The Slippery Slopes

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The Slippery Slopes Keith Yates 2003 IFCA/IFSA
Asia Pacific ConferenceMacau, ChinaOctober 15
- 17, 2003
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Slippery Slopes

• load factors up in last 8 weeks

• a welcome sign

• recovery some way away

• recovery path is complicated treacherous

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The industry

• intense pressure to cut costs

• may see some shifting in traditional networks and
  fleets

• hub and spoke dominance may decline

• emphasis will be on needs of particular customer
  segments and more efficient aircraft use

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Worst period in history for majors

• Impacts
• 9/11
• slowdown in US economy
• Bali
• war
• SARS
• terrorism

A cyclical pattern with perhaps a longer recovery
time than historically experienced
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HistoryThe Ups

• The extraordinary 30 years to 2000
• average annual growth rate of 6.2 in passenger
  traffic
  
• growth in passenger traffic more than twice the
  global growth rate

• 4,700 jets delivered 19952000
• airlines earned US39 billion 19952000

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HistoryThe Downs
1970s (6877) 1980s (7887) 1990s (8897)
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• Bubble
• Revenues peak with strong yields and growing
  RPKs
  
• Profits begin to fall as labour actions raise
  costs
  
• New-aircraft orders peak 1 year after profits peak

• Crash
• Weakening GDP lowers demand
• Yields fall as airlines prop up RPK levels to
  hold market share profits plummet
  
• Aircraft orders canceled or deferred peak orders
  from bubble phase arrive

• Stabilisation
• GDP regains lost ground RPKs climb
• Losses ease as cost- cutting measures take hold
• New-aircraft deliveries add to excess capacity
  yields continue to fall

• Recovery
• Strong economic growth tuels demand
• Profits rise with increased revenues and
  stabilised costs
  
• Capacity balances as new-aircraft deliveries
  taper off and price discipline re-emerges

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History Reflections

• Yields remain low until capacity is better
  balanced and business travellers accept higher
  fares

• Business travel has been critical to the
  profitability of the traditional carriers

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Today Business Travel

• Corporations have made some significant changes
• more executives in Y
• business class is good enough for CEO
• contracts negotiated with 2030 discount

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Just how important is business travel in Asia?
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Brand service need to reach out
Important new trends in Asian air travel revealed
in the Mastercard International Asian Lifestyle
Survey 2001
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The business segment
10 of an airlines passenger base
60 of an airlines revenue
Mastercard International Asian Lifestyle Survey
2001
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10-40-60 Rule
Business travel accounts for most of an airlines
revenue
Mastercard International Asian Lifestyle Survey
2001
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Major shift in who makes the decision on which
airline to fly with
The corporation and the corporate customer are
now making more than 55 of the decisions
Mastercard International Asian Lifestyle Survey
2001
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Trend in corporate steering power
Corporate agreements show greatest shift in
steering power
15 in 1998 56 in 2001
Mastercard International Asian Lifestyle Survey
2001
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Influence
To the airline, the most important function is
the steering or influence on carrier selection.
To understand how influential agents are,
however, we must ask the customer
Degree of Influence travel agent
Segment
1985
1990
1998
2002
Group Leisure Individual Leisure Students Busin
ess (FIT)
Corporate Contract Specialized (labor)
Source Travel Weekly East TAX seminar. MC, IATA
and Axess Asia
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What does it all mean?

• yields may not come back quickly
• recovery will come with long-term structural
  cost reductions
  
• hub and spoke system is challenged by cost
  reductions
  
• low cost operators are well positioned to expand
  operations

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Traditional carriers

• have been serving 2 customer bases leisure and
  business
  
• at peak of the cycle enough business travellers
  with higher yield this worked
  
• at this point in the cycle major carriers are
  struggling to appeal to both

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Low-cost vs. Traditional carriers

• Low-cost carriers like Virgin Blue are capturing
  business travellers

• Traditional carriers are pricing at low cost
  levels with strong control on inventory

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Leisure customers

• want lowest prices
• are less concerned with service
• less concerned with flight frequency
• less concerned with wide range of destinations

