fighting back to profitability - iata.org · the financial crisis ... profitability of air cargo...

Fighting Back to ProfitabilityImproving and Sustaining

Financial Health

IATA Competition Law Compliance

Opening Remarks

Chairman Zeke ZiliakDirector of Transportation & Travel

PROS

Economic Environment

Alain LumbrosoEconomist

International Transport Forum (OECD)

Economic OutlookAlain LumbrosoEconomistInternational Transport Forum - OECD [email protected]

11th IATA World Cargo SymposiumAbu DhabiMarch 16th 2017

Outline

1. The International Transport Forum2. Short term perspective3. Long term perspective4. International Trade

2

Outline


3

What is the ITF?4

57 member countries and expanding(34 OECD + 23 non-OECD)

Active in all modes of transportation

Independent organization housed at the OECD

Council of Ministers of Transport, rotating annual presidency

Annual summit of Ministers of Transport2017: Governance2018: Safety and Security

Aviation research projects on liberalisation, level playing field, forecasting, airport expansion, unmanned transport and airport site selection.

Outline


5

Grey skies clearing…but no sunshine yet

ØThe world economy remains in a low-growth trap;ØProtectionism is clearly on the rise;ØSluggish trade growth;ØLow investments;ØGrowing areas of policy uncertainty;But…ØWorld economy growing at a slightly accelerated pace;ØFiscal stimulus increasingly used to jump start the economy.

6

The Big Picture

7

ØWorld economy expected to grow:

Ø2016:2.9%Ø2017:3.3%Ø2018:3.6%

ØGrowing role of fiscal stimulus in US, EU, China to sustain growth

Where’s growth?

8

ØGrowth in the US leading G-7, Eurozone stuck below 2%;

ØChinese growth at 6% by 2018;ØIndian growth continuing to lead G-20

– Demonetization may have a short term impact

ØBrazil returning to growth in 2018; ØUK to lag behind the Euro zone due to Brexit;

ØForecast revisions turning positive

Outline


9

Long term perspective – The global picture(all modes)

10

Source: ITF, 2017

Trade growth by region(all modes)

ØFastest growing growth of trade in Africa and Asia;

ØShare of trade in Asia to grow to 41% from 26%;

ØShare of trade from Europe to decline by a third to 22%

11

OECD Pacific: Aus, NZ, Jpn, Kor.

2050 2015

ITF Outlook

12

0

100

200

300

400

500

600

Road Rail Marine Air

Billion Intl TKM by Mode2015 =100

2015 2030 2050

Source: ITF, 2017

Ø Air cargo tkm sextupling by 2050 (+4.8% p.a.);

Ø Growing middle class in China, India, LatAm and Africa driving much of the growth;

Ø Growth in air freight tkm outpacing other modes leading to disproportionate increase in CO2emissions;

Ø Success of CORSIA, ETS will ensure air cargo (and aviation) have licence to grow.

Outline


13

Evolution of TradeØWorld trade now growing slower than GDP – a first in over 25yrs;

ØGlobal value chains receding;ØProtectionist policies hampering growth in trade;

ØLow trade growth could lead to weak productivity and standards of living growth.

14

The rise of protectionism

15

New trade restrictions since the financial crisis

Ø Trade restrictions are on the rise;

Ø Success in trade facilitation negated by the emergence of new restrictions;

Ø Trade facilitation measures expected to grow global GDP by 1.5% …but

Ø Trade restrictions to pre-Doha levels would lead to a 1.5% drop in global GDP / 2% drop in major economies

Does trade matter?Hint: YES!!!!

ØImportant driver of productivity growth;ØEnhances competitive pressures;ØImproves resource allocation;ØFacilitates knowledge transfer;ØGenerates demand for air cargo! But….ØPolitical pressure in Europe and U.S. for

protectionism;ØConcerns with environmental impacts of trade

are encouraging locavores;ØNon-tariff barriers more harmful than tariffs.

16

Shareoftotalemploymentembodiedinforeigndemand

Fixing trade...a few policy options

ØLiberalise trade policies and roll back new restrictions;ØProvide better support for job search and re-employment transition;

ØPromote life-long learning to maintain labour skills updated;

ØStrengthen social protection, coverage and effectiveness.

17

Benefits of globalisation are defused, drawbacks are concentrated

Some parting thoughts

Short term perspectiveØSluggish but mildly accelerating GDP growth;ØTrade should follow, but at a slower pace.

