Airline Leader - Issue 17

gLOBAL AVIATION OUTLOOK 2013Pursuing certainty in an uncertain world

Airline leAder

Issue 17 | apr-May 2013

THE STRATEGY JOURNAL FOR AIRLINE CEOS

AIRLINE LEADER | APR-MAY 2013 3

Global AviationIndustry Outlook 2013: The perennial gale

Our aim is to make a difference

The impacT of consTanTly sTormy weaTher in The aviaTion indusTry must seem to many airline executives and indeed all employees like living life inside a washing machine.

For an industry that is so intimately connected to every aspect of daily living, from the macro-economic effects on consumer demand to the social whims of individual lifestyles, this constant reinvention is hardly a surprise, as the world undergoes a transformation in many ways unprecedented.

For aviation though there is another imperative: reinventing a regulatory structure whose roots are still firmly planted in the protectionist ideals of decades ago. Disruption is an essential part of that process. Steep inroads are being made into shifting those foundations, stripping away layers of protectionism; but they are not happening uniformly, nor do they have any clear grand plan. They are messy and hard to adjust to.

Consequently, to use the often-quoted Joseph Schumpeters words, the perennial gale, of creative destruction must often appear to consist entirely of destruction, at least to those at the heart of the established system. The creation is happening somewhere else, or so it often seems.

According to Professor Schumpeter it was this process of industrial mutationthat incessantly revolutionises the economic structure from within, incessantly destroying the old one, incessantly creating a new one.

Where it doesnt happen from within and there are enormous inertial forces within the airline industry the impact of having change imposed from outside can be even more painful. That pain has not been manifest until recently. Despite numerous discussions about failed airlines, the reality still is that very few legacy airlines have gone to the wall.

In the US the process of destruction and recreation has been muted by the half-death of Chapter 11 reinvention. The result has been to create some very large organisations, reducing competition and perhaps only temporarily giving them a road to profitability; yet underneath not a lot seems to have changed. In Europe, where national airlines (backed by the usual nationalism) abound, the EUs relatively doctrinaire

approach to competition is gradually sorting out the least efficient, as LCCs cut a swathe through short-haul economics of the industry. But it is a very slow process, where the exceptions prove the rule. Although a number of non-flag carrier airlines have disappeared, only a handful of national airlines has gone, sometimes re-emerging under different brands. Such are the lingering forces of the old system.

In Latin America, previously a bastion of protectionism, merger has become prevalent, now creating some powerful airline groupings, led by LATAM, although some markets in Central America particularly have been through the washing machine.

It is in Asia, where growth abounds (and competition law and organised labour impacts can be sparse), that the greatest inroads are being made, often apparently careless of the old norms establishing cross-border joint ventures, whose only role is to undermine antediluvian ownership restrictions, creating low-cost subsidiaries and generally adopting much more pragmatic approaches to the future. Most of the older flag carriers still persist, but like elsewhere in the world, their growth prospects are constrained. Yet they are in most cases adapting to take a role in the new world through their subsidiary low-cost operations.

2012 was in many ways a watershed in terms of long-haul alliance mutation and as low cost airlines and others sought to hybridise and adapt to their ecology; 2013 promises more surprises both operationally and around the margins, where the airline product is sold.

This edition of CAPAs Airline Leader offers some thoughts on the global outlook for 2013 and beyond, with creative and sometimes destructive input from our team of analysts.

Peter HarbisonExEcutivE chairmancaPa cEntrE for aviation

4 AIRLINE LEADER | APR-MAY 2013

ContentsAPR MAY 2013

12 MAIN FeAtuRePursuing certainty in an uncertain worldUncertainty has become the new normal and risk reduction takes on a high priority for many airlines as Europes economy stutters and the US struggles for traction.

28 SoutheASt ASIA Southeast Asia continues to be a region of rapid growth driven by low-cost carriers, including budget subsidiaries and affiliates of full-service carriers.

34 South ASIAIndian aviation is seeing signs of revival after another difficult year marked by continuing losses, a 3% decline in traffic and the exit of Kingfisher.

40 South PAcIFIcSouth Pacific carriers are emerging from a period of rebuilding their long-haul networks as they direct their focus to Asia and Pacific Rim.

46 NoRth ASIANorth Asia is one of few regions where most full-service airlines are growing capacity. But the carriers are now looking to complement their expansion drive with definition.

52 MIDDLe eAStEven for a region as fast developing as the Middle East, few years could match the changes wrought during 2012.

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6 Doing more with less through Big Data and Advanced AnalyticsLeading airlines have always managed to face challenges by using resources innovatively to do more with less.

58 AfRicAAfrica is poised to be the next growth story for aviation as the world turns to the continents bountiful resources, ranging from minerals to oil and water.

64 eASTeRN eUROPeEastern Europe continues to be a very active region in commercial aviation, with a number of developments in 2012 indicating the ever-unpredictable transformation of the regions aviation industry.

68 weSTeRN eUROPeThe European airline market has a number of dividing lines. There is little growth on routes within the continent, but steady growth on long-haul.

74 NORTh AMeRicANorth America is on the brink of reaching full maturity thanks to the planned merger between American and US Airways and the previous tie-ups among the countrys airlines.

80 LATiN AMeRicALatin America has been a market characterised over the last decade by rapid growth, consolidation and significantly improved profitability.

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Opinion

Airline Leader is published 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 email [email protected]. Airline Leader Pty Ltd. Airline Leader is printed in Singapore by Times Printers.

EDitOr: Peter Harbison | MAnAging EDitOr: Susan tran | DESign: Jenny Chen | SuBEDitOrS: Corinne Hitching and neha nagpalSEniOr AnAlyStS: ASEAn and latin America: Brendan Sobie; Australasia and Africa: roeland van den Bergh; Europe: Jonathan Wober; Middle East: Simon Elsegood; north America: lori ranson; north Asia: Will Horton; South Asia: liz Pinczewski DAtA: Head of Aviation Data research: Sharon Dai; Data research: Janet Kim ADvErtiSing: neisha turner, email: [email protected]


OPINION

OPINION By Nawal TaNeja

Doing more with less through Big Data and Advanced Analytics


Leading airLines have aLways managed to face chaLLenges by using resources innovatively to do more with less. Here are some examples from the last 30 years:

In the early 1980s, faced with growing competition from low-cost airlines, American Airlines figured out how to carry more passengers at lower (more competitive) fares. Resources used were the information contained in the PNR records and advanced analytical techniques, known, at the time, as yield management.

In the 1990s, Northwest and KLM lacked the scale and favourable hubs to compete with the larger carriers both sides of the Atlantic. By developing the first innovative strategic alliance, they laid groundwork to carry more traffic through their smaller hubs.

In the 1990s, United led a campaign to build the case for e-tickets. Even though it was a multi-year plan, e-tickets enabled more revenue power, more control over distribution with lower expense and lower distribution lead time. E-ticketing enabled airlines to

create more competitive products from last-minute low-fare email specials, to self-service check-in, to ancillary revenues, which all involved less cost and less distribution lead-time.

In 2012, Qantas, faced with increasing competition from the relatively new three full-service UAE-based carriers, developed a game-changing relationship with Emirates to serve multiple destinations in Europe, Middle East and Africa with less ultra long-haul aircraft.

For all these cases, competitive data, advanced network fleet, and schedule planning techniques were used to totally overhaul the networks to achieve more market share with less flying.

why do airlines need to do more with less, again now?

First, with average load factors running in the 85% zone, aircraft are really full now. Consequently, if more passengers cannot be accommodated within existing capacity, then airlines need to figure out how to get more revenue per seat.

Second, given the increase in competition, be it in long-haul markets from the Gulf-based airlines or in the new regional markets from lower cost subsidiaries, airlines need to figure out how to capture more premium fare paying passengers with less relative market presence.

how can airlines face these challenges?

By going beyond the transactional data that they have used up to this point, with behavioural data, they can take advantage of the early stages of customers planning cycles to become more proactive...

OPINION


sources of data, such as social media, support customer sentiment analysis to extract feelings, trends, etc social intelligence at the point they are occurring. If an airline takes months to analyse the data, then it will most likely be too late, for example, to implement service recovery.

New Culture

Besides the acquisition and use of Big Data, airlines will need to change culture (just as they did with the use of yield management and e-ticketing) and (1) build organisations around the new imperatives of information and analytics (including the deployment of IT staff with knowledge of businesses), and (2) design processes to maximise the value from information (faster competitors and in a more repeatable fashion than competitors).

