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MARKET DYNAMICS &
PORTFOLIO STRATEGY
PATRICK BAUDIS
Vice President, Marketing
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A HEALTHY BUSINESS?
Source: IATA Economic performance of the Airline Industry – Mid year 2017 Report
IF INVESTING IN AIRLINES
DOES MAKE SENSE NOW,
IS THE CURRENT TREND
SUSTAINABLE?...
0
2
4
6
8
10
12
Return on capital invested in airlines
% o
f in
ve
ste
dca
pita
l
Return on Capital
(ROIC)
Cost of Capital
(WACC)
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$60
$80
$100
$120
$140
$160
$180
$200
Average passenger fare
33%
DROP
CONTINUOUS PRESSURE ON FARES
Source: IATA, Oxford Economics, Bombardier analysis
… BECAUSE YIELDS KEEP DECREASING
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HOW CAN WE BREAK THIS VICIOUS CIRCLE?
Source: Diio
Lower Yields
Increased
Capacity
Larger Aircraft
Lower Unit
Costs
and therefore require
forcing intoresulting in
AROUND 4,000
INTRA-REGIONAL ROUTES
WERE DROPPED IN 2016
GLOBALLY
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ARE MATURE LCCs RUNNING OUT OF DESTINATIONS
TO DEPLOY LARGE SINGLE-AISLES?
Source: Diio
NEW ROUTES LAUNCHED
(% Of Total Routes In Operation)
0%
5%
10%
15%
20%
25%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150%
10%
20%
30%
40%
50%
60%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
0%
10%
20%
30%
40%
50%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
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AIRLINES CORPORATE CULTURES
Engineering
Culture
Cost Efficiency
Commercial
Culture
LF and market share
Financial
Culture
Route per route
profit contribution arbitrage
BUSINESS MODELS & ORGANIZATIONS ARE EVOLVING
AS AIRLINES FOCUS MORE ON FINANCIAL METRICS
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Revenue
Management
OBJECTIVE
REVENUE/TRIP
Fleet
Planning
OBJECTIVE
COST/SEAT
DemandPax
FaresSupplySeats
= PROFIT OPTIMIZATION ?
MANAGING PROFITS
WHERE IS THE PROBLEM COMING FROM?
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MANAGING PROFITS
WHERE IS THE PROBLEM COMING FROM?
SEATS/FLIGHT
CURRENT BELIEF
REVENUE
COST
COST
REVENUE
PROFIT
PER FLIGHT
PROFIT
REAL OPERATIONS
SEATS/FLIGHT
REVENUE
COST
PROFIT
≠
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THE LIMIT OF UP-GAUGING
CASE STUDY
Profit before taxes
A B
145 seats
Current Load Factor: 93%
Associated Revenue per Passenger: 100
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FROM 145 seater, Load Factor 93% (135 pax)
TO 175 seater, Load Factor 85%(149 pax)
MARKET
(ROUTE)ELASTICITY
REVENUE
PER PAX
REVENUE
PER TRIP
PROFIT
PER PAX
MATURE-1.0 -20% -8% -133%
-1.4 -14% -1% -95%
DYNAMIC
-1.6 -12% +1% -81%
-2.2 -9% +4% -61%
-2.6 -8% +6% -54%
VERY DYNAMIC
-2.8 -7% +7% -48%
-3.4 -6% +8% -41%
-4.0 -5% +9% -35%
THE LIMIT OF UP-GAUGING
CASE STUDY
Source: Bombardier Analysis
UP-GAUGING = MORE REVENUE & LOWER COST / SEAT
BUT LESS PROFIT / PAX
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WHATEVER THE STUDY PARAMETERS ARE…
DEMAND ELASTICITY TO FARES From -4.0 (very dynamic market) to -0.5 (mature market)
AIRCRAFT CONFIGURATION Dual Class or Single Class High Density
LOAD FACTOR 70% or 90%
BUSINESS MODEL Network Carrier or LCC
THE LIMIT OF UP-GAUGING
CASE STUDY
UP-GAUGING = MORE REVENUE & LOWER COST / SEAT
BUT LESS PROFIT / PAX
Assuming aircraft of the same generation
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MANAGING PROFITS
REAL OPERATIONS
DEMAND
ELASTICITY
TO FARES
CAPACITY
& REVENUE
ARE LINKED!
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DemandPax
FaresSupplySeats
MANAGING PROFITS
THE LONG TERM SOLUTION
Profits
ONE METRIC IS ENOUGH!
MONITORING YOUR
PROFIT PER PAX
WILL CONFIRM THAT
BOTH
YOUR FARES AND SUPPLY
ARE OPTIMIZED !
