Chris Tarry

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Session 1
Economic Market Overview What Impact will the
Global Economic Crisis Have on Corporate Travel?

• Chris Tarry
• Economist Aviation Industry Research Advisory
  (CTAIRA)

2
Where do we go from here?Some perspectives on
current and likely future issues

• Chris Tarry
• ACTE Executive Forum
• London
• 20th November 2008

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Agenda

• Overviews
• Economies
• Airline industry
• The requirements in the new environment
• Consequences and opportunities
• Conclusions

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Setting the Scene
Setting the Scene

• The Examination question
• with so many companies banning or cutting back
  on travel, frequent business travellers may soon
  start to become frequent video-conferencers
  instead why so and how much will this reduce
  travel volumes by and if not why not?
• The Times 31st October 2008

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Economic leading indicators OECD overall
Setting the Scene
Source OECD
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Economic leading indicators euro area
Setting the Scene
Source OECD
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Confidence indicators EU
Setting the Scene
Source European Commission
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Confidence indicators Service sector
Setting the Scene
Source European Commission
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Confidence indicators EU Consumers
Setting the Scene
Source European Commission
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Confidence indicators UK
Setting the Scene
Source OECD
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Mortgage lending UK
Setting the Scene
Source Bank of England
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Consumer credit UK
Setting the Scene
Source Bank of England
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GDP Trends
Setting the Scene
Source IMF
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GDP and traffic
Setting the Scene
Source CTAIRA from ICAO and IMF
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Traffic and capacity trends
Setting the Scene
Source CTAIRA from ICAO data
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Some airline perspectives
Setting the Scene

• International passenger demand is now shrinking
  September marked a very sharp downturn across
  all markets until September the sharpest
  declines had come in domestic markets not
  international IATA Monthly Traffic Analysis
  24th October 2008
• it will be very difficult for the group to
  achieve its objective of operating income for
  this financial year of 1 billion. Nevertheless,
  the operating result will remain comfortably in
  profit as long as market conditions do not
  deteriorate any further. Air France /KLM
  release 24th October 2008
• The industry continues to face very difficult
  trading conditions on the back of a weak economic
  environment...we remain focused on delivering a
  small operating profit in the current financial
  year British Airways H1 results release 7th
  November 2008
• The outlook for summer 2009 is uncertain due to
  the difficult macroeconomic environment and
  yields will depend upon the extent of the fall in
  consumer expenditure in Europe and the level of
  competitor capacity reduction in the market. We
  expect to see further downsizing and
  consolidation of many weak competitors -
  easyJet results statement 18th November 2008
• The recession will continue to drive down oil
  prices and fares this winter. We will continue to
  respond with lower fares and aggressive price
  promotions to keep Europe flying and to maintain
  our market leading load factors. Although we have
  limited visibility, we now believe that average
  fares in the second half will fall by between
  -15 to -20 leading to losses in the 3rd and 4th
  quarters. Ryanair earnings release 3rd
  November 2008

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The airline industry and its challenges
Setting the Scene

• An unprecedented two phase downturn
• Phase 1 cost pressure from fuel prices
• Phase 2 revenue pressures resulting from
  spreading economic slowdown
  
• The current airline operating environment
• Fuel
• Worst maybe over but still at a relatively high
  level
  
• The economic background
• Wider spread slowdown in prospect
• Revenues and costs
• Traffic now falling and fares too
• Too much capacity already in some if not most
  markets
  
• Will capacity be cut fast enough to relieve fare
  pressures?
  
• Cash
• Operating cash declining and debt now more
  expensive
  
• Survival
• The key issue for some airlines and when not
  if

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Adjustment sequences
Setting the Scene

• Phase 1 - up until late summer
• Rapid increase in costs for all
• A need higher average revenue per passenger
  against a weakening market background
  
• A need to cut capacity but not instant and
  certainly not costless it is also only a least
  worse outcome and indeed only evident in the
  current winter season
• A need to address issues that had previously been
  pushed aside
  
• Phase 2 from now - the usual sequence
• Volume falls
• Load factors fall
• Market exhaustion
• Traffic redistribution in a structurally lower
  fare environment
  
• In a downturn the traveller re-gains the upper
  hand
  
• Fares cut to attract traffic
• Some cost reduction
• Survival now a real issue for some