With respect to the organisation, an airline must shift the IT function from a data collection and report production centre to one that facilitates collaboration, communication and integration within all areas of the airline. Such a shift requires a different mindset, a different set of skills, and an appropriate data-related architecture. One challenge for becoming a data-driven airline, even more than the investment in technology, is the change in culture needed to acquire and retain people with the appropriate skills as well as the identification and implementation of the appropriate processes. Many airlines already possess a lot of data (although disintegrated) and traditional analytical tools. Some have even invested in data warehousing products. However, they have not fully leveraged big data and advanced

New Data

Airlines should recognise the potential of extracting more value from their data. By going beyond the transactional data that they have used up to this point, with behavioural data, they can take advantage of the early stages of customers planning cycles to become more proactive (1) in increasing the value of current valuable customers (by delivering better experience and generating higher levels of ancillary revenue), (2) in acquiring new valuable customers (by identifying customer behaviours indicative of high value), and (3) in warding off the defection of valuable customers (again, by identifying behaviour indicative of defection and by taking appropriate action prior to defection).

Generally speaking, big data can include transactional data from traditional sources (such as PNRs, FFPs, CRM), and unstructured data derived from newer sources (such as blogs, clicks on websites, emails, posts, sensors, tweets, videos, even voice data). Given that the majority of the new data is unstructured, traditional data tools and analysis, even though they have been used creatively by leading airlines, are now inadequate to handle the quantity, nature, or the speed at which the data is appearing. In this new environment, airlines need to focus their organisations, people and processes on the following activities:

Monitoring and collecting Identifying, interpreting,

predicting and anticipating Taking smart and timely actions Measuring and reiterating

Assuming that an airline has created the environment to collect and discover their data, next steps include identifying influencers and trends and responding to them, all in real time and on a continual basis. New

2

One challenge for becoming a data-driven airline, even more than the investment in technology, is the change in culture needed to acquire and retain people with the appropriate skills...

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OPINION


developed low-cost subsidiaries that they closed later due to cannibalisation of traffic. Big data and advanced analytics can now be used to simulate the proposed value propositions of each subsidiary of an airline and not only anticipate and predict the response, but also optimise the different value propositions. Imagine the value of customer-related information for an airline like Singapore with four proposed subsidiaries (Singapore, Silk, Tiger and Scoot) or to Delta with equities in a growing number of airlines (such as Gol, Aeromexico and Virgin Atlantic).

New Analytics

Big data and advanced analytics offer many opportunities for airlines to create value, including finer customer segmentation, thus yielding more personalised products and services to accommodate the needs of not only a single behaviour of a

analytics to (1) customise their value propositions with respect to the value provided to a customer and the value received from a customer, and (2) equip their customer-facing employees with the quantity, quality and timelessness of information to provide a personalised customer experience.

Such a culture demands a holistic approach knowing what happened in the past, what is happening in real time and a desire to anticipate what could happen by becoming more proactive in providing options and solutions. For example:

Three different departments could be working with a particular passenger (lost baggage, refund and loyalty) and yet not know that it is the same passenger. Consequently, connecting data from different areas to create a full view of this passenger may indicate future behaviour, such as defection. The use of advanced analytics would enable management to anticipate such a scenario and take appropriate action.

Big data and advanced analytics can be used to integrate previously disintegrated brands. For example, many airlines

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...companies in the top third of their industry in the use of data-driven decision making were, on average, 5% more productive and 6% more profitable than their competitors.

Three different departments could be working with a particular passenger (lost baggage, refund, and loyalty) and yet not know that it is the same passenger.


customer, but multiple behaviours of the same customer.

Airlines cannot only leverage big data and advanced analytics to derive deeper insights for passengers, but also for competitors. For example, instead of just monitoring fares offered by competitors (and often simply matching them), they need to gain insights with respect to the rationale behind the fares offered by each competitor in real time and simulate different scenarios for an optimal response. The last step would require measurements, reviews and constant iterations.

Airlines can use big data to substantially improve both customer and operational processes. A recent example is PASSUR Aerospaces RightETA which leverages multidimensional data to provide airlines more accurate predictions of estimated flight arrival times verses actual arrival times. Such a data-driven tool is integral to the airline industry where every minute matters.

As Josh Leibowitz, Kelly Ungerman and Maher Masri stated in a recent Harvard Business Review Blog Network regarding the retail industry, Research shows that personalisation

can deliver five to eight times the ROI on marketing spend and lift sales 10% or more. Such personalisation can differentiate an airline and therefore create an opportunity to increase margins, as well as enhance satisfaction, therefore augmenting loyalty to the brand. For example, if a customer places a phone call into an airlines call centre but does not make a reservation, or if a customer browses a website but does not book a ticket, would making a personalised offer right on the spot help? Such tactics can be easily analysed on a controlled-experimental basis. The key is to monitor the behaviour of a web browser prior to the decision to make a purchase.

In the final analysis, airlines can leverage existing but underutilised behavioural data to become data-driven organisations. As Andrew McAfee and Erik Brynjolfsson stated in a recent article in Harvard Business Review, companies in the top third of their industry in the use of data-driven decision making were, on average, 5% more productive and 6% more profitable than their competitors.

Thats more profit with less resources. AL

...Airlines can leverage existing but underutilised behavioural data to become data-driven organisations.

Research shows that personalisation can deliver five to eight times the ROI on marketing spend and lift sales 10% or more.

HARvARd BusIness RevIew BlOg netwORk

Pursuing certaintyin an uncertain worlda compelling, but ultimately dangerous strategy

caPa global aviationindustry outlook 2013

MAIN FEATURE


Three main themes stand out for CAPAs 2013 Aviation Industry Outlook:

Uncertainty has become the new normal and risk reduction takes on a high priority for many airlines as Europes economy stutters and the US struggles for traction

The Gulf carriers have changed the world, seemingly impervious to the pressures of most other airlines

Asia is rising particularly China and will dominate within five years. The impact may be greater and more rapid than forecasts suggest. Some of the aviation industries of fast economic growth nations, in Latin America, Eastern Europe, India and Africa are performing well , but need to consolidate their base.

Uncertainty has become the new normal and risk reduction takes on a high priority for many airlines as Europes economy stutters and the US struggles for traction.

Over recent months, certain words frequently recur in airline reports to describe their outlook for the market: challenging, volatile, uncertainty are among the most popular. These are understandably in turn accompanied by corporate goals of enhancing the financial position and paying down debt, aligning capacity to demand, reducing costs and adopting more conservative fuel hedging positions, among others.

In these conditions, it is hard for a company to avoid adopting behaviour which is much more cautious and short-term reactive. Analysts and shareholders want restraint, in turn influencing share prices; executives, motivated by incentives issued by their boards, want to achieve share price targets; and in many ways the market simply leaves little option but to follow the herd.

Yet, aside from the lookalike profiles being created in this way, there are real dangers where all companies in an industry adopt the same approach.

This is a global market undergoing transformation, even turmoil, as age old norms are challenged, as the earths aviation axis shifts eastwards and as the apparent stability of the global alliances is threatened.

Change on this scale spells threats, but it also opens up new opportunities, often one-off openings. And as the established airlines line up to follow suit by being more conservative, it is the new breed, lower cost, aggressively expansive, that are moving to centre stage.

The result to embed the process of decline even more rapidly for those legacy airlines unable or unwilling to be innovative. It will not lead to overnight collapse of the old regime, but it does risk locking in that progressive erosion of an earlier pre-eminence.

MAIN FEATURE


RANk AIRLINE totAL SEAtS

1 AtL Atlanta Hartsfield-Jackson International Airport 2,183,726

2 PEk Beijing Capital International Airport 2,068,130

3 HND tokyo Haneda Airport 1,887,497

4 LHR London Heathrow Airport 1,774,606

5 DXB Dubai International Airport 1,639,176

6 oRD Chicago o'Hare International Airport 1,534,449

7 LAX Los Angeles International Airport 1,491,895

8 DFW Dallas/Fort Worth International Airport 1,445,441

9 HkG Hong kong International Airport 1,440,997

10 CDG Paris Charles De Gaulle Airport 1,421,231

11 CGk Jakarta Soekarno-Hatta International Airport 1,400,299

12 FRA Frankfurt Airport 1,394,143

13 SIN Singapore Changi Airport 1,371,158

14 Bkk Bangkok Suvarnabhumi International 1,237,778

15 CAN Guangzhou Baiyun Airport 1,225,526

16 DEN Denver International Airport 1,176,220

17 JFk New York John F kennedy International Airport 1,172,450

18 PVG Shanghai Pudong Airport 1,154,933

19 kUL kuala Lumpur International Airport 1,134,217

20 ISt Istanbul Ataturk Airport 1,125,132

REGIoN SEAtS AVAILABLE SEAt kILomEtRES

Western Europe

24,289,259 46,788,764,439

North America

22,751,781 48,734,439,761

Northeast Asia

18,416,472 34,868,645,952

Southeast Asia

9,188,309 18,617,231,378

Eastern/Cen-tral Europe

6,234,640 10,537,283,992

middle East 5,832,132 15,958,294,027

Upper South America

4,763,997 7,701,389,819

REGIoN SEAtS AVAILABLE SEAt kILomEtRES

South Asia 3,531,719 6,952,994,901

Southwest Pacific

3,132,490 8,479,659,891

Central America

2,260,845 4,342,776,504

North Africa

1,443,549 2,713,132,154

Caribbean 1,226,240 3,012,343,498

Lower South America

1,048,939 2,546,230,465

Southern Africa

953,966 2,936,401,340

tHE WoRLDS REGIoNS BY CAPACItY oFFEREDSOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | WEEk STARTINg 31-MAR-2013

tHE WoRLDS toP 20 AIRPoRtS BY CAPACItY oFFEREDSOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA WEEk STARTINg 31-MAR-2013

tHE WoRLD toP 20 AIRLINES BY SEAtS oFFEREDSOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA WEEk STARTINg 31-MAR-2013