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MARKET DYNAMICS
STRATEGY SHIFT
« GOING BIG » STRATEGY
PROFIT / PAX
COST FOCUS
COST / SEAT & REVENUE / TRIP
CAPACITY DISCIPLINE & FLEXIBILITY
RIGHT-SIZING
NEW REALITY
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WE UNDERSTAND THERE ARE
DIFFERENT MARKETS
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PORTFOLIO STRATEGY
Source: Ascend, Bombardier Analysis
4,0002,500
WIDEBODIES
> 220 pax
SMALL
REGIONAL
< 60 pax
150 pax
60%40%
10,6006,900
60 pax 220 pax
CURRENT WORLD COMMERCIAL FLEET
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Current Fleet: BCA Market Forecast 2017 – 2036 ; Current Backlog: Ascend, as of December 31, 2016
100- to 150-seat aircraft: A318/A319CEO/NEO, 737-300//500/600700/7, CS100/CS300, E195, E190/E195 E2, 717, MD-80s, DC9s, F100, BAe146/Avros, Yak42
SMALL SINGLE-AISLE SEGMENT
IS UNDER-ORDERED
4,000
WidebodyLarge Single-Aisle
10,600
Average Fleet Age:
7.6 years
Average Fleet Age:
9.1 years
Large Regional
3,300
Average Fleet Age:
8.1 years
CURRENT
FLEET
CURRENT
BACKLOG
2,300
WidebodyLarge Single-Aisle
Large Regional
1,100 700
Small Single-Aisle
10,200
3,600
Average Fleet Age:
17.0 years
Small Single-Aisle
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RIGHT-SIZING ALLOW AIRLINES TO DELIVER
NEW STANDARDS OF EFFICIENCY
Lower Trip
Costs
New Markets
Greater
Profitability
Right-Sized Aircraft
Requiring
and therefore
enabling
offering
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BOEING 787 IS A GAME CHANGER
Source: Boeing website
THE POWER
OF BEING
FIRST
MOVER
# of new non-stop routes
never operated before:
12955
2015 2017
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787 & C SERIES ARE MARKET DISRUPTORS
Flight Global – Feb 10, 2017
“It's got CASM rates that are equivalent to much larger airplanes.
So it may enable us, or give us the opportunity, to rethink our bank
structures, how our network is designed”Benjamin Smith, President of Passenger Airlines at Air Canada
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ALMOST 60% OF REGIONAL JETS ARE
FLYING IN THE UNITED STATES
Source Ascend:
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SCOPE CLAUSES
WHERE DID THEY COME FROM?
Opportunity to connect markets with large yield premiums
while bypassing hubs
Regional pilots paid ~20% the salary of mainline pilots
Small single-aisle aircraft becoming uneconomical
Mainline pilots want to protect their jobs!
An attractive
solution because…
Regional aircraft =
…BUT
= restrictions in terms of aircraft seat count, fleet size,
aircraft MTOW, etc…
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SCOPE CLAUSES
WHEN DID THEY CHANGE?
Bankruptcies
Mergers
Misalignment of scope clause limits
Retirement of smallest narrow-body aircraft
Continental in 1983 and 1990, America West in 1991, US Airways in
2002 and 2004, United in 2002, Delta and Northwest on the same
day in 2005, and American in 2011.
America West and US Airways in 2005, Delta and Northwest in 2010,
United and Continental in 2012, US Airways and American in 2015.
Scope clauses ranged from a very limited number of 50 seat jets allowed
at United and TWA to an unlimited number of 70 seat jets at Delta
DC-9s, Fokker 100s, 737-200s, etc…
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SCOPE CLAUSES
WHAT HAS CHANGED SINCE THE EARLY 2000s?
(*) Source: DOT Form 41 Schedule P5.2
*
Pay difference between mainline pilots and regional pilots
is no longer what it was
Scope clauses
are now aligned in seat gauge, quantity, and weight limits
1 2
“NOT ONE PASSENGER MORE, NOT ONE POUND MORE”
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SCOPE CLAUSES
WHAT HAS CHANGED SINCE THE EARLY 2000s?
Source: (*) RAA, (**) IATA
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2004 2013 2014 2015
Portion of Regional Pilot Training Classes Filled*
Pilot ShortageAirlines will not negotiate for
new regional jets they cannot crew
US airlines’ net post-tax profits
was the highest
at $20.3 billion in 2016
3 4
-20
-15
-10
-5
0
5
10
15
20
US Airlines’ Net Post-Tax Profits**
20162010 2015
20052004
2011 2012 20142013
2008 2009
20072006
MAJORS NOW PARTNERING WITH REGIONALS
TO DEVELOP FUTURE PILOT POOL
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SCOPE CLAUSES
WHAT HAS CHANGED SINCE THE EARLY 2000s?
