aviation ppt

4-6 September 2003, Singapore

The Changing Paradigm of the Aviation Sector

PECC International Roundtable

Role of Airports and Airlines in Trade Liberalisation and Economic Growth

Ravindran DevagunamHead, Transportation PracticeA.T. Kearney, Southeast Asia

2A.T. Kearney28/3795

The airline industry has had to cope with severe cycles over the past 25 years

-0.10

0.00

0.10

0.20

0.30

0.40

0.50

0.60

'74 '75 '76 '78 '79 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00

US cents per ASK

World Airline Operating Profit Per ASK (1)

Note: (1) ASK = Available seat kilometers, Sources: Warburg Dillon Read, IATA

estimated


The sector was in a down-cycle even before 911

Key: Blue - Geographical Europe, Green - Total International, Red - North Atlantic

Global Downturn In The Airline Industry

75

77

79

81

83

85

87

89

91

93

95

'88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00

61

62

63

64

65

66

67

68

69

70

71

Yield in US cents per RTK

Load factorin %

Yield Load factor

Source: A.T. Kearney analysis

Development Of Yield And Load Factor


It appears the sector is perpetually in reactive mode

“…Airlines have not earned enough profit to cover the cost of their capital for over the past 30 years…”

Alan Mulally; Chief Executive , Boeing Commercial Airplane Group

Source: The Economist, 3 May 2003; The Asian Wall Street Journal, 23 June 2003

“…It’s a case of ‘constant-shock syndrome’…”

“…the industry has shifted into a new paradigm in which each crisis is no longer an isolated event..”

Peter Harbison; Managing Director, Centre for Asia Pacific Aviation


This has remained one of the few inflexible sectors – but is beginning to be forced into fundamental changes

Inflexible Industry

“…Aviation has been incompletely deregulated, and in only two markets: America and Europe. Everywhere else deals between government dictate who flies under what rules. These aim to preserve state-owned national flag-carriers, run for prestige rather than profit. And numerous restrictions on foreign ownership impede cross-border airline mergers…”

The Economist

Source: The Economist, 3 May 2003; A. T. Kearney analysis

Forces For Change

• Advance and proliferation of Low Cost Carriers (LCCs)

• Greater transparency of fares provided by the internet

• Slow-down in the global economy

• Terror attacks – e.g. 911; Bali bombing, etc.

• War and regional conflicts

• Epidemics

• Internal airline management capabilities

• Labor disputes – e.g. pilot and airline mechanic strikes

Perceived Uncontrollable Factors


Low Cost Carriers (LCCs) have out-performed the market despite “uncontrollable” factors

Significant Growth For Low Cost Carriers

Terrorist Attacks (Sept. 11th, 2001)

“Uncontrollable Factors”

• Slow-down in the global economy

• Terror attacks – e.g. 911; Bali bombing, etc.

• War and regional conflicts

• Epidemics

• Internal airline management capabilities

• Labor disputes – e.g. pilot and airline mechanic stakes



And, these LCCs are expected to continue growing at a rapid pace over the next few years

Source: KLM

1998 2001 2004 2007 2010 2013 2015

0%

5%

10%

15%

20%

25%

“Pioneering Phase”

“Proven Concept Growth

Phase”

“Consolidation Phase”

7-8%

12-15%

20-25%

Mar

ket

Sh

are

Year

Low Cost Carrier Market Growth(% of Total Global Airline Market)

21% CAGR21% CAGR 10.5% CAGR10.5% CAGR


LCCs have altered traditional segments of air travelers

Business travel/weekend leisure

Packaged leisure

• Convenience

• Bundled price

• On-site service offering

Charter Aircraft

Full Cost Carrier

Low-cost carriers

Price-sensitive leisure/VFR/business:• Price• Destinations portfolio• Acceptable

convenience

Business passengers on routes with short flying duration

Seat-only leisure/VFR (no hotel deal)

Leisure/VFR

• Rail• Bus

Carrier Customer Segmentation


• Schedule

• Flexibility

• Frequent Flyer Program

• Service


LCCs reduce complexity throughout the value chain ...

Cost Driver Capacity Sales & Marketing Services Flight Ops /

MRO IT Overheads

Low cost carrier specifics

• Single aircraft type

• Low purchase price

• Low spare parts inventory

• 1-class seating - high density

• No complex buyer furnished equipment

• High utilization

• High number of rotations per day/ fast turnaround

• No feeder traffic

• No agent commission

• No GDS-fee

• No FFP

• No discounts

• No key account

• No field team

• Internet booking

• No pro rating / interlining

• Simple fare structure

• Effective yield management

• Free seating

• Simple check-in

• No transfer services

• No lounges

• No special services (kids, elderly, ...)

• No free catering

• No in-flight entertainment

• Secondary airports

• High labor productivity

• One crew body

• No transition training

• Simple patterns

• Lean Mgt

• Lean MRO engineering

• One type of MRO floor qualification

• MRO equipment

• Punctuality cost

• No complex network management tools

• Simple core applications

• Simple Yield Management

• No FFP

• Simple flight ops systems

• Simple MRO Systems

• Simple Revenue Accounting

• Simple functional structure

• Simple governance

• Simple revenue and cost accounting

• No alliance coordination cost

Cost advantage vs. Scheduled

Airlines◕ ◕ ◕ ◑ ◑ ◑

Low Cost Carriers v/s Traditional Carriers

◔ 0 – 25%

◑ 26 – 50%

◕ 51 – 75%



... while offering services highly valued by customers

Example of Customer Satisfaction Index US Scheduled Airlines

50

55

60

65

70

75

80

1995 1996 1997 1998 1999 2000 2001 2002

Southwest

Scheduledairlinesaverage

Safety

Customer Care

Accessibility

Fulfillment

Puctuality

Attitude of Staff

Expertise

Integrity

Responsiveness

Hours of Business

Sales channels

Price

++

=

- CS Index

(%)