RANk AIRLINEtotAL SEAtS

1 DL Delta Air Lines 3,802,004

2 UA United Airlines 3,416,483

3 WN Southwest Airlines 3,170,990

4 AA American Airlines 2,789,021

5 US US Airways 2,199,479

6 CZ China Southern Airlines 1,773,387

7 LH Lufthansa 1,745,538

8 mU China Eastern Airlines 1,639,682

9 FR Ryanair 1,610,091

10 NH All Nippon Airways 1,498,216

11 AF Air France 1,344,527

12 CA Air China 1,307,969

13 U2 easyJet 1,200,528

14 BA British Airways 1,104,228

15 Ek Emirates 1,093,811

16 G3 Gol 1,089,278

17 tk turkish Airlines 983,611

18 JJ tAm Airlines 965,854

19 JL Japan Airlines 962,136

20 AC Air Canada 916,517

21 Jt Lion Air 856,932

22 QF Qantas Airways 775,580

23 B6 JetBlue Airways 725,700

24 Sk SAS 703,817

25 LA LAN Airlines 680,384

26 AS Alaska Airlines 670,537

27 AB airberlin 613,250

28 kE korean Air 591,357

29 kLkLm Royal Dutch Airlines

589,216

30 SV Saudia 588,548


BRENt CRuDE pRICEs, MAR-2012 to MAR-2013 (usD) SOURCE: Oil-PRiCE.nEt

as underlying ticket prices are discounted, surcharges do little more than help avoid agency commissions.

But either a fuel price spike or another grind upwards will create great discomfort for airlines, progressively squeezing them to reduce capacity on marginally profitable routes or to withdraw completely. Whereas in the past full-service airlines may well have persisted with ailing routes, todays heightened levels of competition are prompting a greater focus on the short term bottom line. The long term has become a luxury few airlines can afford.

(b) The economy:Some observers, talking of global commercial influence, have suggested

that Europe is the past, the US the present and Asia the future. This is a sweeping assessment, but there are grains of truth, as Europes economy looks firmly rooted in debt for at least several years; the US, still a massive aviation market, appears to be forging a shaky recovery, albeit heavily founded on debt and with a political melange more appropriate to a fairground.

Asia meanwhile is robust and gearing up for a bigger future, even faced with a slack global economy.

Europes economic uncertainty however still contains unknowns that threaten to re-emerge. Austerity is not something that the powerful and varied underlying social forces in Europe are prepared to tolerate for extended periods. And, to continue to kick the can down the road, hoping that things will eventually get better is a journey into the unknown. Waiting for time to heal the wounds may even aggravate the initial hurt.

Whatever the case, there are many potential flash points, with major banks erecting barriers to protect themselves from shocks one downstream effect being to make funding and financing more difficult.

At the IATA AGM in 2012, a straw poll of airline CEOs on what kept them awake at night indicated overwhelmingly that fuel prices and the economy each non-controllable were the two leading concerns, followed closely by over-capacity.

The dangerous news is that there are considerable and potentially growing problems in each of these two leading concerns.

Fuel prices have fastened at levels they were at when passenger demand was strong; today it is much weaker. The fact that price increases have been steady was important, avoiding the sort of quick and highly disruptive spike that occurred in 2008.

The industry has managed to adjust to the increases, but often at the price of profitability, where fuel accounts typically for around 30-40% of airline costs.

Todays heightened levels of competition are prompting a greater focus on the short term bottom line. The long term has become a luxury few airlines can afford.

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The ingredients of this uncertain world are not hard to isolate:

(i) the most significant are external risks. these are uncontrollable and are potentially the most serious:

a) the threat of rising fuel prices: b) A weak economy, undermining demand: andc) the (regular) black swansthere are others, but the double of fuel (cost) and weak

demand (revenue) are, by a large margin, the two leading things that keep most CEOs awake at night at least according to a straw poll at the 2012 iAtA AGM. they are the more worrying because they are effectively outside the scope of management to control.

(a) Fuel: Over a year ago, prices climbed to and

remained stubbornly around USD100 a barrel for Brent Crude and this despite a soft international economy and relatively weak demand for oil. According to BP.com, OECD consumption actually declined by 1.2% in 2012 to the lowest level since 1995, but overall global consumption grew marginally, by 0.7%.

Uncertainty in certain politically unstable areas of the Middle East is one factor that is keeping buyers (and speculators) nervous. Instability is not unusual for the region, but there are more potential flash points than usual, as the Syrian crisis is exported and the backwash of the Arab Spring ricochets around various countries.

Most expectations are for fuel prices to remain around current levels for 2013 a relatively positive scenario, given the many variables. Almost no-one is projecting a fall. Fuel surcharges have provided partial refuge to airlines, but these can only be supported against a relatively healthy economic background; also,

MAIN FEATURE


The adjustment has been painful, but possible. Capacity management and higher load factors, usually combined with higher yields, have often made continued profitability possible. This has been against a background of surprisingly strong considering economic fundamentals business sentiment.

However as that skin is stretched further, the ability to withstand further fuel price increases diminishes rapidly.

Where profitability depends on static capacity combined with higher load factors and yields (and a bit of non-fuel cost reduction), any decline in demand offers few levers left for airline managers to pull.

Once economic winds stiffen, so yields soften and the cost/revenue margin diminishes or disappears.

Cost reduction in areas where there is some control over it is an obvious place to go. There are few airlines which do not have a continuing, often brand-name catch phrase, programme to cut costs out of their businesses.

For full-service, legacy airlines, that is necessary merely to keep pace with peers; it cannot significantly narrow the margin between theirs and LCC levels (unless those LCCs are hybridising, adding costs in pursuit of higher yield traffic).

Frustratingly, the proportion of costs now dedicated to fuel barely makes non-fuel cost reduction worth the effort. If so much pain is expended on reducing the residue of costs by 3% or 4% (which translates

RISK

Fuel prices

Slow economicgrowth

High taxes

Over capacityLabour costs

PROBABILITY

to perhaps 2% of total), the fact that a short burst in fuel prices of USD5 a barrel can neutralise that improvement is disheartening to management and staff alike.

Similar problems are arising as governments actively soften their currencies by printing money. In the year to Mar-2013, the USD-euro rate has fluctuated between USD1.20 and USD1.36; the Irish dont call the euro the yoyo for no reason. Such shifts too must be covered and accounted for.

Investors meanwhile vote with their feet. No airlines treasury can today afford to front analysts without a carefully worded strategy that involves very careful capital exposure and a handy cash balance.

In short, the industry has been forced to improve its risk management profile.

As airlines pull all the levers, only capacity reduction remains as an option to protect against losses.

Where profitability depends on static capacity combined with higher load factors and yields (and a bit of non-fuel cost reduction), any decline in demand offers few levers left for airline managers to pull.

Pulling all the leversMost legacy airlines are actively applying

all of these strategies - leaving little room for further policy adjustment if economic conditions

deteriorate

action risk covered

Hoard cash Slower economy

Tight capacity control Competition/slow economy

Increase load factor Downward yield pressure

Increase yields Revenue erosion

Exploit ancillary sales Fare weakness

Strengthen partnerships Market isolation/competition

Lease, not buy/sale and leaseback Debt commitments

Hedge fuel and currency Short term uncertainty avoidance

Fuel surcharges Offset fuel price rises

Most legacy airlines are actively applying all of these strategies - leaving little room for further policy

adjustment

VIAbILIty thREAts AccoRDINg to IAtA cEos 2012 SOuRCE: CAPA CEnTRE FOR AvIATIOn (PRObAbILITY ASSESSMEnT bY CAPA)


(c) and then there are the black swans: Despite their supposed diffidence, so called black swans, or one-off

unpredictable events, tend to plague the airline industry, a consequence of its pervasive and, in reverse, equally pervaded nature. Very little happens in the world that does not affect airline operations in one way or another.