Long- term perspectiveØAir cargo expected to grow faster than other modes, lead by trade in Asia;

ØRisks include protectionism, trade restrictions and social license to grow.

18

Thank you very much

19

2017 Summit onGovernance of Transporthttp://www.itf-oecd.org/summit-events/2017

Raising the Structural

Profitability of Air Cargo

Dr. Carl-Stefan NeumannSenior Advisor

Rothschild Global Advisory

March 2017

Raising the Structural Profitability of Air Cargo11th World Cargo Symposium

2

Key messages

The air cargo market is chronically unprofitable – in part this is due to structural overcapacity driven by fast growing demand for passenger services

However, industry conduct plays an equally important role in driving down profitability

Collective efforts to improve conduct would be win-win for everyone

3

Key messages




4

0

5

15

-15

10

-5

-10

The industry has seen a continued highly unattractive performance

1 Lufthansa Cargo, Cargolux, Air France-KLM-Martinair Cargo, Singapore Airlines Cargo

SOURCE: McKinsey analysis, company annual reports, press

“All of Martinair's MD-11Fs will be phased out by 2016”

– Sep 2014 –

“Thai Airways exit from air freight reflects trends in Asian air cargo”

– Apr 2015 –

2008 09 10 11 12 13 14 2015

“UPS buys 14 B747-8 and takes options on another 14 planes”

– Nov 2016 –

“Qatar Airways Cargo volumes up 37.5% in 2015”

– Mar 2016 –

“LH Cargo ROCE at 0.2 % in 2015”

– Annual Report 2015

Weighted-average EBIT and spread across leading air cargo carriers1

% of revenue

5

Slowing growth meets growing supply – creating a very challenging environmentfor air cargo

Structurally slowing growth in demand

Situational peaks through special events

Yields structurally suffer tremendously (with some event-driven relief)

Structurally, oversupply of belly capacity

Temporarily oversupply of freighters

SOURCE: Rothschild Global Advisory

6

After decades of global trade outgrowing world GDP, globalization has come to a standstill and may even get into reverse from an air cargo point of view

SOURCE: WTO, CSN

Volume growth world GDP and merchandise exports

Merchandize exportsWorld GDP

Key drivers

▪ Shift towards domestic consumption in Asia/China

▪ Factor cost arbitrage opportunity shrinking

▪ Shift towards information products

▪ Protectionist sentiments on the rise-10

-12

-4

-6

-8

-2

0

8

6

12

14

10

4

2

97961995 04020199 00 0598 03 140908 1506 1107 13 16E10 12

7SOURCE: ICAO; Flightglobal; IATA WATS; expert interviews

1 Assumed as proportional with pax capacity growth based on calibration with past developments 2 Boeing Jan 2017: 19 747-8F, 32 777F, 70 767-3F3 actual need may be bigger due to route specifics

Intercontinental pax growth creates a structural overcapacity in belly space

Passenger air travel is still booming …Belly will outgrow freight demand driven by higher growth rates for pax …

Air travel and cargo volumes

5.2%

Belly growth1

<1%

2.7%

Freight volume growth

Implied freighter capacity growth3

320

160

80

240

7,000

2,000

5,000

6,000

4,000

3,000

8,000

1995 07 1509 11 13

FTKs billion RPKs billion

97 03 050199 16E

Cargo FTKs

Passenger RPKs

CAGR 2014-19

>120 wide-body freighters

on order!2

8

Mid-term there are only limited improvements in sight and discontinuities looming

SOURCE: market forecasts and analysis, CSN

▪ Passenger flows keep growing at 1.5-2 times GDP, creating belly capacity growth of 4-6% p.a.

▪ Fuel costs to rise more significantly from 2018 – pushing less efficient freighter capacity out of the market again

▪ Some carriers still adding freighter capacity, e.g., QR

Demand

▪ Global merchandize flows to grow with GDP over next 5 years(~3 % p.a.)

▪ Limited, but growing substitution (one-belt/one-road, 3D printing, near-shoring)

▪ Ecommerce shaking up supply chains, creating a need for fast, cost-effective intercontinental flows

▪ Freight forwarder push internal process automation and require operators to follow this lead

▪ Shippers’ expectations on visibility and reliability increasing

▪ New entrants, e.g., Amazon, JD.Com, but currently with limited 3rd party ambitions

▪ Multiple new intermediaries try to capture some of industry value pools

Supply

New requirements New entrants

Over-capacity to stay

Industry discon-tinuitieslooming

+2.5 to 3.0% p.a.

