The aviation market is in a state of upheaval, with fewer carriers competing across more borders than ever before.
With competition increasing across long-haul routes, how will airlines respond to demand? Will it be with increased service or by packing more onto planes at the cost of passenger experience? And where does technology factor into this discussion?
Last week's CAPA America's Aviation Summit highlighted some of the stark realities facing North American carriers, who are basically faced with the prospect of adapting to a New World Order that includes immense sector growth in Asia, the shifting realities of Open Skies and the enormous strides in global service standards.
Here are some thoughts on how this all plays out for North American carriers.
Asia on top
AirAsia CEO Tony Fernandes was the highlight of the event, as he rarely travels so far away from his home base for speaking engagements.
He made this very clear and then proceeded to show a slide that indicated how many people lived within the regular service area of his airline, AirAsia: nearly 3 billion.
By focusing on this market, the airline is poised to dominate, even as other carriers come in to compete. In comments to the crowd, Fernandes said:
I welcome all competition, we will destroy you! Jokes aside, we are still the lowest cost airline in the world. In the end, the consumers win and they have allowed us to grow to where we are. There’s a huge amount of opportunity...Asia is going to explode.
With the impending growth of aviation in Asia — China alone is set to outpace anywhere else for jet deliveries by 2030 — China-originated traffic is the easy, low-hanging fruit.
For carriers like ANA, this is a vital flow of traffic, says Tadashi Matsushita:
Inbound traffic from visitors to Japan is increasing. We are focusing on this inbound traffic as well. We are confident that having an inbound hub in Tokyo puts us in a good position.
Korean Air's John Jackson is already leveraging the growth in this market:
I can tell you that Korean Air won’t look back at 2015 and say why didn’t we talk about China. China is essential to our strategy, we have the most destinations of any non-Chinese airlines.
AirAsia's Fernandes also sees some missed opportunities serving the long-haul markets in Asia, something that the major U.S. carriers are missing out on given the size of most cities within China and India:
The long-haul offers a huge opportunity for US airlines [in Asia]. When you watch US airlines, they are pre-occupied with domestic and their hubs.I never understood why they didn’t see the opportunity in long-haul. Theres a huge opportunity for sure. As visa restrictions come down, we’ll see more of that.We’re interested in the secondary and tertiary cities - but in China those are huge cities. China, India and Southeast Asia are amazing markets with very little competition.
Challenging Open Skies
The ongoing debate surrounding subsidies versus government ownership within the Open Skies framework shows no signs of cooling down.
The rhetoric was flying during the Open Skies panel that pitted Delta's Ben Hirst, American's Will Ris, Etihad's Jim Callaghan, and FedEx's Rush O'Keefe against each other.
The group was also joined by Americans for Fair Skies president Lee Moak, USTAA CEO Roger Dow and WTTC CEO Savid Scowsill.
The conflict essentially hinges on the definition of subsidy. Is a subsidy any sort of government investment in aviation?
If that's the case, then that goes against the long history of government ownership of airlines internationally. Or is a subsidy only in play when the airline is pricing service below cost? If so, how can that specific subsidy be sliced off from the overall government ownership stake that funds operations?
Etihad's Callaghan highlights this issue, saying at various points throughout the debate:
How [the US carriers] come up with the figure of $17 billion for Etihad, they look at our accounts, and because we are carrying debt from its early years on its books, somehow that renders the entire investment of the government of Abu Dhabi as a subsidy...One man’s subsidy is another man’s equity, investment or shareholder loan.
Callaghan, who was with Ryanair for eight years prior to Etihad, compared the airline's current challenges with those of his previous employer:
I’ve seen all of this before. This is exactly the same playbook that the flag carriers implemented against RyanAir in the early years. Once they figured out that the model was a threat to their hegemony in Europe they threw the kitchen sink at us.You have the 3 largest carriers in the world who also control the three clubs, the three global alliances, which control over 50% of aviation in the world. These are the same 3 carriers that have benefited massively under Open Skies.Now that they’ve gotten to where they want to get, they are trying to shut the door on any kind of competition or potential competition to that hegemony.
