAYERS
 RANKED BY PASSENGERS CARRIED
Figure 17: Total passengers carried (international only), 2008
Figure 18: Total passengers carried (domestic only), 2008
Figure 19: Total passengers carried (international/domestic), 2008
 RANKED BY PASSENGER KILOMETRES
Figure 20: Scheduled passenger-kilometres flown (international only), 2008
Figure 21: Scheduled passenger-kilometres flown (domestic only), 2008
Figure 22: Scheduled passenger-kilometres flown (international/domestic), 2008
 FREIGHT
International
Figure 23: Scheduled freight tonne-kilometres (international only), 2008
Figure 24: Scheduled freight tonne-kilometres (domestic only), 2008
Figure 25: Scheduled freight tonne-kilometres (international and domestic), 2008
BANKRUPTCIES/MERGERS
Figure 26: Major airline failures, by region, in December 2007-October 2008
 DELTA AND NWA JOIN HANDS
Figure 27: The value of expected annual synergies of the Delta/Northwest merger, 2009-12
Complementary route networks
Figure 28: Capacity breakdown of Delta/Northwest combined capacity, 2008
Frequent flyers’ opinion of the merger
Figure 29: Results of frequent flyer poll regarding the Delta/Northwest merger, December 2008
 ALITALIA
Lufthansa
Lufthansa has finally captured BMI
 BA/IBERIA COMBINATION STILL ON HOLD
Hurdles still to be overcome
THE AIRLINE BUSINESS MODEL
 AIRLINE PROFITABILITY
Airlines have not earned their cost of capital
Falling yields over the long term
Figure 30: Trend in passenger yields for US airlines, 1990-2008
A US$11.7-billion shortfall
Other segments of the aviation sector are doing better
Sources of airline revenue
Growth in ancillary revenues
EasyJet’s ancillary revenues up 115% in fiscal 2008
A similar story at Ryanair
Figure 31: Ryanair’s ancillary revenues as a proportion of the total, fiscal years 2007-08
North American carriers slow to exploit ancillary revenue possibilities
Air Canada sells Aeroplan interest
Ancillary revenues 9-11% of total at big US carriers
Increased baggage fees at Delta
Other airlines following suit
US budget carriers to increase ancillary revenues
US budget carriers staying put on baggage charges
Airline cost breakdown
Figure 32: US airline cost breakdown, by type, 2005*
US airlines face higher labour costs
Falling energy prices to be offset by higher labour costs
Tentative agreement with Southwest pilots
Pilots could go on strike
Energy cost – a major concern
Currency helped European airlines
Energy hedges have backfired
Hedging losses have continued to impact 2009 results
Break-even load factors
Seat configurations
LOW-COST CARRIERS
 DEREGULATION CAME IN STAGES IN EUROPE
 THE LCC BUSINESS MODEL
Low marginal costs and aggressive yield management
Savings on distribution
Incentive-based compensation
Figure 33: Summary of the low-cost carrier business model, 2009
Growth has well outpaced the industry
Fast growth in market share
Figure 34: Trend in the operating revenues of Southwest and JetBlue, 2004-08
AirAsia – the leading LCC in Asia
GOL the leading South American LCC
MAJOR AIRLINE ALLIANCES
 CODE-SHARING A CENTRAL FEATURE
 ALLIANCES HAVE OVER A 70% MARKET SHARE
Figure 35: Market share of the three alliances, 2008
 AIRLINE ALLIANCES RELATIVELY NEW
Figure 36: Airlines by alliance, 2008
 RECENT MAJOR DEVELOPMENTS
Continental switching to the Star Alliance
 OTHER DEVELOPMENTS BY ALLIANCES
Figure 37: Summary of the airlines in the three major alliances, September 2008
oneworld
Oneworld affiliates
Growth has picked up in recent years
Former BA franchisees exit the alliance
Aer Lingus restructured as an LCC
Mexicana to join in late 2009
SkyTeam
SkyTeam’s associate programme
Figure 38: Profile of SkyTeam Associate Airlines, 2008
Star Alliance
Varig leaves the Alliance
Varig has become a premium affiliate of GOL
TAM – a replacement for Varig
36 new destinations
Regional member airlines
Figure 39: Profile of Star Alliance regional members, 2008
All under one roof at Heathrow
Three alliance groups could control 80% of the North Atlantic market
Star Alliance antitrust immunity request delayed
Meanwhile SkyTeam integration is moving full steam ahead
Atlantic Plus-Plus approved
Oneworld tie-up still awaiting approval
DOT details are sketchy
Anti-alliance legislation in the works
Congressman Oberstar wants tighter controls
International reaction to the proposed US legislation
Cartel investigations in Europe
Star Alliance & oneworld members targeted
TMCs and TAs sceptical about the value of the alliances
Business Travel Coalition to organise opposition
Travel agents also express their doubts
The next two years will determine the value of the alliance tie-ups
PRICING
 REVENUE MANAGEMENT
Building fences
Move to restrict business traveller fares
Business-class fares five times leisure
Marginal revenue important
How elastic is the demand for air travel?
