Emerging Markets and Evolving Models: Challenging the Industry’s Structure December 2010

Emerging Markets and Evolving Models:
Challenging the Industry’s Structure
2010 ACI-NA International Aviation Issues Seminar
December 2010
William S. Swelbar
Research Engineer
MIT International Center for Air Transportation
When I was here in 2007, I asked
the question:
Is the US Being Relegated
to a Supporting Role
in Tomorrow’s Global Aviation Market?
Shifting Our Attention from the Domestic Arena
to the Global Stage – GAME ON
▐
▐
▐
▐
▐
Airline Geography: Totally different global map today
Iconic Airline Names: Being challenged on every
continent
Global Alliances: Being challenged on every
continent
Protectionism: Is this what is playing out between
Canada and the United Arab Emirates
The U.S. Market: Provides a lens through which to
watch and anticipate possible competitive responses
and potential outcomes
Today I ask:
Is the alliance structure the best operating
model to compete
with the emerging airline models
in Latin America, the Middle East and China?
1
What the Numbers Say
A Strong 2010. Weakness is Expected in 2011.
Global Commercial Airline Profitability
6
20
EBIT Margin (Left)
Net Losses (Right)
4
10
2
5
0
0
-2
-5
-4
-10
-6
-15
-8
-20
'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10F '11F
Source: IATA
15
US$B
Revenues (Percent)
8
Europe Remains Weak; Asia Pacific Outperforming
Airline Net Profits by Region, US$B
6
4
2
0
-2
-4
-6
Europe
Asia Pacific
North
America
2009
Source: IATA, ICAO
Latin
America
2010
2011
Middle East
Africa
Emerging Economies Will Fare Better in 2011
Forecasts for GDP Growth
8
7
6
5
4
3
2
1
0
US
Japan
Europe
Asia Pac
ex. Japan
2010
Source: IATA, EIU
Middle
East/N.
Africa
2011
Latin
America
World
Large Geographical Differences in Travel
Growth in Passenger Numbers by Flight Segment
25%
Within Asia
20%
Change Year-Over-Year
15%
North & Mid-Pacific
10%
Middle East/Asia
5%
North Atlantic
0%
-5%
-10%
-15%
-20%
-25%
2007
Source: IATA
2008
2009
2010
The Airport “Balance of Power” is Shifting
▐
Among top 100 global airports, 26 gained in relative
position
– Asia – 9; Middle East – 5; Europe – 5; South America – 4; North
America – 2
• Europe’s gaining airports can be found in highly concentrated LCC
markets
▐
Among top 100 global airports, 29 lost in relative
position
– North America – 13; Asia – 9; Europe – 6
• Of 9 airports losing in Asia, 5 can be found in Japan
▐
Big gainers in relative position
– Doha, Bogota, Jakarta and Moscow
▐
Big losers in relative position
– Dublin, Fukuoka and Sapporo
Top 20 Airports Ranked in Terms of Available Seat Miles Flown
(ASMs in Billions)
November 2010
Amsterdam
4.16
Beijing-PEK
Seoul
4.86
3.62
Tokyo-NRT
5.65
Shanghai
3.22
Bangkok
5.38
Hong Kong
5.76
New York-JFK
Chicago-ORD
6.36
4.32
San Francisco
New York-EWR
4.05
3.15
Los Angeles
Atlanta
6.64
4.37
London-LHR
9.36
Paris-CDG
6.22
Frankfurt
5.90
Madrid
3.57
Dubai
6.23
Singapore-SIN
5.39
Sydney
3.53
Data Source: Oliver Wyman planestats.com
11
Top 20 of 100 Largest Airports in ASM Growth
November 2010 v. November 2008
Oslo
14%
Beijing
13%
Chengdu
11%
London-STN
23%
Tokyo-HND
11%
Barcelona
11%
Hangzhou
20%
Shenzhen
12%
Kuala Lumpur
19%
Copenhagen
12%
Berlin
18%
Moscow-SVO
21%
Istanbul
24%
Doha
35%
Dubai
20%
Bogota
26%
Jakarta
27%
Sao Paulo-GRU
12%
Sao Paulo-CGH
15%
Melbourne
14%
10-20% Growth
21-30% Growth
30% + Growth
Data Source: Oliver Wyman planestats.com
12
20 of 100 Largest Airports Experiencing Declining ASMs
November 2010 v. November 2008
Dublin
-15%
Sapporo-CTS
-13%
Seoul
-6%
Tokyo-NRT
-14%
Fukuoka
-13%
Las Vegas
-8%
San Diego
-7%
Honolulu
-11%
New York-EWR
-8%
Atlanta
-10%
Orlando
-6%
Tampa
-12%
Manchester
-13%
London-LHR
-10%
Paris-ORY
-12%
Helsinki
-7%
Brussels
-8%
London-LGW
-8%
Milan-MXP
-8%
Bangalore
-15%
5-8% Decline
9-12% Decline
13% + Decline
Data Source: Oliver Wyman planestats.com
13
2
Asia-Pacific Region
Asia Pacific Region
▐
Home to 8 of the Top 20 Airports in the world in terms of seats
▐
Balance of Power Shift is Underway
–
–
–
Less (Much Less?) about Japan and all about China
China’s economy now bigger than Japan
Tokyo’s gateway status to the region in decline
▐
LCC’s in infancy stage, but promise to leave fingerprints on
shape of the market
▐
With JAL in bankruptcy, will there be other legacy carriers in
the region that succumb to the new market realities?