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Business customers

• demand frequent flights
• demand a wider range of destinations and ease of
  connectivity
  
• demand quality service
• are willing to pay a premium

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The majors need to re-evaluate

• reliance on serving large number of destinations
• reliance on a broad range of passengers
• incursions by lower cost democracy operators on
  most profitable routes
  
• decline in numbers within most profitable
  segments

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• Response will be in
• New cost structures
• New service model

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New service models
The issues Business travellers dont enjoy

• sitting in crowded Y cabins surrounded by
  low-fare leisure passengers
  
• negotiating connections at hub airports where
  infrastructure is stressed by large volumes of
  leisure traffic
  
• lengthy check-in and security queues and
  procedures
  
• inflight service that is procedural and not
  geared to the individual

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New Service Models Home to gate ? Gate to gate
Convenience and Modernisation
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Home to gate

• QF City Flyer
• next generation of check-in machines
• single immigration/check-in procedure
• SMS check-in
• seamless and integrated technologies

Focus will be on ease of process personal and
in control
avoiding check-in hall
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Airport Operator
The simplified airport
Passenger
Local Transport Operator
TECHNOLOGY ENABLERS
Smart Airport Solution
Duty-Free Shop Airport Commercial Outlet
Contactless Smart Card
Biometrics
Information Technology
Wireless Communication
Hotel
Airline
Car Rental
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Technical considerations
PC
Hand phone
PDA
Internet
Wireless Kiosk
GPRS/GSM
SMS/MMS
Wireless Communication Gateway
Smart Airport Solution
Wireless PDA
Departure Control System
DB
Wireless Tablet PC
Smart Airport Solution Database
Backbone
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Architecture drive-in lounge nodal airport
structures
transparency and seamlessness
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On the edge of the simplified airport the
seamless process
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• Airports Carriers
• take cost of check-in down by 9 per passenger
• double throughput in same terminal

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• Gate to gate
• business class
• leaders will add value
• Totally personal
• A la carte for even 54 pax
• Freshness in plating presentation
• Service to the individual
• Costs of service down

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Gate to gate economy

• Simplified yet more individual
• Sensitive to the business traveller
• More engaging
• IFE will go beyond the passive
• Communications and internet enabled

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Change in service will continue at an aggressive
pace

• Lifestyle change means
• the end of the rules era
• a move to simplification
• modern is simply elegant
• Service change is lifestyle-driven as much as it
  is a source of competitive advantage

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Simply elegant is not a smoke screen for minimal
food or a token menu
Respect is key in long haul business class
Simply elegant does not mean absence of choice
nor lack of depth in menu offering
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There is an evolutionary process to the simply
elegant in the restaurant environment

• Historical evolution of DesignFoodService
• fooddesign freedom emerged in the early 60s with
  nouvelle cuisine previously there were rules
  and uniformity
  
• Bocuse, Troisgros, Giraudet, championed by Gault
  Millau, began the revolution saucing on bottom,
  light saucing, less cooking time, more freshness,
  innovative presentation

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Historical evolution of DesignFoodService

• Service à lassiette from the kitchen, no use
  of waiting staff
  
• Freedom from classical French conventions led new
  world chefs to be creative, a trend initiated by
  Alfred Portale at Gotham Bar and Grill in New
  York early 80s

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Historical evolution of DesignFoodService

• Portale built food presentation upwards
  beginning the high-stack with a natural look
  
• Paint brushes were introduced into New York
  kitchens in late 80s
  
• Portale I needed fish to cook quickly
  fish cut in half cooks on stove top in 3
  minutes instead of 12. Then stack two pieces on
  top of each other

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Inflight service process change

• From 60s to 2003 40 years for the
  DesignFoodService revolution
  
• How long will it take
• inflight
• in business class ?

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Final reflections on a new beginning

• It takes leadership to challenge the status quo
  and break through
  
• The search for new service models will be
  pioneered by the industrys visionaries
  
• We will all be involved
• Costs out, value up will be the new paradigm
• Customers and their lifestyle ambitions are the
  focus for change