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Is sustainable profit an unrealisable dream?

Is sustainable profit an unrealisable dream?. Chris Tarry Stockholm 19 th November 2003. Agenda. Industry background issues Structural changes and consequences Managing the responses Conclusions Final thoughts. General Strategic Objectives. Survive Compete Prosper BUT:

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Is sustainable profit an unrealisable dream?

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  1. Is sustainable profit an unrealisable dream? Chris Tarry Stockholm 19th November 2003 Chris Tarry Aviation Industry Research and Advisory

  2. Agenda Industry background issues Structural changes and consequences Managing the responses Conclusions Final thoughts Chris Tarry Aviation Industry Research and Advisory

  3. General Strategic Objectives Survive Compete Prosper BUT: How does the industry match up Chris Tarry Aviation Industry Research and Advisory

  4. Global airline industry: Performance Source: ICAO Chris Tarry Aviation Industry Research and Advisory

  5. Passenger traffic and capacity index 1972-2002 600 500 400 Index 1972=100 300 200 100 0 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1998 1999 2000 2001 2002 1972 1973 1974 1975 1976 1977 1978 1979 1980 1995 1996 1997 Passenger traffic Passenger capacity Airline traffic and capacity trends Chris Tarry Aviation Industry Research and Advisory Source: ICAO

  6. Passenger load factor trends Chris Tarry Aviation Industry Research and Advisory

  7. Break even load factor trends Break even load factor = ((op cost x traffic)/(op rev x capacity)) Chris Tarry Aviation Industry Research and Advisory

  8. Long term industry trends Source: ICAO/CTAIRA research Chris Tarry Aviation Industry Research and Advisory

  9. International operating economics Chris Tarry Aviation Industry Research and Advisory Data: IATA

  10. Break even gap AETF airlines 1991- 2001 15 10 5 0 Gap from break even -5 -10 -15 -20 -25 -30 1994 1995 1996 1997 1998 1999 1991 1992 1993 2000 2001 First Intermediate Low Total The source of profit Chris Tarry Aviation Industry Research and Advisory Data: IATA

  11. Long term US yield trends in a mature market Source: ATA Chris Tarry Aviation Industry Research and Advisory

  12. European Airlines Trends: Europe Source: AEA Chris Tarry Aviation Industry Research and Advisory

  13. European Airlines Trends: North Atlantic Source: AEA Chris Tarry Aviation Industry Research and Advisory

  14. European Airlines Trends: Far East Source: AEA Chris Tarry Aviation Industry Research and Advisory

  15. Forecasting issues – traffic and real GDP Data: IMF, ICAO Chris Tarry Aviation Industry Research and Advisory

  16. Nominal GDP and airline revenue Chris Tarry Aviation Industry Research and Advisory Source: IMF/ICAO

  17. The search for a turning point: USA Chris Tarry Aviation Industry Research and Advisory Source: Pollingreport.com/ATA

  18. Industry Outlook Still an exceptionally tough environment Unsupported profit may not be possible before 2005/06 Airlines still need to achieve structural cost reduction Chris Tarry Aviation Industry Research and Advisory

  19. Structural changes and consequences Chris Tarry Aviation Industry Research and Advisory

  20. Terminology Low cost airline Low fare airline New model airline (NMA) Traveller Customer Business traveller Travel policy Compliance Product Commodity Marketplace Value for money ROI Chris Tarry Aviation Industry Research and Advisory

  21. Product issues What constitutes the product offer? • The flight? • Flexibility? • Timing? • Frequency? • Airport attractiveness? • On board service? • On ground service It depends – • Each of us (and our employer) will value and price the attributes differently Chris Tarry Aviation Industry Research and Advisory

  22. Market segmentation - The UK example Mainline British Airways Virgin bmi British Midland Lower Cost easyJet Low cost Ryanair Charter airlines More widely, segmentation is also possible between geographic region, maturity of market and market type Chris Tarry Aviation Industry Research and Advisory

  23. Market segmentation - International Regional: limited long haul network (Finnair) Supra-regional: extensive long haul network (Lufthansa) Intra-regional: cross- border but not long haul (easyJet) Global hub and spoke: global reach (Singapore, Emirates) Chris Tarry Aviation Industry Research and Advisory

  24. Industry life cycles What happens ? Slowing growth rate Changing consumer behaviour in maturing markets Decline unless there is change and re-invention Chris Tarry Aviation Industry Research and Advisory