▐
Southeast Asia promises to be a real battleground
▐
Aircraft technology will continue to permit the overfly of
traditional points on the region’s map
Domestic Asia Markets: 14% Market Share for LCCs
…..and Growing
Top 10 Markets (95% of Total Domestic Traffic)
Domestic China
58% of Asia-Pac
Domestic Traffic
LCC market share: 3%
Domestic Japan
Domestic Australia
Domestic India
Domestic Indonesia
Domestic Rep. of Korea
Domestic Malaysia
Domestic Thailand
Domestic Philippines
Domestic New Zealand
Half of the top 10 markets
With a LCC market share >40%
0
100
200
300
400
500
600
Daily Seats (Thousands)
LCC Airlines
Source: Airbus, Ascend January 2009
Other Scheduled Airlines
700
Big Cities, Big Demand – Intra-Asia Demand Concentrated
Beijing
Seoul
Osaka
Shanghai
Taipei
Hong Kong
Bangkok
Kuala Lumpur
Singapore
Jakarta
Source: Airbus, IATA Paxis – full year 2008
Tokyo
Travelers Between Asian
Countries:
> 46% want to travel between
these cities only
> 91% want to travel from or
to these cities
Domestic China: High Concentration and Fastest Growing Cities
(Air Traffic)
45% of the domestic traffic
from/to these 3 cities
PEK
PVG
HKG
High Concentration of Demand
Beijing, Shanghai and Hong Kong
Source: Airbus
HEK
NDG
JGN
CIF
PEK
UYN
TGO
TSN
WEF
TYN
XNN
CIH
XUZ
LXA
LZO
LYA NKG
CKG CGD YIW
BSD
JJN
LJG
LZH
XIC
SYK
YNZ
Fastest Growing Cities
Airport pairs expected to grow above average
domestic traffic growth
3
Middle East Region
Middle East Region
▐
▐
▐
▐
Much like the LCC’s transformed the US domestic market, the
competitive actions in the Middle East will disrupt global traffic
flows for any number of European, North American and
Southeast Asian carriers and their respective alliances
Region is highly dependent on negotiating new bilateral rights to
further leverage network. Will they be successful?
Big question is whether the region can support three carriers with
similar network goals?