Three different datasets
Levels of aggregation
Figure 40: Levels of aggregation for elasticity calculations, 2007
Cross-price elasticities
Base elasticities
Figure 41: Demand elasticities relative to intra-North American flights, by route and geography, 2005-07
Short-haul/long-haul adjustment
Figure 42: Estimated elasticities* for short-haul and long-haul air travel at the route, national and pan-national levels, 2005-07
Elasticity applications
 HIGH OPERATING LEVERAGE TENDS TO FAVOUR REVENUE MAXIMISATION
Income elasticity
Figure 43: Income elasticities, by length of route and geographical region, 2005-07
DISTRIBUTION TRENDS
 E-TICKETING NOW UNIVERSAL
 THE GDS CONTINUE TO BE A DOMINANT FORCE
 THE FOUR MAJOR GDSS (SABRE, AMADEUS, GALILEO AND WORLDSPAN) CONTINUE TO BE A CENTRAL FORCE FOR THE ELECTRONIC DISTRIBUTION OF AIR TICKETS AND OTHER TRAVEL PRODUCTS. TODAY ALL GDSS ARE OWNED BY PRIVATE EQUITY FUNDS AND THIS HAS MADE ANALYSIS OF THEIR OPERATIONS MORE DIFFICULT DUE TO A LACK OF DISCLOSURE. GALILEO AND WORLDSPAN ARE AFFILIATES OF TRAVELPORT, ONE OF THE LARGEST TRAVEL DISTRIBUTION CONGLOMERATES IN THE WORLD, WHICH, IN TURN, IS OWNED BY THE BLACKSTONE GROUP, ONE EQUITY PARTNERS, TECHNOLOGY CROSSOVER VENTURES AND TRAVELPORT MANAGEMENT. SINCE MARCH 2007, SABRE HOLDINGS HAS BEEN OWNED BY SILVER LAKE AND TEXAS PACIFIC GROUP (TPG), TWO PRIVATE EQUITY FUNDS AND AMADEUS, THE MARKET LEADER, IS MAJORITY OWNED BY WAM ACQUISITION, WHOSE SHAREHOLDERS INCLUDE BC PARTNERS, CINVEN, AIR FRANCE, IBERIA AND LUFTHANSA, THE LATTER THREE OF WHICH WERE PART OF THE ORIGINAL GROUP OF FOUNDERS.
Figure 44: GDS ownership breakdown, 2009
Sabre withdraws NWA lawsuit
Travelport deal with Air France/KLM
Amadeus still at odds with Lufthansa
As of late April 2009, Amadeus had yet to come to terms with Lufthansa to shield its subscribers from the Preferred Fares Program surcharge, and consequently stands to lose ‘significant’ market share in Germany. Lufthansa’s Preferred Fares Program imposes a €4.90 per-way surcharge, in addition to value-added tax, on fares booked through the GDSs in Germany, Austria and Switzerland, though Amadeus competitors Sabre and Travelport have come to separate agreements to shield customers from the fees. Amadeus market share in Germany – where it is the dominant provider of global distribution services – could decline to 20%, although that depends on what deals are being made with the competition, according to statements by Amadeus country manager, Holger Taubmann, at an April 2009 conference of the German travel buyer association (VDR) in Cologne.