And because it genuinely is an airline system, a volcano in Iceland can play havoc with an airline in Australia, disrupting its schedules, stranding passengers all around the world. Anything from pandemic in China or Mexico, to terrorist threat in the US, to snowstorms in London, to the iconic butterfly in Brazil, can disrupt a complex assortment of personal and commercial interactions.

Despite their surprise value, there can be little more certain than that there will be more black swans or what, in the wake of Chinas 2003 SARS near-pandemic (severe acute respiratory syndrome, which quickly spread through Asia and to Canada), CAPA once named the Constant Shock Syndrome. Just one more reason for airlines to keep their stocks of nuts topped up.

The regulatory system is opening up new avenues of competition so that old market responses (chasing market share, discount pricing, adding seats etc) do not provide lasting solutions.

For many airlines, change is more obdurate and more difficult to deal with. It is invisible, but everywhere. Older airlines are heavily constrained by legacy issues; SAS for example last year had to obtain the approval not only of its unions but also of its three government owners to introduce large cost savings. For them, the ability to be innovative and flexible crucial attributes in a volatile market is near impossible.

Archaic regulation, with its rigid controls on ownership and entry, has also, paradoxically, made the industry artificially competitive; thats because inherent in the controls is a restraint on market exit. Aside from constraints against mergers, this no-exit effect is not typically explicit, but manifests itself in subsidy and other more subtle forms of protectionist support.

The result is there are too many airlines and they cant merge. And, despite a handful of bankruptcies and exits, there are still many protective barriers to support seriously ailing flag carriers. The corollary of this should be that as regulation is removed, formally or tacitly, the level of competition is likely to diminish, at least in the mature markets and for the mature airlines.

The legacy airlines are responding, typically by not expanding. 2013 is the Chinese year of the water snake. An important feature of the snakes year is saving money and being thrifty and ... in order to gain the greatest benefits from this year, you must control spending and use your talents wisely.

Airlines have only a limited capability to protect themselves against rising fuel prices. Hedging costs money and is really no more than a risk reduction strategy, a partial and temporary safety net. So, though many will have perhaps a third to a half of their fuel demand hedged for a year or even two, it is no longer realistically possible to buy a long term insurance policy that will protect comprehensively against the threat of prolonged price increases.

Meanwhile, if oil prices were to increase another USD30, there is a real prospect that airlines will extensively reduce flying, with long-haul operations the most sensitive. Contingency route reduction plans are in place at most airlines or they should be. There are few options left.

In todays more intensely competitive, price-competitive market, managements have become much more clinical in analysing marginal or loss-making routes, allowing selective capacity cuts: reduced frequency where possible, or complete route withdrawal where necessary, can occur quickly, as soon as bleeding begins.

Given the stretch that airlines are already feeling, there is little space for absorbing more pain. If oil prices were in fact to increase to USD130, it is not hard to envisage as much as 15-20% reductions in long-haul seat offerings. This would not be evenly applied; route yield profile will be a main determinant, with the first to go the predominantly leisure routes.

Changes on that scale could be devastating to some tourism-based economies that are heavily reliant on long-haul origin markets. Eventually, lower cost airline models might fill the breach in these markets, but there is no clear evidence yet that long-haul low-cost operations are effective beyond nine hours flying time. At that stage, fuel becomes such a high proportion of cost that differentials in other cost areas pale.

There are exceptions to the pain scenario. Short-haul airlines with markedly lower costs LCCs and others have expanded and even flourished while the full-service airlines have stood still; on long-haul, the Gulf airlines are growing as fast as any airlines in history and, with their yield profile are probably best equipped to handle any such headwinds.

If oil prices were in fact to increase to USD130, it is not hard to envisage as much as 15-20% reductions in long haul seat offerings.

MAIN FEATURE


25%

No LoNgER AN IDENtIfIER: AvERAgE LoAD fActoRs of sELEctED mAjoR AIRLINEsSouRce: cAPA centRe foR AviAtion

Sideshows to this strategy, also aimed at yield enhancement, are:

attempts to grow ancillary revenues. Thus for example, revenue from the baggage charges that US legacy airlines added in recent years have been larger than their aggregated profits. This unbundling of pricing, learned from LCCs in a different context, is spreading quietly across the world;

recapturing control of distribution, designed to allow airlines to regain control of marketing from the GDSs and OTAs,

So the second major response by established carriers, after stocking up on cash, is to hold capacity levels down, hoping better to match with demand and thereby to improve yields.

In the US for example, the main legacy carriers, and the even bigger Southwest Airlines, have applied capacity restraint ever since the global financial crisis hit the thesis being that they would not sell seats which did not cover the cost of fuel. Raymond James estimates the prototype LCC Southwests fares have risen by about 25% during that time, very much in line with the full-service airlines.

Capacity management and higher load factors, usually combined with higher yields, have in many cases and notably in the less competitive US market, thus helped make continued profitability possible.

The result is that legacy airlines have also pushed towards higher load factors, to the extent that this is no longer a distinguishing factor between old and new (seating configurations still tend to be much denser on the newer cost-sensitive airlines, delivering lower unit seat costs - but lower average yields).

An important feature of the snakes year is saving money and being thrifty and ... in order to gain the greatest benefits from this year, you must control spending and use your talents wisely.

2010

100%

75%

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0%2011

Delta Air Lines Inc.

Air France-KLM S.A Emirates

AirAsia Ryanair

2012

Jan-07

Jul-07

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8

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9

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The premium traffic declineThe yield profile of passengers has changed, influencing whole range of airline

strategic reactions. What appears to be a long term reduction in the proportion of premium travel is shifting not only attitudes towards aircraft configuration with many airlines reducing business and first class seating, adding premium economy and generally reorganising their real estate but also affects route profiles, on those sectors where premium is more significantly reduced.

in turn this raises the propensity on those routes for speedy withdrawal or frequency reduction.

A reduction from around 9.5% of total to around 8% may not seem a major issue for airlines, but this represents some 15% of premium traffic and a much higher proportion of global revenues.

pREmIum pAssENgERs As A % of totALSouRce: iAtA

The amounT SouThweSTS fareS ThaT have riSen Since The Gfc


65%

with the intention of de-commoditising the airline product (ie allowing more effective price/product discrimination and yield management, rather than merely selling based on price).

There is still upside for many in the ancillary expansion, but the distribution battle, now made further engaging by the introduction by IATA of its New Distribution Capability (NDC), has a more doubtful future, encountering opposition from corporate groups in particular.

As A consequence of this cApAcity restrAint, the new growth is mostly from new Airlines. Nowhere is the contrast between old and new more stark than in Asia and the Middle East; here full-service airlines are suffering from similar forces as their global peers. And their responses are in many ways similar: conservative capacity restraint and strategic route pull-backs, along with reshaping aircraft configuration thinking.

2010

30%

20%

10%

0%

-10%2011

Delta Air Lines Inc.

Air France-KLM S.A Emirates

AirAsia Ryanair

2012

Etihad Airways

by Japan Airlines ( Jetstar Japan) whose names also betray the parallel development in the region, which is for the leading low-cost carriers to establish cross-border JVs.

The only high profile network airline to resist this trend is Cathay Pacific and it is seemingly only a matter of time before it finally concedes, as two new LCCs are planned for establishment at Hong Kong Airport, one of them another Jetstar subsidiary JV, daughter of Cathays arch-rival Qantas.

Aside from these subsidiaries and JVs, it is the regions LCCs that are reaching for the stars, with mind-boggling order lists. The listed AirAsia Group has a modest 387 Airbus aircraft on order; Indonesias privately held Lion Air has 563 orders, for Airbus and Boeings; Indias IndiGo has 203, to name but three, accounting for over 1,100 between the three. All Western European airlines in aggregate have a smaller order book.

Now, as European majors struggle with too-high costs on their short-haul spokes, they too have resorted to attempting a similar form of subsidiary operation, at least in operational terms.

new pArtnerships, globAl AlliAnces And cross-border ownership Are chAnging trAffic flows And hubs. This global shift was dealt with in some detail in the Feb-Mar 2013 edition of Airline Leader (A seismic upheaval opens the way for next-generation alliances). The impact of the Emirates, Qatar and Etihad agreements in Sep/Oct-2012 have irreversibly altered the evolution of the world industry.

Branded global alliances Star, SkyTeam, oneworld remain important, but the evolutionary direction has shifted towards alliances becoming much more pragmatic. This not only affects the airline industry, but goes also to the efficacy of airports and even national economies. Airport hubs will be dictated by these trends, shifting away from the traditional gateway transfer points to Gulf airports and, progressively to markets like China.

As these changes are digested and their repercussions spread in 2013, the global map will look increasingly different, especially as new radial alliances take on more entrenched status, delivering enhanced profitability.