… AND EFFICIENT SMALL
SINGLE-AISLE AIRCRAFT ARE
BACK!
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SCOPE CLAUSES
WHY WOULD THEY CHANGE?
US airlines make money!
Pay difference is not what it was
Scope clauses are now aligned
Efficient small single-aisles are back!
Shortage of regional pilots
KEY REASONS WHY SCOPE CLAUSES
ARE NOT LIKELY TO CHANGE
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TURBOPROP MARKET DYNAMICS
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-
50
100
150
200
60 TO 79 SEATS
40 TO 59 SEATS
20 TO 39 SEATS
80 TO 90 SEATS
TURBOPROP CAPACITY DEMAND
KEEPS GROWING
New Turboprop segment
emerging in the 80-90x seats
Growth is in
60-90
seat category
TP SEATS PER YEAR (M)
+215%
-28%
-66%
Source: Diio MI, Sept 2017
2004 2005 2006 2007 2008 2010 2011 2012 2013 2014 2015 2016 20172009
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AIRLINES TODAY WANT TURBOPROPS TO
COMPLEMENT THEIR EXISTING FLEETS
POINT-TO-POINT
STAND-ALONE FLEET
BASIC LEVEL OF SERVICE
SHORT DISTANCES
PAST TURBOPROP OPERATIONS AIRLINES’ CURRENT NEEDS
NETWORK INTEGRATION
TYPE INTERCHANGEABILITY
SEAMLESS PAX EXEPRIENCE
GATE CAPABILITY
FULL NETWORK COVERAGE
PRODUCTIVITYBASIC NEEDS BASIC PRODUCT
ADVANCED NEEDS ADVANCED PRODUCT
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ADVANCED TURBOPROP NEEDS
EXAMPLES OF Q400 OPERATORS
Source: Diio, August 2017
TYPE INTERCHANGEABILITY
PRODUCTIVITYNETWORK INTEGRATION
GATE CAPABILITY
EXTRA CARGO
PRODUCTIVITY
TYPE INTERCHANGEABILITY
FULL NETWORK COVERAGE
TYPE INTERCHANGEABILITY
PRODUCTIVITY
FULL NETWORK COVERAGE
SEAMLESS PAX EXPERIENCE
NETWORK INTEGRATION
FULL NETWORK COVERAGE
NETWORK INTEGRATION
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150
200
250
2001 2006 2011 2016
RANGE (NM) - AVERAGE MISSIONQ400
AIRCRAFT
OVER
40%
EXTRA
RANGE
Q400 MISSION LENGTH EVOLUTION
WORLD FLEET AVERAGE
Source: DiiO and Fleet analyzer. Yearly data based on 12 months ending June
Q400 EIS 2000
ATR72 EIS 1989
RANGE IN NM (AVERAGE MISSION )
Q400
ATR72
They fly today beyond 700 NM:
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3
4
5
6
2001 2006 2011 2016
NUMBER OF FLIGHTS PER 1 AIRCRAFT
Q400 DAILY UTILIZATION EVOLUTION
WORLD FLEET AVERAGE
Source: DiiO and Fleet analyzer. Yearly data based on 12 months ending June.
Q400 EIS 2000
ATR72 EIS 1989
AVERAGE NUMBER OF FLIGHTS(PER AIRCRAFT PER DAY)
Q400
ATR72
Q400
AIRCRAFT
OVER
20%
ADDITIONAL
FLIGHTS
They do 7 to 9 flights
per aircraft per day
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Q400
AIRCRAFT
TWICE
THE
PRODUCTIVITY
Q400 PRODUCTIVITY EVOLUTION
WORLD FLEET AVERAGE
Source: DiiO and Fleet analyzer. Yearly data based on 12 months ending June.
ASK PER AIRCRAFT PER DAY
Q400 EIS 2000
ATR72 EIS 1989
25,000
75,000
125,000
175,000
225,000
2001 2006 2011 2016
DAILY PRODUCTIVITY PER 1 AIRCRAFT (ASK PER A/C PER DAY)
Q400
ATR72
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MARKET DYNAMICS & PORTFOLIO STRATEGY
SUMMARY
PROFIT PER PAX IS THE NEW METRIC FOR SUSTAINABLE PROFITS
US SCOPE CAUSE WILL NOT CHANGE ANYTIME SOON
AIRLINES NEED MORE FROM THEIR TURBOPROPS
C SERIES IS A MARKET DISRUPTOR
1
2
3
4
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#1
IN THE
60- TO 150-
SEAT SEGMENT
Ingenuity
in flight.
BOMBARDIER COMMERCIAL AIRCRAFT