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Change for growth, growth for change

Czesc, which is Polish for Hi, and as such allow me to offer greetings from here in Kraków where Routes Europe 2016 has kicked off with the Strategy Summit.

 

The stage is set for the Routes Europe 2016 Strategy Summit

Welcoming delegates, Mike Miller, head of content and industry relations for Routes, began with a positive appraisal of the industry. From his observation of the global industry, he noted how there has been a 6.2% rise in available seat kilometres since July 2015 compared with the previous year, against an average growth in the air travel industry of about 5% year-over-year for the last decade.

Furthermore, thanks to cheap oil prices (which are slowly creeping up, Miller conceded), IATA estimates airlines will have made an all-time record profit in 2015 of $7 billion.

With these figures in mind, Mark Pilling, Flightglobal’s chief markets officer, led the first panel discussion – titled ‘What Europe Needs is…’ – with the question ‘Is the European Aviation market as good as it gets at the moment?’ Interactive polls showed delegates felt there was room for a little more growth yet, whether it lasted a year or more. However, the panellists were torn.

Geoffrey Weston, partner and leader of EMEA air transportation and services practice at Bain & Company, said that while the industry may have two to three years of capacity growth ahead, the growth in profit would be negligible as yields are coming down. “There’s still capacity in excess of demand,” stated Weston, “so even if the market’s going well, if you’ve got no more oomph in your fuel hedging it’s hard to see where profit’s going to come from.”

AEA’s CEO, Athar Husain Khan, disagreed with this sentiment, claiming airlines were actually getting very good at matching capacity with consumer demand. To demonstrate his point, Khan employed figures drawn from seasonal route data. “Over the last decade, 16% of European routes changed between seasons – that’s now gone up to 25%,” iterated Khan. “40% of summer routes from 10 years ago are no longer in operation today, but there is hardly any difference between seasonal routes last year and this year.”

Bringing the conversation back to the central question, John Grant, director of JG Aviation Consultants, asserted that now was the time for airlines to be re-evaluating their cost bases, and to be wary of wearing their rose tinted glasses. He predicted a downturn in growth in less than a year’s time, citing the North American market as a precursor to possible events in Europe.

ELFAA’s secretary general John Hanlon wasn’t so sure though, saying the future of European aviation is up to the industry itself to determine. Averring that he’s not sure the US domestic market is overserved, Hanlon opined, “Some markets in the EU are governed by restrictive air services agreements, but more liberal agreements will create growth opportunities in EU. European carriers just need to seize change.”

Jeremy Robinson, a partner at Watson Farley & Williams LLP, agreed liberalisation could mean huge growth, but also acknowledged that politics (which is always, if unfortunately) entwined with economics, can impede progress. Grant gave an example of it when he cited the UK government instating environmental taxes on aviation.

The panel then moved on to whether small and medium regional carriers will continue to remain relevant. Weston declared that of the few of those who are currently relevant, even fewer will remain so, and only if they have a serious stranglehold on capacity in a single market. “If your home base has no capacity restrictions you’re in serious trouble,” he remarked. “Virgin America has never been more profitable, but they can see the writing is on the wall and they’ve decided to get out of being a small carrier by selling themselves off to Alaska Air Group.”

Akhtar echoed that it’s inevitable a number of small carriers will disappear in the next 3-5 years, but in his mind their survival is dependent on whether they can find a strong partner in an alliance. Hanlon argued that made sense if today’s hub-and-spoke model continued, but mentioned the problem of EU261, saying that if small carriers are an hour late and passengers miss their connection, then the financial threat is significant.

Grant put it more bluntly, contending that regional carriers are used as a warm up act for low-fare airlines – that they prove or disprove markets and then are replaced. “Look at Bristol Airport,” he attested. To this, Weston interjected, “We need to stop referring to low-fare airlines as a different kind of airline altogether. If you have a low cost-base you’re a winner.”

Robinson’s solution was more vague and perhaps utopian, which elicited laughter from Grant. “Can the industry overcome this short-term thinking [of needing to bump passenger numbers up in the short term] and zone in on long-term partnerships between airlines and airports and think more creatively.” Perhaps to Grant, Robinson concluded, “If you don’t try these new things you won’t get an answer at all.”

Although Akhtar recognised that the hardest time to rethink is during a period of success, both he and the panel were agreed on the fact that the industry as it is, although changing slowly on its own, is in need of a big shake up – however it’s achieved.

While a few of the speakers remained quiet on the issue, Hanlon and Robinson both seemed of the opinion that the UK leaving the European Union (often referred to as Brexit) wouldn’t be the best option for a game-changer, although Grant – devil’s advocate once again – did intone that there were far more pressing matters to worry about before the impact of a possible Brexit has made itself known.

Stephanie Taylor, assistant editor, LARA
Krakow, Poland

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