Anyone who ever thought aviation was a glamorous business would have had their illusions shattered at this week’s CAPA LCC Global Summit in Singapore as airline executives, one after another, spoke of the myriad challenges facing their industry.
Those of us who’ve followed the industry know that airlines typically have a lot to worry about – from external threats (such as people with toy guns who decide to hold up a plane) to internal operational challenges (fuel costs, distribution costs), not to mention the uncertainties of the global economy.
But now they have even more to worry about, from threats from tech advancements such as autonomous air taxis to disruption from tech giants reducing them to commodities and mere service providers in the travel food chain.
Peter Harbison opening CAPA LCC Global Summit
Opening the conference, chairman of CAPA (Centre for Aviation Sydney) Peter Harbison spoke of the uncertain outlook ahead sparked by factors such as excess capacity, rising fuel prices and substantial demand reduction.
The aviation industry has seen double digit growth the last three years and “that’s unusual”, warned Harbison. “Growth has been at the price-sensitive end of the market and low cost airlines have had an advantage operating better margins at low yields.”
But all that might change because truth is, there have been lots of aircraft orders over the last 12 months – specifically narrow body aircraft such as the 737Max and A320/321 NEOs, enabling longer narrow body flights for low cost carriers – and most of the capacity is coming into Asia, including the Middle East.
Low cost airlines now account for more than 50% of shorthaul air capacity in Asia Pacific, the figure higher in South-east Asia than North Asia, where activity is hotting up as well. Japan Airlines’ new low cost longhaul subsidiary is poised for takeoff and its name is likely to be called ZIPAIR.
Here are the key takeaways from the event.
• A future of autonomous air taxis and the inevitability of commoditisation
Steven Greenway points out the threat of commoditisation by tech giants.
Other than the challenges of launching an ultra low cost airline in the tough market of Canada, Steven Greenway, CEO of Swoop, admits to being worried about the impact of autonomous air taxis when they become a reality. “People used to catch trains, then we had cars. This is coming and I cannot see how this would not have a huge impact on airlines.”
The CEO of the West Jet-owned subsidiary, who spent more than a decade in Asia, most recently with Scoot in Singapore, also pointed out the threat of commoditisation by tech giants such as Google and Amazon. “They have great power and have more interactions with customers than any of us. They will own everything between search and boarding the flight and somehow, we could just be providing the uplift for them.”
And the truth is, he admitted, he doesn’t have an answer to how to prevent this inevitability, with how platforms were now offering customers anything from car rides to food deliveries.
“I am a commodity. This is a problem for everyone, even for full service brands even though they might not want to admit it.”
• Beware the perils of the platform economy
Hugh Aitken of Skyscanner also raised the spectre of “Google, friend or foe” argument, with its growing power in the travel funnel. Its growth has been staggering in the US, he said, affecting airline direct traffic as well as travel search brands like KAYAK.
He also pointed to platforms such as Airbnb that had expressed its intention to build an end-to-end travel platform. It started with accommodation, then in-destination experiences, and now it’s looking at transportation and last minute bookings in hotels.
Just as low cost carriers were the disruptors, they risk being disrupted. Aviation is not in a comfortable place, he warned.
Johnny Thorsen, Mezi and VP, travel strategy and partnerships, American Express, said airlines tended to look towards regulation but tech giants looked at things differently. “Innovation will happen without permission. If Airbnb wants to build an end-to-end experience, the transportation part is difficult, they’re not going to buy new aircraft, they will look for partners.”
He added, “Imagine if Airbnb asked its 250m customers, do you want the best price? We have created too many layers of search to help customers find the best fares.”
• Networks and connectivity key to success and growth
As low cost longhaul carriers compete, the ones with the strongest feeder networks have an advantage. AirAsia X, which has flown 43m passengers to date, relies on 45% of its traffic from its parent’s shorthaul network. “It’s tough without feeder markets,” said Benyamin Ismail, CEO.