In this evolution, on current trends US airlines look very likely to be sidelined, raising questions, for one thing, on their likely value as international partners in the global alliances beyond providing access to the protected US domestic market.

Boeings long term forecasts, which have a habit of being remarkably reliable, have Asia-Pacific, Europe, and the Middle East regions accounting for more than 90% of widebody, long-haul aircraft demand in the 20-year forecast to 2031. Of the total, an astonishing 65% of aircraft will head to the Middle East and Asia alone. (Boeing Current Market Outlook 2012)

pAssENgERs % INcREAsE: LEgAcIEs stAND stILLSOuRCe: CAPA CentRe fOR AviAtiOn

percentage of widebody orders to 2031 destined to asia and the Middle east

There is one big difference in Asia though. There, a common legacy airline response is to establish a low-cost subsidiary or two to account for the parsimony market. In 2012, three new subsidiary/joint venture LCCs were established in the high cost/high yield Japanese market alone.

Two of them are part owned by All Nippon Airways (Peach and AirAsia Japan) and one

MAIN FEATURE


A sNApshot of thE futuRE: whERE tomoRRows AIRcRAft ARE goINg

The countries whose airlines industries are growing faster and the ones that are buying aircraft for the long-haul international markets.

The graphs on these two pages illustrate broadly the direction of various national industries in the next two years and beyond.

It can be no more than a general direction, as orders change, especially beyond 2014 and because a third of all aircraft operated by airlines are through lessors, where these data address only direct manufacturer orders and delivery dates.

Certain features emerge clearly in focus however: The new aviation countries are expanding exponentially faster

than the established world, whose orders often suggest little more than replacement; the US for example has a very elderly fleet, which is increasingly sensitive both to fuel costs and growing environmental pressures;

Despite the more competitive territory on short-haul markets, European and North American airlines are buying predominantly single aisle aircraft; long-haul aircraft are mostly the domain of the Gulf carriers; and

The surge in growth of the Asian short-haul low-cost airline market could not be more apparent

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uNItEs stAtEs: cuRRENt fLEEt: 7426; oRDERs: 1868 pRojEctED DELIvERy DAtEs foR AIRcRAft oN oRDERSOURCE: CAPA - CENTRE FOR AVIATION | WEEk STARTING 31-MAR-2013

uAE: cuRRENt fLEEt: 387; oRDERs: 331pRojEctED DELIvERy DAtEs foR AIRcRAft oN oRDERSOURCE: CAPA - CENTRE FOR AVIATION | WEEk STARTING 31-MAR-2013

gERmANy: cuRRENt fLEEt: 704; oRDERs: 256pRojEctED DELIvERy DAtEs foR AIRcRAft oN oRDERSOURCE: CAPA - CENTRE FOR AVIATION | WEEk STARTING 31-MAR-2013


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CHINA: CuRRENt fLEEt: 236; oRDERs: 446 pRojECtED DELIvERy DAtEs foR AIRCRAft oN oRDERSOURCE: CAPA - CENTRE FOR AVIATION | WEEk STARTINg 31-MAR-2013

INDoNEsIA: CuRRENt fLEEt: 497; oRDERs: 742pRojECtED DELIvERy DAtEs foR AIRCRAft oN oRDERSOURCE: CAPA - CENTRE FOR AVIATION | WEEk STARTINg 31-MAR-2013

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BRAzIL: CuRRENt NAtIoNAL fLEEt: 528; oRDERs: 266pRojECtED DELIvERy DAtEs foR AIRCRAft oN oRDERSOURCE: CAPA - CENTRE FOR AVIATION | WEEk STARTINg 31-MAR-2013

tuRkEy: CuRRENt fLEEt: 368; oRDERs: 230 pRojECtED DELIvERy DAtEs foR AIRCRAft oN oRDERSOURCE: CAPA - CENTRE FOR AVIATION | WEEk STARTINg 31-MAR-2013

INDIA: CuRRENt fLEEt: 383; oRDERs: 475 pRojECtED DELIvERy DAtEs foR AIRCRAft oN oRDERSOURCE: CAPA - CENTRE FOR AVIATION | WEEk STARTINg 31-MAR-2013

RussIAN fEDERAtIoN: CuRRENt fLEEt: 1,134; oRDERs: 243 pRojECtED DELIvERy DAtEs foR AIRCRAft oN oRDERSOURCE: CAPA - CENTRE FOR AVIATION | WEEk STARTINg 31-MAR-2013

MAIN FEATURE


AvIAtIoN AND thE ENvIRoNmENt IN 2013

The environment was relegated to the back burner in late 2012 as the European Commission predictably (in retrospect) delayed implementation of its punishing threats included in its extra-territorial environmental tax and as economic pressures diverted attention.

But the issue is scheduled to recapture the headlines later this year as ICAO recommences its search for a multilateral compromise at the 38th triennial Assembly of ICAO in Sep/Oct-2013.

ICAOs wide democracy is unlikely to deliver a solution sufficiently strict and far-reaching to please the Brussels hierarchy. So some sort of collision appears inevitable, again; but lessons will hopefully have been learned on all sides, sufficient to avoid a repeat of the past highly damaging confrontation.

Meanwhile, high fuel prices have achieved what governments could not. The discipline imposed by US100 oil has forced airlines to (i) use more fuel efficient and younger aircraft and (ii) restrain capacity growth and increase load factors.

These measures largely unrecognised by Brussels have been far more effective in reducing emissions than any carelessly and unilaterally imposed tax was ever likely to have.

There are other issues in this always complex and many layered industry. IATAs controversial entry to the distribution scene with its New Distribution Capability, while more constructive than the organisations previous attacks on the GDS, is meeting stiff headwinds, as any new initiative is sure to have where vested interests abound. Whether it is a Trojan horse, or simply a sheep in wolf s clothing, existing distributors are cautious-to-staunchly opposed, while corporate account managers and OTAs have been anything but equivocal in their opposition.

All the while new forces are gathering strength in the information, Big Data, travel and associated areas; these new entities are much more tech savvy than the airlines and seem destined to collide with the existing system at some time in the next five years.

As low-cost airlines exploited the internet to reshape the online sales model, so the new data-hungry entities will explore new opportunities. The combatants are not clearly defined at this stage, but there is sufficient interest in aggregating information from the top 10% of the worlds economy who can afford to travel that it is not a matter of whether, but of how and when.

Just as inflight Wi-Fi opens new and mostly unexplored avenues for new sales models, airports too should be watching warily as retail opportunities emerge or threaten the status quo.

thE bAttLE foR coNtRoL of pRoDuct DIstRIbutIoN hAs coNtINuED uNAbAtED IN 2012 AND wILL coNtINuE to occupy thE bAckgRouND hEADLINEs IN 2013.

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MAIN FEATURE


partnerships with foreign airlines. This is not an area where Chinese carriers have been active, other than in a largely superficial way; they are frequently described by would-be American and European partners as difficult to work with. But the partnering direction is becoming more pressing, if only because, in the new world order, many airlines are seeking close bilateral links with one or other of the Chinese airlines.

Now though, even equity acquisitions in foreign airlines are very much on the radar, albeit led by the independent Hainan Group, rather than Beijings chosen three, Air China, China Eastern and China Southern.

To date, the great bulk of Chinese international seats are understandably dedicated to Northeast Asian near neighbours and elsewhere in Asia. Europe and North America account for paltry single figure percentages. These will only increase, perhaps quickly; meanwhile resource rich Africa, where China is one of the worlds three largest investors, is also firmly a destination for expansion.

There is another facet to Chinas industry maturing: the sheer volume of Chinese travellers means that China can become the most powerful transit country in the region and probably the world. With the added advantage of high levels of end-to-end traffic flows, the sixth freedom opportunities mean Chinese airlines will be able to price very competitively on their transfer routes.

AsiA rising: The contrast between the old world markets and Asia could scarcely be more stark. The rising middle classes of countries across the Asian region are creating demand levels that influence policy changes, hastening liberalisation and encouraging new airlines to order aircraft a potentially self-fulfilling cycle.

In particular Chinas impact on world aviation simply has no precedent. Consequently, forecasting growth levels and their patterns is near impossible.

Predicting the specifics of an avalanche is beyond most means, other than to recognise that it will be bigger than anything that has preceded it.

Some potential hotspots may be guessed at, for example where there has been only limited growth to date. And, with a centrally controlled aviation policy that can influence airline behaviour, further hints may be inferred. For example, encouragement from Beijing to go international has shaped management thinking of the larger airlines. The countrys aviation leaders are well aware that fundamental changes are occurring in the global market and of the dangers of not taking part in reshaping the industry, outside as well as domestically.