Aggressive low cost expansion will also work to stimulate new
demand in many new and emerging markets in various regions
The Middle East Has a Geographical Advantage to
Access the Emerging Market Traffic Flows
8,000 nm
4,500 nm
86% World Population
63% World GDP
Source: Airbus
2,500 nm
36% World Population
16% World GDP
Emirates Route Map
Newcastle
London
Glasgow
Amsterdam
Moscow
Hamburg
Manchester
Frankfurt
Birmingham
Dusseldorf Munich
Prague
Paris
Vienna
Zurich
Nice
Venice Istanbul Larnaca
Milan
Damascus
Rome Athens
Tehran Peshawar
Madrid
Beijing
Tunis Malta Beirut
Tokyo
Islamabad
Seoul
Baghdad
Lahore
Osaka
Kuwait
Amman
Ahmedabad
Casablanca Tripoli
Delhi
Shanghai
Cairo Dammam Bahrain
Dhaka
Guangzhou
Medina
Karachi Mumbai Kolkata
Doha Dubai
Riyadh
Hong Kong
Hyderabad
Muscat
khartoum Jeddah
Dakar
Bangalore
Chennai
Manila
Sanaa
Kozhikode
Bangkok
Kochin
Lagos
Addis Ababa
Colombo
Kuala Lumpur
Abidjan Accra
Male
Nairobi
Singapore
Entebbe
Thiruvananthapurar
Dar
Es Salaam Seychelles
Jakarta
Luanda
Cape Town
Johannesburg
Durban
Toronto
Houston
Mauritius
Sao Paulo
Brisbane
Perth
New York
San Francisco
Los Angeles
Sydney
Melbourne
Auckland
Christchurch
4
Latin American Region
Latin American Region
▐
A region in its infancy
▐
50 percent of the region’s activity centered on Brazil and Mexico
–
Colombia emerging as an important aviation market
•
•
▐
In one of the most interesting consolidation announcements in 2010,
LAN announces a merger with Brazil’s TAM
–
▐
▐
Avianca does strategic merger with TACA in 2009
Peru, Uruguay and Chile offer significant upside
Another alliance fight brewing like in Japan?
The Mexicana bankruptcy/liquidation should be of no surprise
The low cost carriers in this region will also have a say in market’s
ultimate architecture
–
GOL and Azul in Brazil
Emerging Airline Models in Latin America
San Salvador
Panama City
Quito
Bogotá
Guayaquil
Lima
São Paulo
Santiago
Buenos Aires
LAN/TAM
Taca
Copa/Aires
5
Commonwealth of Independent States
Commonwealth of Independent States
▐
▐
▐
Home to one of the world’s fastest growing
airports in terms of relative importance – Moscow
Countries all below world average in terms of trips
per capita
Commodity driven economies represent
risk/opportunity
– Export driven economy
– As world emerges from recession, commodity price rise
will be an important contributor to growth
▐
Growth areas to watch
– North America and Asia
CIS Nations Spread Their Wings
1992
36 International City Pairs
>4,000 Monthly Seats
2000
56 International City Pairs
>4,000 Monthly Seats
2008
126 International City Pairs
>4,000 Monthly Seats
6
Africa
Africa
▐
China, India, Middle East and AFRICA – YES AFRICA - expected
to lead the world recovery
▐
Second most populated continent after Asia
▐
Like the CIS, a commodity rich continent
–
▐
As political tensions wane, increases in tourism and trade
–
–
▐
▐
As commodity prices rise ….. So do prospects
Considerable foreign investment in recent years
The addition of North American services to the continent is significant
LCC presence in North Africa stimulating new demand
African airlines have less than 50 percent of the continent’s
market
7
North America
North America
▐
Still home to the largest airports
– Largest in terms of departures; smallest in terms of average
seat size
– Growth prospects reflect maturing of the market
• Below average growth rates for worldwide traffic
▐
Growth will occur in the Asia Pacific, Middle East and
CIS Regions
– Regions where liberalization will lead to new opportunities
▐
Significant consolidation activity underway
– Low cost carriers failing to find organic growth opportunities
– Regional carriers combining
• Need to alter business approach as 50-seat jets come off of lease
8
Europe
Europe
▐
More about Central Europe than Western Europe
– Watch out for Turkey and its flag carrier, Turkish Airlines
▐
LCC’s are prevalent and growing
▐
Most threatened by Middle East airline activity
▐
Consolidation activity – Building intra-continental
market strength
– Market still remains highly fragmented so more consolidation
activity expected
▐
Will Middle East activity facilitate first global merger?
Domestic European LCC Operations Primarily Focused on a Small
Number of Key Countries Today
Domestic Spain
Domestic Italy
Domestic Germany
Domestic UK
Domestic France
Domestic Norway
Domestic Sweden
Domestic Greece
Domestic Finland
Domestic Portugal
Domestic Denmark
Domestic Ireland Rep.