+3 to 4% p.a.

9

Key messages




10

In volatile capacity situations transparent rational behavior and differentiated customer value strategies minimize pain to the industry

SOURCE : Rothschild Global Advisory

1 Low cost is clearly another value driver – although of varying importance

Focus on superior customer value1

+

Rational industry behavior

Adherence tocontracts

Harmonized costing logic

BU1 BU2

Transparent(ex-ante) pricing

Global reach

End-to-end solution

Shipper Recipient

Speed/responsiveness

Solution

Simplicity Fulfilling needs

Emergency service

Planned fast time-to-market

Planned on-demand production

11

Unfortunately, the air cargo industry does not show the rational behavior needed to avoid a meltdown in volatile capacity situations…


Adherenceto contracts


Harmonizedcosting logic

▪ Mostly “free option” contracts

– Low utilization: Downfalls towards lower spot rates, short notice CXLs

– High utilization: Shipments rolled

▪ Lack of transparency for carriers leads to overshooting reactions in both lower-than-expected and higher-than-expected demand situations

▪ Whole range of internal cost allocations seen – from marginal pricing to sharing full cost

▪ Unreliable supply chains in both situations

▪ High pricing volatility

▪ Very different strategic decisions in similar situations

Situation Implications

12

Wide variance of costing approaches for belly capacity leads to undesirable outcomes


ILLUSTRATIVE

1 Assuming 40¢ cost of ground-based services

Belly costing approach

Fixed flat rate for network usage

Revenue-based split of full cost

Marginal cost vs. pax-only flight

Walk-away price1 120¢ 40¢ 50¢

Implications

▪ Hard to compete with other models

▪ Lower LF for plane – overall profit optimum not achieved

▪ No inherent pricing discipline

▪ Annual flat rate detached from daily pricing – overall optimum not achieved

▪ Low inherent pricing discipline

▪ Lack of links to market opportunity – overall optimum generally not achieved

Sub-optimal outcomes of current steering approaches

13

Key elements of customer value strategies are also still missing


Simplicity

Global reach ▪ No true global coverage yet (unlike integrators)

End-to-end

Shipper Recipient

▪ Low visibility, although improving

Speed/responsiveness

Solution

▪ Still too many manualprocesses

Fulfilling needs

▪ Mostly reliable end-to-end solutions through forwarder steering

▪ Increasingly offered, although still more project than product

Emergency service

▪ Mostly reliable end-to-end solutions through forwarder (multi-carrier) steering

Planned fast time-to-market

Planned on-demand production

14

Key messages




15

Structural overcapacity and looming discontinuities will further aggravatethe situation – changes in industry conduct are necessary

SOURCE: Rothschild Global Advisory

Over-capacity to stay

Industry discon-tinuitieslooming

Thoughts on industry dynamics

▪ Industry profitability already close to zero and ROCE well below WACC

▪ Structural overcapacity estimated to grow by up to 2%pts per year and increasing pricing transparency leading to further yield pressures towards marginal operating costs

▪ Retirement of older capacities as result of rising fuel prices may actually lead to even less attractive marginal pricing

▪ Ambitious improvement programs only able to compensate for one or two years of structural decline

▪ Overall – without a significant change in industry conduct – exits and turbulence seem inevitable

16

A drive for straight consolidation is unlikely to solve the structural challenges in the air cargo industry

SOURCE : Alphaliner , World ACD

1 Excluding integrators

Concentration in air cargo and container shipping – market share of top 5 carriers

31%

2000

43%

2010

57%

2017/18

Container shipping Air cargo1

33%

2016

After decades of liner conferences/ alliances and consolidation only now rational price and capability management start to become visible

Drive for consolidation low due to restrictions in the attached passenger transportation business

17

Consolidation has been slow in the industry

SOURCE: Company information, Mergermarket, Rothschild Global Advisory

% acq.

Enterprise value (€m)

Selected recent air cargo focused transactions

234

135

241233231

154

253

481

101

n.a.

Nov-06Feb-15Feb-16 Jan-16 Mar-09

n.a.

Jun-07Dec-10

n.a.

Apr-12Dec-12Dec-13

n.a. n.a.n.a.