This go-international edict is also consistent with the national trade priorities of securing resources for the long term, in Africa and elsewhere.

The result: to add international capacity, but also, where economic realities have restricted expansion options, to work more at enhancing

53.8%

20.6%

7.6%

5.6%

3.3%2.9%

6.3%

Asia : North East Asia

Asia : South East Asia

Europe : Western Europe

North America

Middle East

Europe : Eastern/Central Europe

Others

ChINA INtERNAtIoNAL CApACIty sEAts by REgIoNSOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | WEEk STARTINg 31-MAR-2013


ThE AIRcRAfT fINANcINg DIscoNNEcT AND ThE vITAL RoLE of LEssoRs

A growing part of an airlines financial risk management strategy is assessing its best profile of leased to owned aircraft. Gone are the days when owning long term valuable assets was a serious airline business play. The need to preserve balance sheet appearance is part of this, but also the highly effective role of leasing companies, with attractive lease and tax propositions has provoked major shifts in ownership strategies in the past decade. For example, over half of all A320s are owned by leasing companies.

For many years the major aircraft manufacturers sought to limit sales leakage through leasing companies, with their buying power and their ability to intervene between the manufacturer and the end client. But the realities of financial markets and a host of new airlines has refashioned the marketplace.

Another feature now appears. When a change in the world order occurs it is hardly reasonable to expect that everything will adjust in sync to the new situation.

As the old worlds economies stagnate, and traditional bankers pull down the shutters and slowly migrate their attention to Asia, a considerable disconnect is created in the area of aircraft financing.

It will be rectified, but meanwhile there is a divide between the demand for funding and the reality of current needs. The maladjustment has several layers.

Simultaneously with the downturn in global economies and the

consequent nervousness of debt funders, this once in history shift in the balance of aviation powers inevitably creates a gap in the supply chain. The confluence of these events has been entirely coincidental, but that does little to help the airlines caught in the middle.

The majority of airlines now buying aircraft and needing the funding are Asian, not American or European. Lenders were beginning to get used to that a decade ago. But the traditional banking roots are Euro-American and they are familiar with the long-established airlines, the flag carriers.

Now however, like other markets, it is not the recognised airlines that are expanding. It is the new names. And, in Asia and the Middle East they are ordering unprecedented quantities of new aircraft.

For increasingly cautious credit committees buried in the vaults of venerable London and New York banks, names like Tiger, Lion, IndiGo, even AirAsia, have little history. The oldest of them is less than 10 years of age. They may have a future, and almost certainly do, but they do not have a history to compare with the numerous 50+ year-old flag carriers that dot the region. Yet just this handful has 1,100 aircraft on order. Some 500 of them are for delivery in the next two years alone.

These new airlines are certainly not household names outside the region and, so long as the current underlying credit cautiousness continues, the disconnect between demand and supply is inevitable one reason aircraft lessors have become more active in these transactions. But lessors too have to fund their acquisitions; they can rely to some extent on their own credit ratings, but increased use of non-traditional sources will be vital.

In short, until a substantial lending capability is developed in Asia itself, there may be constraints on funding sources for the new growth.

... The realities of financial markets and a host of new airlines has refashioned the marketplace.

MAIN FEATURE


Living with uncertainty. It is not only the aviation industry that is affected by economic and social uncertainty. But aviation is the handmaiden of those forces; and what is bad for the master is typically worse for the servant.

Older airlines are adapting to this new world as best they can, assuming cautious profiles that reduce risk, shaving costs and capacity, accumulating cash as far as possible. Having pulled most of the strategy levers, the more successful have prepared themselves reasonably well for the short term.

But for the medium to long term, the outlook becomes different. As the future course of the industry is set, the newer airlines (short and medium-haul), low-cost, the hybrids, the Gulf carriers (and Turkish Airlines), promise to be the source of growth.

The longer established airlines will not readily allow a process where they decline steadily, but there may be little they can do to arrest a process that is already advancing fast. One option, as regulatory controls loosen, is to forge mergers and entrench their roles through acquisition.

Meanwhile though, the very strategies employed to secure the short term may be those that stifle the future. There is a whole new breed of airline thrusting remorselessly to the front of the queue.

...The very strategies employed to secure the short term may be those that stifle the future. There is a whole new breed of airline thrusting remorselessly to the front of the queue.

AL

As the future course of the industry is set, the newer airlines (short and medium haul) low cost, the hybrids, the Gulf carriers (and Turkish Airlines), promise to be the source of growth.

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southEAst AsIA toP 10 AIRLINEsSOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | WEEk STARTINg 31-MAR-2013

southEAst AsIA toP 10 AIRPoRtsSOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | WEEk STARTINg 31-MAR-2013

Southeast Asia OutlookSoutheaSt aSia continueS to be a region of rapid growth driven by low-coSt carrierS, including budget subsidiaries and affiliates of full-service carriers. For the first time LCCs accounted for over 50% of seat capacity within Southeast Asia in 2012. The region has seen a steady rise in LCC penetration rates since the turn of the century from a base of virtually zero ... southEAst AsIA cAPAcIty sEAts PER wEEk

SOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | WEEk STARTINg 31-MAR-2013

RANkINg cARRIER NAME sEAts

1 Lion Air 856,932

2 thai Airways 541,436

3 AirAsia 525,240

4 garuda Indonesia 471,698

5 Malaysia Airlines 461,134

6 singapore Airlines 444,125

7 Vietnam Airlines 372,916

8 cebu Pacific Air 333,010

9 thai AirAsia 236,160

10 sriwijaya Air 207,396


1 Jakarta soekarno-hatta International Airport 1,400,299

2 singapore changi Airport 1,371,158

3 Bangkok suvarnabhumi International 1,237,778

4 kuala Lumpur International Airport 1,134,217

5 Manila Ninoy Aquino International Airport 824,383

6 ho chi Minh city tan son Nhat Airport 482,968

7 surabaya Juanda Airport 452,707

8 Denpasar Bali Ngurah Rai Airport 381,732

9 Bangkok Don Mueang Int'l Airport 359,626

10 sultan hasanuddin International Airport 330,293

SOUTHEAST ASIA

Lion Air

Thai Airways

AirAsia

garuda Indonesia

Malaysia AirlinesSingapore

AirlinesVietnam Airlines

Cebu Pacific

Thai AirAsia

Other

0M 1M 2M 3M 4M

856,932

541,436

525,240

471,698

461,134

444,125

372,916

333,010

236,160

3,714,324


southEAst AsIA fLEEtSOURCE: CAPA - CENTRE FOR AVIATION | WEEk STARTINg 31-MAR-2013

southEAst AsIA pRojEctED DELIvERy DAtEs foR AIRcRAft oN oRDERSOURCE: CAPA - CENTRE FOR AVIATION | WEEk STARTINg 31-MAR-2013

southEAst AsIA bREAkDowN foR AIRcRAft IN sERvIcESOURCE: CAPA - CENTRE FOR AVIATION | WEEk STARTINg 31-MAR-2013

southEAst AsIA most popuLAR AIRcRAft typEs IN sERvIcESOURCE: CAPA - CENTRE FOR AVIATION

southEAst AsIA cApAcIty sEAts shARE by ALLIANcESOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | WEEk STARTINg 31-MAR-2013

Narrowbody Jet

Widebody Jet

Regional Jet

Piston Engine Aircraft

Military Transport

Turboprop

Small CommercialTurboprop

51.6%24.0%

13.0%

9.3%1.4%

0.5%0.1%

A320

737

A330

777

ATR

Others

747

CARAVAN

26.9%

23.0%

8.6%

8.5%

7.3%

3.6%

2.1%

20.1%

Unaligned

SkyTeam

oneworld (affiliate)

Star

oneworld

57.7%15.6%

15.3%

11.2%0.2%

1,456

67

1,533

2,000

1,500

1,000

500

0In service In storage On order

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ATR CRJ A320 A330 A350 A380 737

777 787 DHC6 SSJ YUN7 ARJ21

Lcc cApAcIty shARE (%) of totAL sEAts: 2001-2013SOURCE: CAPA - CENTRE FOR AVIATION WITh DATA PROVIDED bY OAg

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Jan-Mar2013

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57.4%

SOUTHEAST ASIA


50%

Based on CAPA data, the regions LCC fleet will grow by between 25% and 30% in 2013 to approximately 530 aircraft.

... The four largest domestic markets in Southeast Asia Indonesia, Philippines, Malaysia and Thailand all now have LCC penetration rates exceeding 50%. The Philippines has the worlds highest domestic LCC penetration rate among medium and large size countries 80% in 2012, which is likely to increase to about 85% in 2013. But there is still room for more LCC growth in Southeast Asia as the size of the overall market, and in many cases LCC penetration rates, continue to increase.

