five reasons why the airline industry will never be … industry profitability elusive ... us...
TRANSCRIPT
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Five Reasons
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Five Reasons Why The Airline
Industry Will Never Be Profitable
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-25
-20
-15
-10
-5
0
5
10
15
20
25 1
99
1
19
93
19
95
1997
19
99
20
01
20
03
20
05
20
07
1Q
09
3Q
09
U.S. Passenger Airlines
U.S. Corporate Average
Airline Industry Profitability Elusive Pretax Profit Margin Highly Cyclical and Well Below U.S. Corporate Average
Pre
tax P
rofi
t M
arg
in (
%)
Sources: (1) IRS Statistics of Income (Historical Table 13) – “Net income (less deficit)” divided by “Total receipts”; (2) ATA Cost Index
www.airlines.org 3
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Macro Scale Drivers
US Airline Net Profit
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World Airlines Net Profit (from 1978 to 2009)
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Aircraft
Profits
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#1 It’s A Capacity Lead Business
Model
Causes Constant Over Capacity
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QSI Market Forecasting Model
• Quality of Service Index
– Values a service relative to other service
offerings
– Allows forecasters to determine potential of new
markets and services
• Developed in the 1960s
• Very accurate
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Basically a Share Model
• QSI for Montreal to Ft. Lauderdale
– Number of Nonstops x 1.0 5 5.0
– Number of Onestops x .33 1 .33
– Number of Connections x .03 30 .9
– Market QSI 6.23
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Forecasting A New Service
• Montreal – Fort Lauderdale QSI 6.23
• New nonstop QSI 1.0
• New Montreal – Fort Lauderdale QSI 7.23
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Demand For The New Service
New Service 1
YUL-FLL QSI 7.23 = .138 x 250 = 34.6
Passengers
Per Day
Market
Demand
Note: Demand for air travel historically grew at the
same rate as GDP.
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Carriers Always Get Their Share
• Frustrates many a marketing department
– Steak and eggs
– More legroom in coach
– Food
– Widebody aircraft
• Why carriers focus on price not product
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Impact On Current Services
Market share before 1
6.23
Market share after 1
7.23
5.5 Less
Passengers
per day
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Standing Still Not An Option
• If others add, and you don’t, you lose
revenue
• Can’t grow revenue without adding capacity
first
• Doesn’t matter how good a product one has,
one always gets your share
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This Simple Display Is To Blame
Cleveland to Orlando Service and Fare Display For All Participating Carriers
More service leads to more display space
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Airlines are managing demand to
capacity, not capacity to demand
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#2 Airplanes Don’t Go Away
They Just Become More Efficient
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#3 Labour Leverage
Political Organization Can’t Manage
Economic Reality
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Politically, Short Term Trumps Long
Term
• Timing of settlements
• Deciding how much is enough
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Twelve Days Of Christmas
(Well, OK, fifteen)
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It Takes Two To Tango
Contract Settlements
It Takes Two To Tango
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Contract Settlements
It Takes Two To Tango
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“Why would Management agree to a
contract they could not afford?”
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#4 Input Costs Are Too Volatile
Revenue Cycle and Cost Cycle Out of
Sync
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Cost Breakdown By Category
4.7%
7.1%
7.8%
8.0%
14.0%
25.0%
21.2%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
FUEL
LABOR
TRANSPORT-RELATED EXPENSES
PROFESSIONAL SERVICES
OTHER OP. EXPENSES
AIRCRAFT RENTS & OWNERSHIP
NON-AIRCRAFT RENTS & OWNERSHIP
INTEREST
UTILITIES & OFFICE SUPPLIES
NON-AIRCRAFT INSURANCE
ADVERTISING & PROMOTION
COMMUNICATION
PASSENGER COMMISSIONS
AIRCRAFT INSURANCE
MAINTENANCE MATERIAL
LANDING FEES
FOOD & BEVERAGE
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Book Revenue Now, Buy Fuel Later Perc
en
t of
flig
ht
capacit
y b
ooked Ye Old Booking Curve
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Fuel Volatility Very Difficult To Manage
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Cost Volatility and Low Margins –
Not a Good Match
Total Cost By Year Indexed to
Year 2000
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Even In Quiet Years, Cost Jump 20
Points
Total Cost By Year Indexed to
Year 2000
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Not Impossible To Manage – Just
Unlikely
Need large cash
reserves to
manage volatility
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Airline CEO’s Favorite Game
Hide The Cash!
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#5 Nobody Really Wants It To Be
Fixed
Value Chain, Customers and
Governments Benefit From The Way It
Is
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3
4
5
6
7
8
9
10
11
1968 72 76 80 84 88 92 96 2000 04 08 12
Inflation-Adjusted Price to Fly One Mile on U.S.
Airlines Average, in Constant 1978 Cents
Source: ATA analysis of data from the U.S. Department of Transportation and the U.S. Bureau of Labor Statistics www.airlines.org 34
International
Domestic
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One Way Fares from Montreal in 1968
and 1982
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June 2008 – Fares from
Montreal
Consumers Are Happy
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Source: ATA analysis of federal tax code
Tax Bite on a $300 One-Stop Round Trip* Has Nearly Tripled
www.airlines.org 37
Airfare Taxes
* Sample itinerary assumes one-stop domestic round trip with maximum passenger facility charge (PFC) per airport; $300 total price includes taxes and fees.
2009 Taxes
20% ($60)*
1972 Taxes
7% ($22)*
1992 Taxes
13% ($38)*
Governments Are Happy
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Best Way To Make Money –
Service The Airline Industry
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0
5
10
15
20
25
Uptu
rn R
OIC
div
ide
d b
y D
ow
ntu
rn R
OIC
Ave
rage
RO
IC 1
99
6-2
00
4 (
%)
Average ROIC (LHS)
Volatility in ROIC (RHS)
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Summary
• A capacity lead model fostering
commoditization
• Capacity never leaves
• Labour has leverage, but cannot manage its
responsibility
• Input costs are volatile and would require a
level of cash that is difficult to maintain
• Value chain does not want to see things
fixed
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Five Opportunities
1. Capacity driven business model
2. Airplanes don’t go away
3. Labour leverage
4. Input costs too variable
5. Nobody really wants it to be fixed
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It may be dull...
but never boring