Delta's Hirst opened with the airline's position that the financial investments of Middle Eastern governments is so massive that it has actually altered the marketplace economics:
[It] distorts the aviation marketplace...all we are asking is that the two sides sit together and stem the flow of subsidized capacity into the US market.They can’t be subsidizing airlines and still have access to the market...We need to have government-to-government talks, as the agreement both governments signed and agreed to. They should address the flow of subsidized capacity into the US.
American's Ris furthered the point, saying:
We are opposed to airlines that are massively subsidizes or any businesses supported by the state that can bring products to the United States at lower than cost, and then have unfettered access to the market.We don’t believe in opening the doors to any business where the government is the source of the competitive advantage. We are not opposed to government ownership of airlines, what we are opposed to is when the government itself creates a massive advantage so we end up competing with the governments and not the airlines.
When asked directly by the moderator whether or not Etihad receives underwriting in the form of government subsidies, Callaghan responded emphatically, saying
No we don’t receive subsidies, and we’re working with the government on a response.
The next point of contention beyond defining subsidies was the definition of bankruptcy. One of the common rebuttals to U.S. airlines' claims of unfair subsidies points to the bankruptcy protections during 9/11.
If the airlines could go bankrupt and wipe their balance sheets clean, how can other airlines compete if they are unable to do the same due to country-specific laws?
The point, says American's Ris, is that bankruptcy doesn't involve any actual cash exchanging hands and requires painful downsizing — hardly a positive outcome for anyone:
In the bankruptcy situation, you do all sorts of painful things to survive. The government is not handing you a benefit. The US government is not in the business of keeping US airlines in business. It doesn’t give zero interest loans, it doesn’t invest in airlines.We remain because we are very fierce competitors, and not a dime of federal money came in to support us. Beyond 9/11 compensation for shutting us down, there has never been any government money.
Global service standards vs LCC
While Fernandes' airline is ideally poised to take advantage of that growth, there was also significant discussion regarding the relative merits of a pure-play Low Cost Carrier model or a hybrid model that brings some elements, such as unbundling, into a full-service environment.
The question is whether LCC's can match full-service legacy carriers in service — or even whether some LCCs have managed to outperform on service while leaving legacy operations on the defensive as far as service.
The service discussion became especially apparent within the context of the ongoing conflict between the Gulf and American carriers relating to subsidies and Open Skies.
The Gulf carriers believe that protectionist U.S. carriers are simply trying to stifle competition because they know that the airlines' service standards cannot be matched, while the U.S. airlines believe the Gulf carriers have a leg up since they don't require profitability due to government involvement.
Fernandes also felt passionately on the ability of his own airline to deliver memorable service while still balancing the needs of low-cost.
I’ve never understood the hybrid model or what that can even mean. While we have created different models, they have been difference companies with very clear focus. Focus is key.We have no problem working with another airline but we are nervous of going away from our principles. Then you become a hybrid and you lose track of why you are in business in the first place.
Southwest, which just posted record profitability matched by consumer satisfaction, feels that the low-cost model doesn't have to mean poor service:
We don’t get a lot of complaints. We get more “atta boys” than “we hate you.” The people that want to fly on a lie-flat seats, that’s a small segment.Those who don’t want to check a bag, change a ticket, or have good service, that’s also a small segment. We try to sell things in addition to the flight, and that works well with our model.
Southwest has certainly stuck to its approach over time and has truly been reaping the dual rewards of high profit and solid customer loyalty.
Conclusions
There is clearly some settling still to remain, as the Big Three in the U.S. bring the fight to carriers dominant on other continents.
With Asia rising, the question is: can the U.S. carriers compete against Asian airlines that have primed the pump, learned the market and are poised to deliver worldwide service to the insatiable demand of its ascendant population?
And where does technology fit into this narrative?
Will those that provide the best traditional service win, or will those who invest in the newest fleets and latest tech be able to out-maneuver other airlines by creating a sticky customer base?
NB: AirAsia image courtesy Shutterstock.
NB2: Disclosure - author's travel and accommodation costs were supported by CAPA event sponsor Travelport.