Ed McKenna Director Ultramar Strategic Solutions November 19 th 2015 NJBTA Education Day Agenda Introduction GDP Growth 1H15 Global Commercial Aviation Results Regional Updates Europe Middle East ID: 624438
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Slide1
Global Airline Industry Update
Ed McKenna
Director, Ultramar Strategic Solutions
November 19
th
, 2015Slide2
NJBTA Education Day: Agenda
Introduction
GDP Growth
1H15 Global Commercial Aviation ResultsRegional UpdatesEurope / Middle EastAsiaLatin AmericaNorth America2016 Buyer’s LandscapeQ&A
2Slide3
Introduction
35+ years in strategic roles in the travel industry, both on the travel agency and corporate sides
20 years travel agency experience in:
TechnologyReportingOperations 15 years corporate experience in:Travel Program ManagementProcurement (Regionally & Globally)Joined Ultramar Strategic Solutions in September, 2015 as Director of Strategic Solutions
3Slide4
Global Airline Industry Overview: GDP Growth
Region
2014
20152016United States2.42.72.8Latin America
0.9
0.4
2.0
Brazil
0.1
-1.3
1.1
United Kingdom
2.8
2.6
2.6
Germany1.41.51.6Japan0.01.11.7China7.47.17.0Australia2.22.42.9India7.37.57.9Africa (Sub-Sahara)4.64.24.6Worldwide2.62.83.3
Source: World Bank (November 2015)
Gross Domestic Product (GDP)Primary indicator used to gauge the health of a country’s economyConsists of 4 components:InvestmentNet ExportsGovernment ExpenditurePersonal Consumption Expenditures
4Slide5
1H15 Global Commercial Aviation Results
Financial Results - 1H15
Carrier
RevenuesProfitsAmerican Airlines$20,700M$3,100MDelta Airlines$18,600M$2,200M
United Air Lines
$18,500M
$1,900M
Air France
/ KLM
$13,161M
$1,127M
Lufthansa Group
$16,441M
$1,021M
Japan
Air Lines*$5,588M$996MEmirates **$13,150M $600MIAG / British Airways$11,088M$594MSingapore Airlines*$5,137M$256MCathay Pacific$6,500M$254MWhy are the Financial Results so good?All Oil and Ancillary Fee related?Airline Spend $823B (1% of Global GDP)Fuel represents 30% of total costs ($1 flux in barrel of oil generates $100M in incremental cost/savings)Carriers will spend $70B less in fuel in 2015 vs 2014 (-33%)2014 ancillary fees generate $39B incremental revenue (+17%)Are Customers Benefitting from the Newly Found Fortunes?New aircraft (1,700 to be delivered in 2015 alone)Lower Air faresEnhanced premium product offeringsAmenities (On Board & Lounges)Carriers introducing more non-stop to secondary marketsToday’s Airlines are Profit DrivenMinimal government assistanceCost structure is based on $100 oil (per barrel)Becoming very lean & efficient thru intense competition* Results based on April 1, 2015 – September 30, 2015 time frame** Based on April 1, 2014 – March 31, 2015 and normalized
5Slide6
Europe / Middle East Outlook
Aer Lingus part of IAG (British Airways, Iberia)
Ultra Low Cost Carriers (ULCCs) impact:
Norwegian Airlines challenging British Airways in London Ryan Air & EasyJet establishing corporate type programsCapacity ExpansionAggressive capacity expansion from Middle Eastern carriersSignificant expansion on the North Atlantic from both legacy-network carriers (BA & LH), as well as ULCC such as Norwegian Uneasy political situation, especially in Southern Europe / Middle EastLabor issues, most notably at Air France and Lufthansa German AirlinesCurrency fluctuations impacting earnings
Strong US Dollar and GB Pound SterlingWeaker Euro
6Slide7
Asia Outlook
Cathay Pacific aggressively adding new cities in Europe & North America
Korean Air facing intense LCC competition and pressure from Chinese carriers
Singapore Airlines experiencing sluggish growth, profits and yieldEmphasis on Scoot Airlines expansion (Singapore’s LCC)Japan Airlines predicting strong growthStrengthening its oneWorld relationship with new DFW to Tokyo serviceQantas restructuring has produced record breaking earningsJetStar expansion into Asia
Slower economic growth in China will impact long-term growth
China has experienced blistering economic growth for many years
Expansion of non-stop service from secondary cities in China to Europe & North America
United added San Francisco to Chengdu and will add Xi’an in 2016
Xiamen and China Southern Airlines keen to expand
787-8 Dreamliner
7Slide8
Latin America Outlook
Uneven Regional Economic Performance
Brazil’s economy still in the doldrums