2013 will again see more LCC capacity pouring into Southeast Asia. Based on CAPA data, the regions LCC fleet will grow by between 25% and 30% in 2013 to approximately 530 aircraft. This includes almost 300 aircraft from Asias top two LCC groups AirAsia and Lion - and over 100 aircraft from affiliates or subsidiaries of Southeast Asian full-service carriers. Singapore Airlines, Thai Airways, Garuda Indonesia, Philippine Airlines and Vietnam Airlines are all now participating in the budget end of the market, allowing these groups to pursue growth while demand for long-haul and premium passenger services remains relatively flat and as demand in the cargo sector continues to be depressed.

There are now 25 LCCs operating in Southeast Asia, five of which have launched since the end of 2011. More new LCCs will enter the market in 2013, including Malaysias Malindo, and most of the regions existing LCCs continue to expand rapidly.

Some LCC markets in Southeast Asia may be approaching saturation and some routes will suffer from over-capacity in 2013. But market conditions overall remain favourable and can support rapid growth, driven by the continued strength of the regions economy and the continued rapid rise of the middle class. The increase in discretionary incomes feeds into the hands of LCCs as a larger portion of the population can afford to fly but generally only on budget airlines. Southeast Asian flag carriers are also growing, particularly their budget and regional full-service subsidiaries, albeit at slower rates.

Indonesia, the regions largest market by a wide margin, has emerged as one of the most dynamic and biggest growth markets in the world. Indonesias domestic market grew 20% in 2012 to 72.5 million passengers, making it the worlds fifth largest domestic market after US, China, Brazil and Japan. It has been growing at a double-digit clip since 2008 and this is expected to continue in 2013 despite the bankruptcy and suspension of operations in Jan-2013 of Batavia, which accounted for about 8% of the domestic market. Indonesias four LCCs have quickly filled the void left by Batavia and will add approximately 50 aircraft in 2013, more than twice the size of the fleet Batavia operated in 2012.

With Batavia exiting, the outlook has improved for market leader Lion, Garuda budget subsidiary Citilink, Indonesia AirAsia and new Tiger affiliate Mandala. All four LCCs are growing at rapid clips easily exceeding 20%. Garuda also continues to expand its domestic and regional full-service operation rapidly while Lion plans to launch in 2013

new full-service subsidiary Batik Air. Smaller domestic carriers also continue to expand and enter the market. But some will likely fail as they are stuck in the middle of the market, wedged between the low-cost and full-service business models.

The combination of the worlds fourth largest population, a rapidly expanding middle class, a booming economy and an archipelago geography are driving soaring demand for domestic air travel. Indonesias much smaller international market, which consisted of less than 10 million passengers in 2012, also has big potential. Indonesias international market is now primarily exploited by Gulf carriers and the big airline groups of Asia as Indonesian carriers generally remain domestic-focused.

Thailand will also see more LCC expansion in 2013, led by Thailands two main LCCs, Thai AirAsia and Nok. Thai AirAsia completed an IPO in 2012, giving it the capital to accelerate domestic and international expansion. 2013 will see IPOs from Nok and full-service carrier Bangkok Airways. Nok, which now only operates scheduled services in the domestic market, plans to launch international services in 3Q2013.

2013 will also see growth for new Thai Airways regional unit Thai Smile, which launched services in Jun-2012 following a hybrid model. The expansion of Thai Smile and Nok are important components of Thai Airways new multi-brand strategy as the group looks to reduce its reliance on long-haul routes to Europe, where market conditions remain challenging. Thai Airways is also investing in fleet renewals and cabin retrofits as part of an attempt to improve yields and boost premium traffic. But competing at the top end of the market with Asias leading premium carriers and Gulf carriers, which have expanded rapidly in Thailand, is difficult while fast-growing LCCs led by Thai AirAsia pose a threat at the other end.

2013 will be a landmark year for Malaysia as

ProPortion of LCC seat CaPaCity in southeast asia


Indonesia, the regions largest market by a wide margin, has emerged as one of the most dynamic and biggest growth markets in the world.

the countrys flag carrier attempts to turn the corner and a new LCC aims to launch services. Malaysia Airlines (MAS), which spent most of 2012 in restructuring mode, entered the oneworld alliance on 01-Feb-2013. oneworld membership was a major milestone for MAS and a key component of its new strategy, which focuses on the premium market.

Like most other Southeast Asian flag carriers, MAS is focusing capacity growth in 2013 on the regional market within Asia as conditions on long-haul routes remain challenging. Of Southeast Asias six main flag carriers, MAS is now the only one without a budget subsidiary. This puts it in a weak position as it is unable to participate in the faster growing bottom end of the market. It also creates a void in the Malaysian market for a second LCC, which is now being exploited by Lion.

Malindo, a joint venture between Indonesias Lion and a Malaysian company, aims to launch services at the end of Mar-2013 and operate a fleet of about 12 737-900ERs by the end of the year. Malaysia-based AirAsia in recent years has been pursuing more ambitious expansion in other markets but is re-focusing on Malaysia in 2013 as part of an effort to fend off Malindo.

AirAsia Malaysia plans to add 10 A320s in 2013 for a total of 74 aircraft. Long-haul sister AirAsia X also plans to add seven aircraft. As a result, Malaysias total LCC fleet is expected to grow by 40% in 2013 to 102 aircraft, outstripping the LCC growth at the other five major ASEAN countries. The sudden surge in LCC capacity will likely lead to over-capacity on some domestic and regional international routes but there is also still room in Malaysia to stimulate demand through lower fares as Malindo breaks the AirAsia-MAS duopoly.

Singapore will see slower growth in 2013 than the 10% increase in passenger traffic recorded in 2012, as its LCC market is now approaching saturation. LCCs now account for 30% of capacity at Singapores Changi Airport, which in 2012 passed the 50 million passenger milestone, an incredible achievement for a country of only five million people.

Singapores three largest LCCs AirAsia, Jetstar and Tiger will continue to expand but

at modest levels. Faster growth will come from Scoot, SIAs new long-haul low-cost carrier which launched in mid-2012. Unlike short-haul routes within Southeast Asia, medium-haul markets to Australia and North Asia remain relatively untapped by LCCs. Scoot and Jetstar, which has a small widebody operation in Singapore, are trying to fill this void.

SIA regional subsidiary SilkAir also plans to pursue rapid expansion in 2013, growing capacity at a clip exceeding 20%. SilkAir and Scoot, as well as increased involvement in Tiger, have emerged as important components in the new SIA Group strategy, which aims to pursue growth at the budget end of the market and within the region to offset weak market conditions on long-haul routes.

The Philippines will see the launch of at least one and possibly two long-haul low-cost operations in 2013. The new long-haul unit from short-haul Philippine market leader Cebu Pacific which will launch in mid-2013 with services to Singapore, Seoul and Dubai will open a new chapter in the Philippines dynamic LCC market. LCCs will account for about 85% of domestic passenger traffic in the Philippines in 2013, but there are still huge opportunities for LCCs to make inroads in the international market.

Cebu Pacific will become the fourth widebody low-cost operator in Southeast Asia, joining Jetstar, Scoot and AirAsia X. Philippine Airlines (PAL) is planning to fight off its rival by also expanding its LCC subsidiary, AirPhil Express, into the long-haul market by the end of 2013. PAL is also planning to expand its own long-haul operation as the carrier takes delivery of another batch of 777-300ERs.

PAL has struggled in recent years but is investing significantly in upgrading itself, including through fleet renewal, following the sale of a majority stake in 2012 to Philippine conglomerate San Miguel. 2013 could see further strategy changes as San Miguel looks to make its mark at PAL. Long-haul expansion could be unlocked if the Philippine authorities succeed at getting off the EU blacklist and being upgraded by the US FAA to Category 1 status.

Consolidation in the highly competitive Philippine market is also likely, with the Mar-2013 equity tie-up between LCCs Zest and AirAsia Philippines a potential first move. There are now five LCCs competing in the domestic market, which is clearly too many. Over-capacity and irrational competition already resulted in losses throughout 2012 at all

Of Southeast Asias six main flag carriers, MAS is now the only one without a budget subsidiary.

SOUTHEAST ASIA


Philippine carriers except Cebu Pacific.Vietnam will see significant LCC growth

as it starts to catch up with the more mature markets elsewhere in Southeast Asia. VietJet, which launched services in Dec-2011, has already surpassed Jetstar Pacific as Vietnams largest LCC. VietJet expanded into the international market in Feb-2013 with the launch of a Ho Chi Minh-Bangkok service and is expected to add at least two more international routes by the end of the year. Jetstar Pacific will also likely enter the international market in 2013. The carrier, which is partly owned by Australias Jetstar, has new life after a majority stake was transferred to Vietnam Airlines in early 2012.