Dec-13Oct-14 Jun-11Oct-11 Nov-07

10% 100% 100% 100% 35% 25% 35% 49% 24% 35% 32% 100% 49% 49%>30%

Date

TNT Airways & PAN

Air

South-ern Air

Florida West

Farnair CargoluxWest

AtlanticCagolux

Air CargoGermany

Grand-star

CargoCargolux

China Cargo

Alitalia Cargo

Cargo Holdings

ASTAR Air

Cargo

Polar Air Cargo

Target

Country

ASLAviation

Atlas AirWorld-wide Air

ASLAviation

HNCA

Air Trans-

port Services

Gov. of Luxem-bourg

Volga Dnepr

Hana Daetoo

Qatar Airways

Singa-pore

Airlines Cargo

AlisAero-linee

ABX AirDHL

ExpressDHL

ExpressAcquirer

18

Collective efforts – while not hampering competition – could still improve conduct and create customer value


+

+

+


Harmonized costing logic

Adherence tocontracts

Simplicity

Simplicity

Fulfilling needs

Industry –owned platform

Joint global solutions

Establish an Air Cargo Exchange

Shipper Recipient

Solution

19

New York Shipping Exchange (NYSHEX) introduces mutualcommitments between shippers and carriers with great initial success

SOURCE: NJIT, NYSHEX

Traditional container shipping industry conduct

▪ Shippers not accountable for missed minimum quantities/no-shows

▪ Carriers unilaterally apply general rate increases to pre-agreed contract rates

▪ Flat prices over longer periods lead to over-subscribed and under-utilized sailings without steering mechanism

▪ No hedging against volatility (futures contracts)

▪ As a result on-time container delivery rates at 53.6% (2014) – with multi-billion impact on supply chains

Approach of NYSHEX1 to change conduct

▪ Carriers digitally offer fixed “all-in” contracts to shippers and forwarders

▪ Contracts specify volume, departure date/s, place of receipt and destination

▪ Shippers can enter into fully enforceable contract with penalty for non-fulfillment

▪ Contract can be “re-sold” if the shipper, carrier or forwarder cannot fulfill their obligation

Pilot impact (2016)

▪ Downfall rates decrease significantly

▪ Rate impact to carriers beyond USD 200/ container

▪ Significant supply chain stabilization for shippers

1 Major carriers and shippers hold equity stakes

20

Considering the options on how to deal with online intermediaries leads towards the development of a joint industry booking platform


Question ▪ How to deal with online price aggregators and transaction platforms?

Partner with preferred platform

Options Ignore/stay away Open books to allBuild joint industry booking platform

Only use in “red flight” situations

What you need to believe?

Others will do the same – lack of volume will kill aggregators

Carrier X’s volume is worth something, e.g., “equity stake for volume”

Carrier X usually is price leader

Industry can agree on joint approach, customers accept rules

There will still be enough “traffic” on the site to attract customers

21

Joint global solutions would allow air cargo carriers to get at par with integrators along many customer value levers


Customer value levers Integrators Joint air cargo carriers

▪ Cost effective (needs-based pricing)

▪ Simple “plug and play”

▪ One-stop for all needs/ geographies (limits on weight) (limits on time options)

▪ End-to-end solution (to be developed)

▪ Continuous visibility(via tracking standard)

( )

22

While there are still open questions, there is also a clear first mover advantage along all the described levers to improve industry conduct – get moving!


Air Cargo Exchange

Industry –owned platform

Joint global solutions

First mover advantage Open questions

▪ Value of supply chain stability vs. cost arbitrage from shipper’s point of view

▪ Influence of shippers to drive forwarders

▪ Ability to agree on one standard

▪ Back-office automation progress of carriers

▪ Frameworks of global cooperation –merger, alliance, commercial JV

▪ Operational and commercial setup

▪ Founding members would be first to benefit from lower down-trading

▪ If founding members gain critical mass superior value capture will follow

▪ Unconstrained choice of partners and chance to establish own processes as standard

Transforming Air Cargo to

Modern Commerce

Xianqin (Lisa) WallaceSr. Vice President Revenue Management and Network Planning

MABKargo, Malaysia Airlines Bhd.

Transforming Air Cargo to Modern Commerce

IATA 11th Cargo SymposiumAbu Dhabi

Xianqin (Lisa) WallaceMAB Cargo, Malaysia Airlines Bhd16, March, 2017

B2Bbuyersdemandmoreconvenienceandspeed.Buyersareforcingcompaniestorethinktraditionalsellingmodelsandharnesstechnologiesto

deliverasuperiorcustomerexperience.

