CAPA Airline Leader Summit: A CEO Gathering 2017 – PART TWO

 

CAPA’s Airline Leader Summit rolled into Dublin last week on the 11th and 12th May. Hosted by Dublin Airport and Cork Airport, the event included a variety of high profile industry leaders discussing topical issues related to aviation.

Below is a summary of the key points raised during the event.

Travelport:

Travelport global head of product and marketing air commerce Ian Heywood, stated:

  • Airlines operate on slim profit margins they need to ensure API distribution delivers improved results by testing the system on a few routes/fare types and then slowly roll out. “If airlines want to substantially grow their volume of API sectors there needs to be a collaborative effort between all players involved”, he said. “We will see 26 fare classes grow into 676 options. Are they capable of working?”;
  • Airlines and aggregators will have to manage both ATPCo and NDC worlds for numerous years. “We shouldn’t be worried about costs, but should focus on generating revenue”, he added, but said that the delivery of NDC “will take many years”. He also said that in the development of NDC, airlines need to test robustness of their technology built up over the last 40 years’ of ATPCo technology, replicate the efficiency and effectiveness of the agent booking process and workflow in the API and re-engineer human processes;
  • As an industry we’ve been waiting for disruption but not worked together with the industry to adapt and evolve. “Why has our industry been talking about application programming interface (API) distribution for so long with such limited impact?” he questioned. He noted that application programming interface (API) technology is important for airlines. “API distribution provides capabilities that cannot be achieved through with traditional Airline Tariff Publishing Company (ATPCo) methods”, he said. Mr Heywood also said airlines need to distribute a combination of ATPCo and API content via aggregators. “This content must be displayed in a retailing marketplace and accessed by travel agents using familiar processes and airlines will then be able to make significant progress to increase sales via their APIs”, he said.

Aviation Strategy & Concepts:

Aviation Strategy & Concepts MD Ulrich Schulte-Strathaus, argued:

  • ‘Ownership and control’ regulation will actually provide the framework to ensure Brexit is delivered in a balanced way. “Without ‘ownership and control’ we would not be able to implicate this”, he said. He also noted that ‘ownership and control’ regulation is vital to governments to safeguard their national economies. “Airlines provide infrastructure that governments need”, he said in terms of financial investments, exports. Airlines “strongly impact GDP growth” so are major assets to governments so will “not give up” transport policy and infrastructure policy rights;
  • Union concerns need to be taken seriously. “They have an important role to play and need to be heard”;
  • Governments “will not abolish their sovereignty” and will retain ownership restrictions. Change will occur for sure, but this will not be due to ‘ownership and control’ changes but due to technological advancements, usage of drones, more automation, emergence of big data etc, he noted. He also said the big debate issue on ‘ownership and control’ is based on the simple balance of developing a global economy and maintaining national sovereignty, but its framework does permit sustainable change and should not always be highlighted as the barrier to change. “The strategy of abolishing such agreements are negative”, he argued. “If you do away with ownership and control, then what? How do you negotiate things”;
  • ‘Ownership and control’ conditions allow governments to better trade with other governments and he does not expect rapid change. “It has been effective”, he said. “Ownership and control is the fundamental pillar of sovereignty. It makes perfect sense that governments want to control aviation policy”;
  • Lufthansa‘s investment strategy in other airlines as a “defensive euro-centric move to solidify its home market”. Outside of the airline sector he said the airline had been clever historically to invest in external businesses despite its brand being only associated with airline operations. “Lufthansa’s aviation group strategy allowed it to buffer cyclical ups and downs in the airline sector through year-round businesses such as catering and MRO. These bring revenues despite cyclical nature of the airline business”, he said.

European Aviation Club:

European Aviation Club chairman Rigas Doganis, stated:

  • “The more you deregulate, the more people that are employed in aviation. It is as simple as that. Liberalisation creates more employment opportunities in the sector”. He also noted that investment issues should not influence decisions on ‘ownership and control’ regulation. “Airlines are now driven by sovereign funds, or cash rich businesses such as HNA, which is putting lots into industry”. He said it is not private investors that is driving the business. ‘It is lessors and manufacturers that make it easy for airlines to grow, new businesses to set up”;
  • The speed of change of ‘ownership and control’ is accelerating. Using United AirlinesAir Canada and Lufthansa Group joint ventures as an example he questioned: “What nationality is the business? They are flying huge numbers across the Atlantic, but we don’t know under what flag. It shows it is no longer relevant!”. He also noted that governments want to see changes in ‘ownership and control’ and as such it “is no longer an issue”;
  • The rules on ‘ownership and control’ as they exist have become increasingly irrelevant as markets have evolved: “Many countries now accept substantial foreign ownership, in most cases up to 49%. Some now accept 100% foreign ownership. Many now accept not just ownership, but also effective control such as Etihad Airways with airberlin and Alitalia“. He also highlighted that Delta Air Lines “has effective control” of Virgin Atlantic. “Nobody believes Virgin Atlantic is in control of its decisions”, he added;
  • Why airlines are going in the opposite direction to what we expect in terms of working with big data. He commented that while we are suggesting about closer links between airlines with data providers, we are actually moving away from this model as “airlines have been leaving and selling their shares in global distribution systems”;
  • Cross-border alliances and foreign control investments show that in isolated cases the industry can be “willing to abandon the rules” to stay competitive as change is taken place “progressively faster”. He said the industry as a whole in the future will “be more competitive, more open and in terms of ownership, and a very different environment”;
  • ‘Effective control’ is key to all airline investments, but warned that even if guarantees are made in government controlled businesses, a cautious stance is required. “Being controlled by government brings additional costs to a business”, he said;
  • Athens International Airport would make a good investment opportunity at the current time. The airport is witnessing a strong growth with traffic up 8.7% across the first four months of 2017, buoyed by monthly double-digit year-on-year growth in the international market.