Accommodating unbundled fares
Companies obliged to re-evaluate their travel policies
Lockheed Martin
90-95% of air expenses still included
‘Sabre Branded Fares’ debut in Australia
For online retail and agents
Multiple price points for clear market segmentation
Allows for product differentiation
Travelport/Air Canada breakthrough
United and Sabre enable travel agent upselling
Other carriers to follow
Sabre competitors also working on solutions
Travelport’s Universal Desktop
Amadeus’ ‘Airline Retailing Platform’
‘Amadeus Airline Service Fees’
Conflicting trends regarding commissions
Airline CEOs reveal ‘distribution dreams’
American Airlines
Delta Air Lines
United
Not a good time to reduce distribution costs
Continental more conciliatory
Travelport sees no change
Agency commissions eliminated in Japan
American, NWA and Air France/KLM already at 0% commissions
A major consolidation in the offing
Meanwhile some carriers are willing to raise commissions
Emirates doubles commissions on incremental sales
BCD sees commissions making a comeback
BA offering agents incentives once again
FREQUENT FLYER PROGRAMMES
 TOTAL MEMBERSHIP APPROACHING HALF A BILLION
Figure 45: Airline loyalty programme membership figures, 2006-09*
Many travellers belong to more than one programme
Figure 46: Travel programme snapshot, February 2009
Similar structure with some differences
Figure 47: A comparison of airline frequent flyer programmes, 2008
Original loyalty programmes were straightforward
Credit card companies as intermediaries
Awards far outpacing capacity growth
Declining value of air miles
Customers want more options
But the downturn has produced a counter trend
FFPs have been lucrative assets for the airlines
Decreasing value of miles puts business model at risk
Airlines considering spin-offs of FFP
Airline options to maintain their FFPs
Flight rewards
Non-flight rewards
SECURITY AND SAFETY
 ‘SECURE’ FLIGHTS CAUSING HEADACHES
All airlines to be in compliance by the end of 2010
Airlines will depend on travel agents
GDSs are under time pressure to comply
Travel agencies to follow GDS structure
Four airlines already handed over to the TSA
Airlines will have to transmit passenger data within 72 hours
Whole-body scans to be implemented in US airports
Contracts to be awarded in summer of 2009
A positive side – limits on liquids could be removed
Disagreement about efficiency
IATA’s safety programme
The IATA Operational Safety Audit
Now compulsory for IATA member carriers
ISAGO for ground operations
Air travel’s safety record improves
Figure 49: Worldwide airline accidents of IATA and non-IATA airlines, 2004-09*
Figure 50: Hull loss rate*, 1999-2008
Some major regional differences
Figure 51: Western-built jet hull losses per million flights, 2005-08
Most accidents involve little-known carriers
Figure 52: Western-built jet hull losses, 2008
EU bans Thai, Ukraine, Kazakhstan, Benin Airlines
ENVIRONMENTAL ISSUES
 EMISSIONS CONTROL AND ENERGY CONSERVATION
High-altitude NOx emissions
Carbon monoxide emissions reduced by 50%
A 70% increase in fuel efficiency
 GLOBAL AVIATION ENVIRONMENTAL STANDARDS
CAEP structure and functioning
Few concrete results
No stricter standards before 2015-20
Airport standards regulated locally
 EU EMISSIONS TRADING SCHEME
Timetable for 2009
Rapid growth in Eastern Europe
Carbon allowances
Still higher prices needed
Airlines may be faced with high prices by 2012
WHAT NEXT?
 OUTLOOK FOR THE PRESENT CRISIS’ IMPACT ON THE INDUSTRY
Load factors drop as passenger demand falls – freight stabilises
Passenger transport
Cargo
Figure 53: Trend in supply and demand growth in the air transport industry, by region, March 2009
Figure 54: Trend in supply and demand growth in the air transport industry, by region, YTD* March 2009
 MORE MERGERS NEEDED
Governmental authorities stepping in
 IMPACT OF FURTHER ENVIRONMENTAL RESTRICTIONS
Long haul reserved for an elite?
Optimism that a solution may be found
Continuous descent
Why are all airports not doing it?
New fuels – the way forward?
Seaweed?
Airlines getting on board
Other biofuels
 LCCS GO LONG HAUL?
Southwest dipping its toe in the water
Overseas not on the agenda yet...
AirAsia X flying long haul since 2007
Kuala Lumpur to London
25 A330-300s on order
Ryanair to the US?
Dublin to Long Island?
Plans delayed by the recession
Waiting to pick up a cheap fleet
Can it succeed where others have failed?
Zoom to be revived?

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