Benyamin Ismail: Tough without feeder markets
Its ancillaries have grown from RM43 per passenger to RM164 between 2007 and 2018 and Ismail said the target of RM200 was within reach. Almost half of its flights offer wifi and “we give free wifi on the A320 to enable people to shop on our Amazon-like platform,” said Ismail.
Indeed, much discussion centred around how to enable passengers in the captive environment to shop. Airbus’ vice president marketing Asia & North America, Joost van der Heijden, said it was time to think of “the aircraft as the enabler of everything”, rather than just a flying machine.
One problem that several companies, such as Air Black Box, Duohop and Kiwi.com, are trying to solve is the connectivity piece between different airlines at airports, allowing passengers to connect between say, a full service longhaul and a low cost shorthaul.
Solving this problem would open up feeder networks to airlines, said aviation analyst John Thomas, who referred to the Gatwick Connect service which allows partner airlines to tap into Easyjet’s 600m passengers.
Timothy O’Neil Dunne of Air Black Box said the “through bag needs to be solved” and no one has been able to solve this at scale and claims their system has solved the problem.
He estimated that the number of passengers who self connect globally at 7-10% of trackable passengers and that the potential was massive if the problem could be solved. The problem wasn’t technology, it was simply the complexity of systems and processes of the several parties involved, from airports to airlines to airport handlers, to make it happen.
“Somebody has to provide a product to enable the customer to buy a connection at airports that is trustworthy, easy and reliable,” he said.
• Canada plays catch-up
It was interesting to learn too how much of a latecomer Canada is to low cost airlines. Charles McKee, CCO of Flair Airlines, and Steven Greenway, CEO of Swoop, both said the country was about 20 years behind the rest of the world.
Greenway called it “the graveyard for airlines” due to a mix of factors ranging from tyranny of distance to sparse and spread out population and extreme seasonality.
“I’ve never seen a market with such bad seasonality. In the summer, no one wants to leave and in the winter, everyone wants to leave,” he said, and when they do leave, they’d rather drive across the border to fly American low cost carriers than fly Canadian airlines.
But with the entrant of new low cost airlines such as Swoop and Flair, things are changing, and these airlines are for the first time bringing low air fares to a market used to high prices.
Swoop, launched June 20 last year, is offering fares that are 30-40% lower and is taking a 100% mobile approach. It is looking to shut down its call centres.
Even though smartphone adoption is relatively low in Canada compared to Singapore where Greenway was last based, he said they had taken a deliberate strategy to force customers to use the app “for the Full Monty of services”.
The website only offers 30% functionality and “we tell people if they want the full suite of services to download the app. It’s a leap of faith but we think that to get the cheapest fare of $9 is incentive enough for Canadians to do so.”
McKee predicts a shootout ahead for low cost airlines in Canada. “It’s a small conservative capital market and airlines have found it hard to attract offshore capital but now that’s changed.”
Flair for instance has received funding and support by Miami-based 777 Ventures, which has also invested in World Airways, with plans to launch the US’ first low cost longhaul carrier.
• Corporate travel the golden nugget for low cost airlines
Corporate travel buyers have embraced the inevitable, said Michael Molloy, global head, travel & expense, Rio Tinto, in a panel around how low cost airlines could tap into the $1.5 trillion corporate travel spend.
“We have embraced new alternatives and added Airbnb for work and using Booking.com content. This would have been unthinkable before. For example, five years ago, everyone said we wouldn’t use Uber for ground but now Uber makes up the majority of expenses for Concur in the US,” said Molloy.
“For us, the important thing is safety and security and knowing where our employees are.”
As such, corporate travel buyers are now more open to working for low cost airlines especially as they expand in the region and offer better networks, connectivity and prices.
“There is an increased preference for low cost airlines for corporate travellers who want to avoid busy airports and are willing to go to second and third tier airports,” said Adriana Nainggolan, travel manager, Asia Pacific, Autodesk.
• Featured image: A panel discussion at CAPA LCC Global Summit