Brazilian carriers are cutting domestic Brazil capacity significantlyOlympic Games in Rio should provide additional reliefContinued turmoil in VenezuelaCurrency devaluations in Brazil & Colombia leading to double-digit inflationCommodity prices has fallen significantlyUnited Airlines 5% stake in Azul SAUnited looking to strengthen its footprint, especially in BrazilSimilar strategy to Delta’s relationship with GOLAeromexico / Delta Joint Venture
Increase flight options with both carriers in the US and MexicoStrengthens
Aeromexico
position in the face of LCC competitors (
InterJet
&
Volaris
)
Increased non-stop service to US and Europe
LATAM
building up Sao Paolo service to
Europe in response to their move to
oneworldAzul added non-stop flights from Sao Paolo to Orlando and Fort LauderdaleEvaluating Sao Paolo service to/from New York/JFK in 20168Slide9
North America Outlook
Day of Week Analysis for NYC to Hong Kong Travel
Moderate economic growth expected to continue in 2016 & 2017
American / US Airways merger completeContinued Consolidation at Hub airportsUnited transfer of JFK / West Coast service to NewarkCapacity ExpansionAddition of new flights, especially over the North Atlantic and PacificUpgauging of equipmentEnhanced Product Offerings
NYC/Boston to West CoastExpansion of JetBlue’s Mint service
Air Canada: Strong International Growth
Targeting US travelers with connections in Toronto
PRASM and load factors in Western Canada are down significantly due to oil crash
Ultra LCC Impact
Frontier, Sprit and Allegiant establishing routes in Chicago and Seattle
9Slide10
2016 Buyer’s Landscape
Geopolitical Events
The Great Unknown
What is Old is New Again! Revenue-based performance contracts with certain carriersCarriers want more “premium” businessMarket Share Performance Remains ImportantAbility to move international travel will impact positively domestic discount structureJV/JB Corporate Deals Now the Norm Single carrier & world-wide alliance programs are a thing of the pastIncreased Capacity = Opportunity?After years capacity discipline, carriers are adding more flights/seats
North Atlantic, in particular, becoming hyper-competitive
Ultra Low Cost Carriers (LCCs)
Expanding into new markets like Chicago & Seattle
Limited ability to leverage expanded ULCC networks with legacy carriers
Benefit of lower published pricing to be competitive
10Slide11
Take the Pulse & Determine Scope
Whether utilizing 3
rd
party consulting services or doing internally, the first steps of any airline sourcing initiative include determining the company mindset/culture, data collection and scope of workBefore taking action, take the “Pulse”
What’s the appetite for change?What’s the traveler’s satisfaction threshold?
Understanding your Top Markets
Where are the opportunities within these top markets?
What international markets can I shift to obtain stronger domestic discounts?
Past and Present will dictate the Future
Can I “turbo source” or is a formal sourcing initiative more appropriate?
Do I need 3
rd
party consultants to assist me?
Is my sourcing initiative a North American / US only exercise or is my company looking
for additional points-of-sale pricing?11Slide12
What to Expect When Negotiating
What do airlines look for from buyers?
Above and beyond FMS/QSI
Premium Spend and SegmentsCommitments to not “Overcommit”Which agreement(s) do I choose?Hard Savings vs. Cost AvoidanceRoute Coverage or Spend CoverageCarrier Friction
What
is
FMS/QSI?
Fare Market
Share (FMS) or Quality Service Index (QSI)
is a measurement frequently used by carriers which represents a carrier’s “expected” (given no corporate agreements exist) market share in an individual market or combined set of markets.
Many factors are considered in determining these numbers, including, but not limited to:
Non-stop versus connections
Frequencies offered
Total number of seats available
Departure / arrival times and the appeal to the traveler
Equipment utilizedAirline hubs12Slide13
Post-Implementation Management
On your Market, Get Set …. and GO
Internal Marketing
Status MatchingPerformance Content Customization … Don’t be afraidAlways Remember … Nothing is Permanent13Slide14
Q & A
14Slide15
Thank You!
Ed McKenna
Director, UTM Strategic Solutions
ed.mckenna@ultramartravel.com212-856-563515