  25. What are the constraints to change? Management? Labour? Capital? Infrastructure? Regulation? In reality a combination Chris Tarry Aviation Industry Research and Advisory

  26. Airline industry life cycles Is maturity and decline the only option? Does structural rigidity mean an inability to change? Has the managerial prerogative at some airlines been ceded? Is the fundamental and necessary change impossible? Are the costs of change too high? Will there be further exits? Opportunities for segmental new entrants Chris Tarry Aviation Industry Research and Advisory

  27. If traffic alone is not the route to profit, what is? A need for: The “right cost base” The best revenue stream The appropriate level of assets There is not a “one size fits all” template Chris Tarry Aviation Industry Research and Advisory

  28. Mainline airlines - what needs to be done? Reduction of structural excess supply Differentiation of increasingly commoditised products Addressing the gap between “customer and the traveller” Reacting to changing market structures Structural reduction of cost Improvement of shareholder returns Also important to keep a sense of perspective Chris Tarry Aviation Industry Research and Advisory

  29. British Airways: Productivity measures Chris Tarry Aviation Industry Research and Advisory Source: Company reports

  30. British Airways: Total measurement Data:: British Airways Chris Tarry Aviation Industry Research and Advisory

  31. New entrant airlines Chris Tarry Aviation Industry Research and Advisory

  32. Changing markets - The “new entrant” formula Supply led growth High utilisation High density seating Low distribution costs Simple fare structure Chris Tarry Aviation Industry Research and Advisory

  33. The London area experience Source: CAA Chris Tarry Aviation Industry Research and Advisory

  34. London and the Southeast Main focus of NMAs Rich travel market and incumbents initially pressured Significant fight back by incumbents Signs of market maturity Chris Tarry Aviation Industry Research and Advisory

  35. The Mainline “fight back” With a focus on: • Price discriminators • Quality discriminators Now able to offer “more options” • Business to Full fare Economy • Full Fare Economy to Restricted Economy Fundamentally changed “rules of engagement” Chris Tarry Aviation Industry Research and Advisory

  36. Mainline fight back (2) Fare structure simplification Easier internet booking process Raising awareness of value proposition Exportation of new fare structures Chris Tarry Aviation Industry Research and Advisory

  37. Fare trends – 2002 Source: American Express Chris Tarry Aviation Industry Research and Advisory

  38. The UK in an intra-European context Source: American Express Chris Tarry Aviation Industry Research and Advisory

  39. A snapshot of marketplace changes (1) Source: British Airways Chris Tarry Aviation Industry Research and Advisory

  40. A snapshot of marketplace changes (2) Source: British Airways Chris Tarry Aviation Industry Research and Advisory

  41. Potential effects on the NMAs From the mainline airlines’ response: Fall in average fare Rise in break even load factor Pressure on earnings growth Stock market reaction when “go-go” stocks go “ex” Chris Tarry Aviation Industry Research and Advisory

  42. Limits to growth exist – even for NMAs Markets are not infinite Risk of over-dependence on journey price elasticity Need for a reason to travel even if the ticket is free Increasing importance of other “trip determinants” Relationship between income and travel Chris Tarry Aviation Industry Research and Advisory

  43. UK Maturing markets? (1) Source: CAA Chris Tarry Aviation Industry Research and Advisory

  44. UK Maturing markets? (2) Source: CAA Chris Tarry Aviation Industry Research and Advisory

  45. UK Regional traffic trends (1) Source: CAA Chris Tarry Aviation Industry Research and Advisory

  46. UK Regional traffic trends (2) Source: CAA Chris Tarry Aviation Industry Research and Advisory

  47. Industry Consolidation Chris Tarry Aviation Industry Research and Advisory

  48. Consolidation issues “The degree of concentration in an industry reflects the extent and nature of competition” based on Douglas Needham “The Economics of Industrial Structure” 1970 Competition and market maturity are not evenly spread So – is consolidation the answer to the industry’s problems? Chris Tarry Aviation Industry Research and Advisory

  49. Putting it in context What are the problems of the mature and maturing airlines? Too much capacity Too much cost Not enough profit even in the best times Will these be solved by consolidation? Not in the absence of other actions Is the industry capable of managing the necessary change? Not a good track record in this area Chris Tarry Aviation Industry Research and Advisory

  50. Conclusions Permanent change in the operating environment New business models needed Without continuing change the industry will not: • Achieve adequate profitability • Attract new capital Key challenge remains the management of change Chris Tarry Aviation Industry Research and Advisory

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