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Airline economics passenger trends
Setting the Scene
Source CTAIRA from ICAO data
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International traffic trends
Setting the Scene
Source IATA
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International traffic trends by region
Setting the Scene
Source IATA
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Premium traffic trends
Setting the Scene
Source IATA
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British Airways Premium traffic trends
Setting the Scene
Source CTAIRA from company reports
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British Airways Premium traffic and profit
Setting the Scene
Source CTAIRA from company reports
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ATMs projected changes winter 08
Setting the Scene
Source CTAIRA from ACL reports
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Seats projected changes winter 08
Setting the Scene
Source CTAIRA from ACL reports
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What does it mean?
Setting the Scene

• Scale effects?
• Less rather than more travel
• Value effects?
• More for less use of buyer power and
  re-negotiation in a market with excess capacity
  
• Substitution effects?
• Videoconferencing instead of face to face
  meetings?
  
• But where else?
• Behavioural changes?
• If you want to do things like changing airport
  departure times and locations, you can probably
  save 5. If you want to save 15-20, then you
  have to stop people getting on a plane. You have
  to make them use the telephone, or video
  conferencing, or plan quarterly trips to meet
  staff instead of monthly trips. It's all about
  the mindset. You see people starting to realise
  that they do have a responsibility to save money,
  they do have a responsibility to be sensible
  Logica Outsourcing quoted on page 7 of CFO
  Amadeus Travel Survey October 2008

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Issues of value and price for airline customers
Setting the Scene

• What constitutes the product and which are must
  haves and what is the value and price associated
  with each?
  
• A bundle of attributes which may comprise
• The flight
• A free baggage allowance
• FFP points for travel/lounge access
• Ticket flexibility
• Timing
• Frequency
• On board service
• On ground service
• Airport attractiveness
• Ease of airport access

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Load factor trends
Setting the Scene
Source IATA
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Can NMAs be substitutes for legacy carriers?
Setting the Scene

• It depends on the scope for substitution
• Business routes
• Leisure routes
• Depends upon the extent of corporate client
  penetration
  
• Routes to market internet alone may not be
  enough
  

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Ryanair - breakeven and revenues
Setting the Scene
Source CTAIRA from Ryanair Form 20F
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easyJet - ancillary revenue trends
Setting the Scene
Source CTAIRA from easyJet company reports
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What about new sources of revenue for legacy
carriers?
Setting the Scene

• A need for a disaggregated offer?
• Checked bags 1st, 2nd or both?
• Buy on Board food and drink?
• Rent/buy a pillow and/or blanket?
• Rent a headset or a film?
• On board mobile phones?
• What else?
• On the ground?
• In the air?
• But will it provide real additional revenue or
  just a redistribution with the underlying fare
  falling?
  

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Some perspectives from the CFO-Amadeus travel
survey October 2008
Setting the Scene

• While 60 of survey respondents believe that
  managing travel costs is very important, under
  half say that their companies are managing them
  well or very well .....its perceived importance,
  finance executives say that travel cost
  management has, as yet, made a minimal
  contribution to overall cost management at their
  companies
• Nearly two-thirds of respondents said that they
  wanted travel managers to help save employees
  time on their journey. And 45 said that they
  wanted travel managers to focus on employee
  productivity when booking travel
• Almost 60 of survey respondents deemed managing
  travel costs to be very important, and when asked
  what they thought travel managers should focus
  on, nearly 80 selected immediate cost savings.
  Sixty-two percent also wanted to see
  longer-term cost savings

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Concluding observations
Setting the Scene

• Unprecedented time for the airline industry
• Deterioration in revenue environment - but are
  there new sources for which customers are
  prepared to pay?
  
• Risk of diminishing returns and adverse
  behavioural change resistance and push back to
  new charges
  
• Cost reduction is important but rapid change
  difficult to achieve and effects are lagged
  
• Nobody will be immune
• But what is a challenge for most if not all will
  present opportunities for some

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This report has been prepared and issued by Chris
Tarry Aviation Industry Research and Advisory
Limited a business that is not registered to
give investment advice. This report is for
information purposes only and should not be
construed as giving investment advice. Chris
Tarry Aviation Industry Research and Advisory
Limited accepts no responsibility or liability
whatsoever for any expense, loss or damage
arising out of or in any way connected with the
use of all or any part of this report.No part
of this report may be reproduced or distributed
in any manner without permission of Chris Tarry
Aviation Industry Research and Advisory Limited.
Setting the Scene
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