ForresterResearch

TheOldBattlegroundforDriving

CustomerBuyingDecisions

Product Service Brand&Company

PricetoValue

ThesefactorsCOMBINEDdrive<50%ofcustomerbuyingdecisions

SalesExperienceistheNewBattleground

toDriveRevenueGrowth

Company&Brand

Product&Service

ValuetoPrice

SalesExperience

19%

19%

9%

53%

InternalSellingComplexityInhibits

RevenueGrowth

n=2,055salesprofessionals.Source:CEB2015SalesComplexityAssessment.

ExternalComplexity

ProductComplexity

InternalComplexity

AirCargo– Complexity+Disconnect

• BusinessModel– carriers,forwarders,

shippers/consignees− Customerrequirements,regulatoryrequirements,too

manytouchpoints,differentITplatforms,dataentry

redundancy,andsoon…

• CustomerExperienceOwnership– enduser

experienceaccountability

• Product/ServiceOffering– notalignedtoprovide

consistentservices&createadditional

challengesfortheentirechain

• NonTransparencyintheChain– inefficiencyand

counterproductivity

• ITCapability– investandenhancetokeepup

withdemand

©2017PROS,Inc.Allrightsreserved.ConfidentialandProprietary.

Thesearemissionstatementsfromthreemoderncompanies.Theyallhaveonethingincommon:

theyremovedthefrictionfromcommerceNoCompanyisimmunefromdisruption,notevenindustryleaders!

BlueApronmakesincrediblecooking

availableforeveryone!

Enablingeveryonetosign,send,andmanagedocumentsanytime,

anywhere,onanydevicewithconfidence.

Transportationasreliableasrunningwater;everywhere

foreveryone.

Companyincontrol

Guesswork,sellingongutinstinct

Online/offlinesilos

Manual,opaquepricing

Standard,pre-definedoffers

From: Traditional commerce

Customerincontrol,fullyinformedbuyers

Sellingonscience,algorithms,machinelearning

Frictionless,omni-channelexperiences

Dynamic,transparentpricing

Personalizedoffers

To: Modern commerce

©2016 PROS, Inc. All rights reserved. Confidential and Proprietary. 8

TheNewImperative

©2017PROS,Inc.Allrightsreserved.ConfidentialandProprietary.

TheEightPrinciplesofModernCommerce

DrivingCustomerSuccess

Personalized Omni-ChannelFrictionless Transparent

RealtimeDynamic Mobile Algorithmic

TherisktobusinessofgettingthiswrongMoneyleftonthetable,reductioninwin-rateanddownwardpricepressures

• SLOW:can’tquotequickly,frictioninthe

approvalprocess

• STATIC:pricescan’tmovewiththemarket

• IMPERSONAL:pricesnotspecifictocustomers

andsegments

• SILOED:Disconnectionacrosssaleschannels

• INCONSISTENT:variedpricingcreateslowprice

expectations

Singlebiggestfactor

holding

moderncommerceback?

Theinabilitytoprice

dynamically

acrossallchannels

FightBackToProfitability

Frictionless,transparent,andomni-channelpricing

SolutionGuidance

PricingGuidance

SupportingAnalysis Approvals

TheNewRequirements- DynamicPricingScienceEssentialformoderncommerce andthemodernbuyingexperience

©2016PROS,Inc.Allrightsreserved.ConfidentialandProprietary. 12

EMBEDDynamicPricingScienceinallmoderncommerceinitiatives

TRACKANDANALYZEhundredsandthousandsofinternalandexternalfactors

GENERATEtherightofferattherightcustomermoment;segmentofone

ENSURESPEED,PRECISIONANDCONSISTENCYacrossallchannels,continuously

MASKargo – TheTransformation

• NetworkOptimization

• CustomerSegmentation

• ProductOfferingEnhancement

• OperatingSystem(Unisys)and

RMSystem(PROS)Integration

• DataAnalyticsandReporting

THANKYOU

Thank you to our Networking Break Sponsor

Fighting Back to ProfitabilityImproving and Sustaining

Financial Health

What is the Model for the Future of Air Cargo?

Moderator:Ö George Anjaparidze, Senior Economist, IATAPanelists:Ö Nik Delmeire, Secretary General, European Shippers CouncilÖ Marcela Figueroa, Cargo Revenue Accounting Director, Latam AirlinesÖ Eric Hartmann, Vice President, SkyteamÖ Ryan Keyrouse, Vice Resident, Seabury Group

Closing Remarks

Chairman Zeke ZiliakDirector of Transportation & Travel

PROS

fighting back to profitability - iata.org · the financial crisis ... profitability of air cargo...

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