Domestic Switzerland
Domestic Poland
Domestic Austria
Domestic Romania
Domestic Croatia
Domestic Israel
Domestic Iceland
Domestic Greenland
Domestic Bulgaria
Domestic Czech Republic
Domestic Slovakia
Domestic Cyprus
Domestic Latvia
Domestic Netherlands
Domestic Estonia
Domestic Bosnia & Herzegovina
Domestic Macedonia Former
Domestic Lithuania
0.0
LCC Airlines
Other Scheduled Airlines
LCC Market Share: 22%
0.5
1.0
Source: Airbus, OAG, Scheduled seats (millions), Sept. 2006
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
9
Airline Industry Structure
Why Can Industries Serving the Airlines Consolidate – Across
Borders – And the Airlines Cannot?
ATC
one at
each
airport
Source: Lufthansa
Aircraft
Manufacturers
Aircraft
Leasing
2–4
providers
2 providers
> 1500
Top 10
100%
market share
45 %
market share
Appr.
35 %
market share
Boeing
Airbus
ILFC
GECAS
Fierce
Competition!
Airlines
Ground
Handling
<3
competitors
at deregulated
airports
Catering
Airports
MRO
CRS
2 providers
“natural
Monopolies”
Top 5:
3 providers
50 %
market share
85 %
market share
40%
market share
Sabre
Amadeus
Galileo
Airline industry is highly fragmented if compared
to other industries
100%
80%
Top 10 = 85%
Top 10 = 76%
Top 10 = 63%
Top 10 = 36%
Toyota 13%
Maersk 17%
Delta 7%
American 4%
United 4%
Nokia 39%
GM 11%
MSC 11%
Global Share
Ford 10%
60%
40%
20%
0%
Samsung 16%
Hapag-Lloyd
Evergreen
APL
NYK Line
Hanjin
Etc.
Volkswagen
Renault
Hyundai
Honda
Fiat
Suzuki
Etc.
LG 8%
Sony Ericsson
RIM
Sharp
Motorola
Apple
Etc.
15%
24%
37%
64%
Mobile Handsets
Automotive
Container Shipping
Airline
Top 3
Source: Boston Consulting Group
CMA CGM 8%
Air France KLM
Emirates Lufthansa
British Airways
Continental
Southwest
US Airways
Top 4-10
All Others
Airline Industry is Highly Fragmented but Alligned
by Alliances
The Airline Industry is Highly Fragmented
Others
AA
DL
Others
UA
JL
LH
NH
AF
CZ
BA
Source: Lufthansa
STAR Alliance is the Leading Airline Alliance
US
CO
Consolidation is still affected by diverse limitations
▐
▐
National Laws: Restrictions of M&A by “Ownership
clause” and other local laws
High National Identification: Airlines as “national
property”
▐
Traffic Rights: Bilateral restrictions of traffic rights
▐
Unions and Politics: Heavy influence over mergers
▐
Financial Position: higher risk to liquidity
The Synergies of a Cooperation are Determined by the
Level of Integration
Economical Benefit/Complexity
100%
8
JV
7
6
Alliances
5
4
3
2
1
Merger/ M&A
Bilateral Joint Ventures (Profit)
Bilateral Joint Ventures (Revenue)
(Free sale) Codesharing
Blocked Seat Agreements (Codeshare)
Sales Incentive Agreement
Special Prorate Agreement (SPA)
Interline Agreements
no cooperation
Depth of
integration
The Size of Alliances is Increasing
QF
AA
AY
BA
CX
IB
JL
LA
MA
RJ
Affiliates
KA
YW
JO
JC
NU
4M
XL
LP
AO
Top Unaligned Airlines
Network Carriers
MX
PR AR
SV
EI
EK
EY
S7
AS
HU
KQ
AF Associates
CM
AM
UX
AZ
CZ
DL
KE
KL
NW
OK
SU
CI
FV
ET
LY
BR
B6
AB
QR
TA
IT
VN
GA
GF
FL
F9
WN
DJ
JQ
FR
G3
U2
OS
BD
OZ
CA
SA
CO
SK
JJ
SN
JK
SQ
LH
TG
LO
TK
LX
TP
MS
UA
NH
US
NZ
LCCs
WS
AI
9W
MU
AV
MH
VS
AC
Regional
OU
KF
JP
The Top 5 Alliance Partners Generate Almost
Two Thirds of the Synergies
Partners 2007
Network Contribution
38 Partner Airlines
~1.000m€ pa.