Vietnams fast-growing economy and increasing popularity as a tourism destination should also support further rapid growth at Vietnam Airlines. The flag carrier is preparing for an initial public offering in late 2013, which would unlock a new phase of growth. The carrier already has ambitious plans to expand its fleet by 35 aircraft over the next three years and grow its long-haul operation, which is very small compared to its Southeast Asian peers. Of Southeast Asias six main flag carriers, Vietnam Airlines is now the only group that is not publicly traded and remains 100% government-owned.

Among Southeast Asias four smaller markets, Myanmar is a clear stand out. International seat capacity in Myanmar surged by over 60% in 2012 as the country opened up following the landmark election of Apr-2012. Capacity will continue to increase at a very rapid clip in 2013 as carriers from abroad look to exploit the opportunities in this frontier market.

Domestically several local carriers are also expanding as they aim to profit from the boom

in tourism and business travel. In Jan-2013, the countrys first LCC, Golden Myanmar Airlines, launched services and is now operating domestic and international routes. There is huge potential for LCCs in both the domestic and international markets as Myanmar continues to open up.

Cambodia also has seen rapid growth, with total passenger traffic growing 18% in 2012, making it quietly one of the fastest growing countries in Asia. More expansion is expected in 2013 as Cambodia Angkor Air, one of the smallest flag carriers in the region, expands its network to greater China.

For Laos, 2013 should also bring more growth albeit on a very small scale. Laos has seen capacity double since 4Q2011, when Lao Airlines added two A320s. Previously there were no jet aircraft operating in the small country. More capacity will be added in 2013 as Lao Airlines continues to expand its A320 fleet and start-up Lao Central Airlines, which launched services in May-2012, adds 737s and Sukhoi Superjet 100s.

In the smallest ASEAN country of Brunei, Royal Brunei Airlines (RBA) will mark a significant milestone in 2013, as it becomes the first carrier in Southeast Asia to operate the 787. RBAs five 787s, all of which are slated to be delivered by early 2014, will replace 777s and allow the flag carrier to complete a restructuring it began in 2011.

Overall market conditions in Southeast Asia remain favourable and conducive for growth. Rising discretionary incomes and rapid growth in the middle class is creating particularly favourable conditions for LCCs. Demand for travel within the region and to other parts of Asia-Pacific will once again grow rapidly in 2013. Long-haul markets will remain challenging but should see some outbound growth as an increasing portion of the population is able to afford overseas trips.

The Philippines will see the launch of at least one and possibly two long-haul low-cost operations in 2013.

Vietnam will see significant LCC growth as it starts to catch up with the more mature markets elsewhere in Southeast Asia.

AL

Overall market conditions in Southeast Asia remain favourable and conducive for growth.

south AsIA toP 10 AIRLINEsSOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | WEEk STARTINg 31-MAR-2013

south AsIA toP 10 AIRPoRtsSOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | WEEk STARTINg 31-MAR-2013South Asia

OutlookIndIan avIatIon Is seeIng sIgns of revIval after another difficult year marked by continuing losses, a 3% decline in traffic and the exit of Kingfisher, which up until less than two years ago was the largest single domestic airline in the country ...

south AsIA cAPAcIty sEAts PER wEEkSOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | WEEk STARTINg 31-MAR-2013


1 Indigo 500,580

2 Air India 442,828

3 Jet Airways 413,303

4 spiceJet 375,833

5 Pakistan International Airlines 132,880

6 goAir 129,240

7 JetLite 114,448

8 sriLankan Airlines 95,606

9 Air India Express 83,538

10 Biman Bangladesh Airlines 34,032


1 Delhi Indira gandhi International Airport 919,165

2 Mumbai Airport 831,365

3 chennai Airport 352,124

4 Bengaluru International Airport 332,111

5 Dubai International Airport 309,142

6 kolkata Netaji subhas chandra Airport 278,652

7 hyderabad Rajiv gandhi International Airport 252,504

8 colombo Bandaranayake International Airport 187,126

9 kochi Airport 140,679

10 karachi Quaid-E-Azam International Airport 133,442

Indigo

Air India

Jet Airways

SpiceJet

EmiratesPakistan Intl

AirlinesgoAir

JetLiteSriLankan

AirlinesOther

0k 250k 500k 750k 1,000k

500,580

442,828

413,303

375,833

185,924

132,880

129,240

114,448

95,606

1,024,457

SOUTH ASIA


south AsIA fLEEtSOURCE: CAPA - CENTRE FOR AVIATION | WEEk STARTINg 31-MAR-2013

south AsIA pRojEctED DELIvERy DAtEs foR AIRcRAft oN oRDERSOURCE: CAPA - CENTRE FOR AVIATION | WEEk STARTINg 31-MAR-2013

south AsIA bREAkDowN foR AIRcRAft IN sERvIcESOURCE: CAPA - CENTRE FOR AVIATION | WEEk STARTINg 31-MAR-2013

south AsIA most popuLAR AIRcRAft typEs IN sERvIcESOURCE: CAPA - CENTRE FOR AVIATION

south AsIA cApAcIty sEAts shARE by ALLIANcESOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | WEEk STARTINg 31-MAR-2013

Narrowbody Jet

Widebody Jet

Regional Jet

Piston Engine Aircraft

Turboprop

Small CommercialTurboprop

57.7%

17.7%

12.5%

8.9%2.8% 0.3%

A320

737

DHC6

ATR

777

Others

A330

DHC8

29.6%

26.0%7.8%

6.2%

5.9%

4.3%

4.2%

15.9%

Unaligned

oneworld

oneworld (affiliate)

Star

SkyTeam

83.3%

7.7%

5.4%3.4% 0.3%

800

600

400

200

0In service In storage On order

577

62

504

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

0

25

50

75

A320 A330 A350 A380 777 787 737 DHC6

Lcc cApAcIty shARE (%) of totAL sEAts: 2001-2013SOURCE: CAPA - CENTRE FOR AVIATION WITh DATA PROVIDED bY OAg

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Jan-Mar2013

0

10

20

30

40

50

60

0.1%0.9%

5.8%

22.7%

38.6%42.8%

47.3%

50.0%50.0%

57.0%55.8%


SOUTH ASIA

100

Kingfishers exit in Oct-2012 has positively impacted market dynamics for the remaining carriers.

JET AIRWAYS EXPECTED ORDER OF NARROWBODIES

... Many of the structural challenges in Indian aviation such as the uncertain and unpredictable policy environment, intervention by the regulator on commercial matters, high sales taxation on fuel, and the low productivity of airports and airspace remain unaddressed. However, two key developments in recent months have given rise to greater optimism.

Firstly, Kingfishers exit in Oct-2012 has positively impacted market dynamics for the remaining carriers. The withdrawal of capacity, combined with pricing discipline, resulted in higher yields and improved financial performance in FY2013, at least up until 4Q when aggressive discounting returned.

And secondly, the historic decision by the government in Sep-2012 to allow foreign airlines to invest up to 49% in Indian carriers is a vital step in establishing a more professional and corporatised sector in India. It offers the promise not only of introducing strategic capital and expertise into the market, but also delivers a much needed confidence factor for other institutional funding.

CAPA estimates that Indias carriers will report a combined loss of approximately USD1.6 billion in the 12 months ending 31-Mar-2013, with most of this accounted for by Air India and Kingfisher Airlines.

Air India has delivered a significant improvement in its operational and financial performance in FY2013, but its beleaguered business plan is under attack on all fronts. With poor aircraft utilisation, a huge interest burden, a bloated workforce, insufficient recapitalisation and regular government intervention, the challenges are huge. If the carrier is to have any chance of success it must be radically restructured both financially and operationally. This will require a level of political will to take tough decisions, a feature that has been absent to date. If decisive action is postponed as we expect Indian taxpayers will bear the cost.

Taking advantage of the foreign investment reforms, Etihad looks set to acquire a stake in Jet Airways, Indias second largest international and domestic carrier. There is likely to be an extensive codesharing arrangement between the two new partners, network and scheduling coordination and integration of frequent flyer programmes. The Jet Airways-Etihad deal has the potential to be a game-changing combination. It brings together one of the most successful airlines in India with a well-capitalised Gulf carrier with global ambitions.

Critically for Jet this deal will provide it with the capital that it requires at this time. Jet Airways is expected to place an order in the coming months for up to 100 narrowbodies. Following the conclusion of the Etihad transaction, Jet Airways is also expected to have the capital to implement a clearer market segmentation strategy, in particular the establishment of a strong hybrid model under the JetKonnect brand.

IndiGo remains the leading performer in the market, both financially and from a brand perception perspective. The carrier continues to grow

aggressively on domestic and short-haul international routes and is also evaluating the possibility of launching a domestic regional subsidiary utilising tu

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Airline Leader - Issue 17