John Grant

OAG

Living in Changing Times

Aviation has always innovated, inspired and led change in the global community.

We have innovated in the most amazing ways over the last 100 years.

• Composite aircraft

• Twin-engine intercontinental operations (ETOPS)

• Distribution technology and transparency

• Logistics management

• Environmental welfare

• Championed global trade

• Constantly challenged convention and asked ‘why’

Living in changing times

As an industry we’ve also failed…

Failed to make consistent profits since commercial operations started in 1914.

• There are a few notable successes – Ryanair, easyJet, Air Asia, Southwest, Emirates.

• And there are many notable failures – Panam, TWA, Swissair, Sabena.

Failed to overcome protectionist activities from numerous Governments and industry

bodies.

• Foreign ownership rules prevent natural consolidation of supply

• ‘Odd’ operating requirements protect state owned carriers

And we have collectively failed to keep our promises.

• ‘Open skies’ agreement was signed but never implemented

And yet…

The global recession appears to have changed attitudes.

Airline CEOs are no longer chasing more capacity but balancing supply to demand.

Costs are being very closely managed in most cases.

State-owned carriers are being allowed to fail or shrink:

• Cyprus Airways, Malev, Malaysia Airlines

And we are no longer afraid of the ‘big C’ word,

Consolidation

But there are signs of optimism

Too many chasing too few….

Summer

Season

World Europe North

America

Asia China

2011 781 241 95 165 24

2012 770 218 98 173 23

2013 736 203 92 177 24

2014 718 190 89 181 29

2015 634 168 84 174 29

196 countries in the world and 634 scheduled airlines… so over 3 per country!

In the last 5 years, Europe has ‘lost’ over 73 scheduled airlines.

China, despite its very strong growth in both domestic and international services, has 29 scheduled

carriers reflecting the State control of development.

So, do we have too many airlines that are sub-scale, niche, boutique or just wrong?!

Airline consolidation is happening and will continue to happen in the next few years:-

• The United States now has the ‘Big Three’

• Europe has IAG, Lufthansa Group & Air France/KLM

• Latin America has LATAM and Avianca

• Asia has the Singapore consolidation

• China has consolidation through ownership structures

And it’s happening both in legacy airlines, low-cost carriers and even migrating across

operating models – IAG, Singapore Airlines, LAN.

So, consolidation is happening………..BUT

The consolidation play

Alliances appear to be no longer the only model for overcoming regulatory barriers and are

appearing to fracture.

Bi-lateral, inter alliance agreements are appearing between carriers with American code-

sharing with Korean Airlines.

Some secondary alliance members are becoming frustrated at the lack of ‘bottom line’

improvement they see, particularly from a cost perspective.

Alliances are fracturing

Increasing equity involvement between carriers:

• Delta Air Lines investment in Virgin Atlantic

• Etihad’s investments in various European carriers

• Qatar Airways investment in IAG

• Singapore Airlines investment in Silk Air & Scoot

Franchise solutions – a successful operating model that is franchised out overseas with a

local partner to overcome regulatory hurdles and provide further investment:

• Air Asia

• Viva Mexico, Colombia

• Air Arabia, Air Arabia Maroc, Air Arabia Egypt

Which is great as it’s creative and helps builds competition BUT….

Which is leading to

Regulation is stifling growth, competition and returns.

Few industries have as many ‘regulators’ as aviation..

Ownership rules prevent real industry consolidation

‘Local laws & rules’ restrict competition

So collectively we find ways around the rules, get flexible in our thinking but avoid the

elephant in the room.

But we need to stop acting and thinking too local and act more global.

Avoidance of the issue…..

Momentum for change is building.

Today’s ‘healthy’ returns for many will not be there forever.

Pressure is building for those carriers still carrying legacy practices

People are finding ways around the barriers

Consumer pressure for transparency is mounting

As an industry, we ‘self-regulate’ very effectively. We create new exciting product offerings

every day, we reduce our environmental impact every day and we drive efficiency in all our

practices.

Before the window closes, we should fly through the opening and seriously

start to act globally and innovate locally!

A window of opportunity exists…