60%
Top 5
Source: Lufthansa
Benefits of Joint Ventures
▐
▐
▐
▐
Consumers gain access to greater inventory of seats, more
destinations, more routings, and more price options
Pooling of revenues creates incentives for carriers to maximize the
value and consumer benefits of the joint venture (carriers become
indifferent to which partner operates a flight)
Integration of planning, pricing, inventory management and sales
enhances the carriers’ ability to compete effectively with other
alliances
Allows partners to achieve many of the benefits of a transnational merger
Integration of LH Group Airlines will reinforce the leading
position of A++ on the North Atlantic
Transatlantic Passenger Shares By Alliance:
45%
40%
35%
30%
25%
40%
Combined A++ Revenue
in the Dimension
of 10 B$
6%
5%
29%
30%
3%
21%
20%
15%
10%
Air Canada
Continental
Lufthansa
United
26%
20%
5%
9%
0%
Star
Source: Lufthansa
SkyTeam
Joint Venture (ATI)
oneworld
ATI (Non-JV)
Unaligned
Non-ATI
Different Models of M&A Integration
Examples
Characteristics
Advantages
Disadvantages
Source: Lufthansa
One Brand
Co-Brand
Multi-Brand
Full integration
Very high integration
High integration
One management
Integrated management
Management teams
One brand
Two brands
Multi-brand
Maximum of synergies
Higher synergies
Fast decision processes
Maintain (national)
brands
Loss of a potentially
well known brand
Higher complexity
Profit center orientation
Maintain (national)
brands
Flexibility in growth
Higher complexity
Half of the Synergies Cannot be Realized by Alliances but
by Mergers
Illustrative
Synergies in %
15
Network Related
15
15
4
20
5
15
4
11
10
3
7
10
4
6
12
3
100
50
Synergies, which
can be realized by
M&A
15
50
11
Synergies, which
can be realized by
Alliances
15
New
O&Ds
DOM
Souce: McK 2007
New
O&Ds
IC
Overlap
O&Ds
Redesign
Network
FFP
Cost
Synergies
Others
Total
Synergies
The Need for Transfer PAX is Driving the Consolidation in Europe
41.6 Million (53%)
Local IC-Passengers out of alliance hubs
Others: 11.6 Million
37.4 Million (47%)
Local IC-Passengers of alliance-hubs
15.7
HEL
0.5
14.1
AMS
3.7
LH system
needs
transfer
pax
7.6
LHR
15.7
ZRH 1.5
CDG
10.4
BA
Source: Lufthansa
AF/KL
GLA
0.5
DUB
1.0
SNN
0.4
MUC 1.5
FRA 4.6
LH/LX
STO
0.8
OPO
0.2
LIS
0.8
MAN
1.9
MOW
1.6
CPH
1.0
BER
HAM 0.6
BRU
0.5
BHX
1.4
0.4
DUS
PRG
0.7
STR 0.4
0.3 VIE
LYS GVA
0.9
0.8
0.7
MIL
TLS MRS
2.3 VCE
0.3 0.8
0.5
NCE
0.4 ROM
BCN
MAD 1.2
2.6
3.0
WAW
0.4
KRK
0.1
BUD
0.3
IEV
0.3
BUH
0.2
IST
1.4
ATH
0.9
A Case for Foreign Ownership?
▐
▐
If vendors serving the airline industry are allowed to consolidate
into dominant positions with few border restrictions, and …
If other industries like steel are permitted to consolidate market
power around 4 global providers, and……
▐
If the global airline industry has not one dominant player, and …
▐
If Joint Ventures only capture 50% of potential synergies, and…
▐
▐
If the five biggest alliance members produce 60% of the benefits,
and ….
If the new and emerging competition is obvious,
A Case for Foreign Ownership?
▐
▐
▐
▐
Then why should airline companies be hamstrung in their ability
to maximize financial performance?
Then why should airline companies be forced into band aid
solutions like alliances when the new and emerging competition
are building truly seamless, organic products?
Then why should companies that are, or are certain to be, under
attack from the new and emerging competition be prohibited
from joining hands to mount the strongest competitive reaction
possible?
A far flung alliance formation has less chance to build a global
brand than the new and emerging competition
For More Information on the
MIT Airline Data Project
email: [email protected]
or visit:
www.airlinedataproject.mit.edu
www.swelblog.com
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