=

=

=

=

+

+

=

-

=

The Most Important Factors When Choosing An Airline

Source: Customer Satisfaction Survey – Airline Sector; SGS, London, September 2001; American Customer Satisfaction Index (ACSI)

Low cost carrier performance vs. traditional carriers

Low cost carrier’s attractive service/price value proposition is a major threat to traditional carriers


Consequently, LCCs are able to operate at close to 57% less cost than network carriers

57%2%3%

6%

6%

10%

2%6%

3%3%

16%

Source: Low Cost Carriers in the European Aivaiton Single Market Report 2002

Seat Density

Higher Aircraft

Utilization

Lower Crew Costs

Cheaper Airports/ Landing

Fees

Outsourcing Maint./Single Aircraft Type

Minimal Station

Costs/Outs Handling

No In-flight Catering

No Agent Comm.

Reduced Sales/

Reservation Costs

Lower Overhead

Costs

Total

Low Cost Carrier Advantage v/s Full Cost Carriers(% Cost Advantage)


LCCs are now beginning to expand beyond their original niche model…

Separate business class cabin for a small incremental fee

Transcontinental services in North America

Possible regional services in Asia

Source: The Economist, 3 May 2003


…Offering “frills” while continuing to deliver superior performance

Comparison Of Different Low-Cost Carrier Models


Ryanair Easy Jet Virgin Express

South-west jetBlue

Seat Pitch 29-31 29 31 32 32

Leather N N N Y Y

TV N N N N Y

Frequent Flyer N N Y Y Y

High Fare Variation Y Y Y N N

Connections N N Y Y Y

Customer Focus N N Y / N Y Y

Low Price Y Y / N Y / N Y Y

Pass Growth 38% 36% -18.6% 1.2% 172%

Revenue E 624.1 E 580.6 E 212.1 E 5 488 E 326.9

Profit Margin 24.1% 10.6% 0.1% 9.2% 9.8%

Founded 1986 1996 1996 1971 2000


Asia too has begun to see expansion of LCCs

Examples Of Low Cost And Budget Carriers in AsiaObservations

• Budget airlines operate mostly on domestic routes within Asia Pacific region, such as in Australia, Japan, Malaysia, New Zealand, Philippines, Thailand and Indonesia

• There is still the Restrictive Air Service Agreements for international routes that prevent a carrier from developing a pan-Asian network

• Air Asia is exploring the introduction of flights to/from Malaysia with destinations in SEA and China

• Virgin Blue is considering expanding operations in SEA• Cebu Pacific has recently expanded its international

routes to Hong Kong and Seoul • Quantas acquired a former competitor and low cost

carrier Impulse Airlines in 2001and will operate the budget airline on domestic routes in Australia

• Earlier this year, SIA warned it was ready to launch a low-cost carrier in short period if any budget carriers try entering its home turf. Since then, SIA has mentioned the possibility of recasting SilkAir into a low cost carrier

• SIA is also exploring the opportunity to build a low cost carrier with Bangkok Airways, to be based out of Chiang Mai

• Value Air of Singapore is also expecting to launch a regional low cost carrier

BeijingSeoul

Tokyo

Hong Kong

New Delhi

Melbourne

Sydney

Taipei

Kuala Lumpur

Singapore

Bangkok

Shanghai

Jakarta

Sources: ING Report on Low Cost Carriers, February 2003; various literature research

Value Air

Air Deccan


Network carriers have generally been slow to take the appropriate actions to address the “constant-shock syndrome”

Costs have not decreased in proportion to the drop in revenues

Continue ordering aircraft based on historical growth that may not necessarily be valid for the current environment

Continue to slash variable costs to weather the cycle

Network carriers have been slow to address structural costs and the fundamental way in which they operate


A select few network carriers have recently embarked on programatic change to reinvent themselves

Qantas

• Aggressive cost cutting plan that splits operations into three separate divisions

• Changes are designed to address domestic competition from operators such as Virgin Blue, as well as international threats from Emirates and Virgin Atlantic

• The proposed structure will separate passenger operations from supporting services and other businesses

Qantas

• Aggressive cost cutting plan that splits operations into three separate divisions

• Changes are designed to address domestic competition from operators such as Virgin Blue, as well as international threats from Emirates and Virgin Atlantic

• The proposed structure will separate passenger operations from supporting services and other businesses

British Airways

• Launched “Future Size and Shape” program aimed at reducing costs, restructuring short haul operations and removing complexity Introduced low fares for short haul flights to directly challenge no frills operators. Implemented online booking engine and reduced agency commission through initiatives such as increased e-ticketing

British Airways

• Launched “Future Size and Shape” program aimed at reducing costs, restructuring short haul operations and removing complexity Introduced low fares for short haul flights to directly challenge no frills operators. Implemented online booking engine and reduced agency commission through initiatives such as increased e-ticketing

Estimated Savings of US $ 659m

Estimated Savings of US $ 1,030m


The sector requires agility, facilitated by regional governments – to serve the greater good of spurring economic growth

Reassess regulations that limit open skies

Facilitate possibility to establish cross-border airline mergers

Review partnership equation between airports and anciliary service providers with airlines

Open up second and third tier airports to facilitate the proliferation of LCCs

Facilitate dialogue and collaboration between all related industry players on specific ideas to reinvent the sector

Source: IATA; A. T. Kearney

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