DVB Bank:

DVB Bank senior VP aviation research Albert Muntane Casanova, stated:

  • From an investment perspective there is little pressure on the need to make changes to ‘ownership and control’ regulation. “Yields are not so significant” from an investment perspective in the airline sector and “not appealing”, he said.

BKH Aviation:

BKH Aviation chairman Barry Humphreys, stated:

  • ‘Ownership and control’ rules are going to be “one of the key problems faced in negotiations” on the United Kingdom’s departure from the European Union. He said Brexit would not just impact UK airlines but also many non-UK operators but a “common interest to address the issue” should deliver a sensible conclusion. “There is a sensible conclusion. I just hope politicians don’t stand in the way of it”, he said. He also said concerns that relaxation of ‘ownership and control’ rules could lead to flags of convenience. “There are straight forward ways to avoid these issues”, he said. In relation to questions on labour issues and how the framework protects employment, he claimed it had a limited function. “Governments deal with labour issues in others industries without such ‘ownership and control’ rules and things work progressively”, he explained;
  • Governments in Africa are “willing to accept foreign investment as a tool to maintain national airline sovereignty”, a market where ‘ownership and control’ rules are at their strongest;
  • ‘Ownership and control’ rules are “archaic and wholly inconsistent compared with other industries”. Using US airlines as an example he highlighted how “basket case” airline strategies had translated into a highly-profitable business through consolidation. “Common-sense should prevail and we should have a major reform”, he said. This he believed would occur through a “chipping away” strategy rather than a “big bang” but would ultimately create “a better industry”.

European Commission:

European Commission director general MOVE Henrik Hololei, stated:

  • The development of technology and new aircraft models have “helped to bring new business models and allow new entrants” to arrive in the market. “We need to be there to support them [to gain access to the market]”, he said;
  • “Airline investment is one of the main ways to achieve operational efficiencies for benefits of the business and consumers. I would like to see this much more on a global scale.” He suggested growth should be guided through a regulative framework. “I will feel far more comfortable to have an Air Service Agreement (ASA) that enables me to develop operations knowing I have a level of stability”.

Irish Aviation Authority:

Irish Aviation Authority CEO Eamonn Brennan, stated:

  • Airline mergers and investments within Europe and into other regions have to be transparent from a regulatory viewpoint. “There is no real concern on safety standards providing the centre of control is clear”, he said.

ACI Europe:

ACI Europe director general Olivier Jankovec, stated:

  • It would take an “innovative” airline to consider investments in an airport and questioned whether it would be allowed from a competition law perspective. “There are lots of barriers to break vertical integration in other industries”, he noted. However, he showed that solutions can be found, citing Lufthansa’s investment in Fraport and described the airline’s joint venture in Terminal 2 at Munich Airport as “very rewarding” enabling it to “influence every feature of its hub” delivering “an edge” to its operations.

airBaltic:

airBaltic CEO and chairman of the board Martin Gauss, stated:

  • Acquisition discussions have to come down to “which business is run better”. He said restrictions such as 49% ownership caps have no value as foreign investors “are smart enough to know how to gain effective controls” even through a minority investment.

KLM:

KLM president and CEO Pieter Elbers, stated:

  • Equity shares represent an “intermediate step” for airlines restricted by ‘ownership and control’ restrictions. Key drivers of investment include the ability to enhance local market position, boost footprint and accelerate growth, according to the executive. He highlighted that it would be easier to invest in another airline rather than another industry due to huge market capitalisation difference, highlighting the technology giants as an obvious example.

Dublin Airport Authority:

Dublin Airport Authority CEO Kevin Toland, stated:

  • The company has “significant concern” over Brexit as travel from the UK accounts for around a third of traffic into Dublin Airport and over a half of demand into Cork Airport. “They have to maintain market freedoms. The UK must find a way of organising itself in negotiations to see if it can preserve it”, he said;
  • Strong support to the European Commission for its “huge role” in supporting the industry and in particular Norwegian’s long haul expansion from Ireland. They ensured the delivery of “fair market conditions” to allow the airline access and permit its launch of transatlantic flights;
  • The important historic and continued role Ireland has played in the aviation leasing sector. “We invented the aircraft leasing business which is now a key driver of aviation activity across the world. It’s very important to us”, he said;
  • Ireland has “punched above its weight in aviation” for a long time. He noted that “Ireland is a people’s country” and a number of “key roles in the aviation sector” are held by locals. “We are small local economy so we have to trade internationally… take twice as many flights as counterparts in the UK… four times as many as those across Europe”, he added.