strategic transportation & tourism solutions
Session TE104 Improving Air Access to Tourism Destinations Paul Ouimet & Hans Mohrmann
48th ICCA Congress & Exhibition November 10, 2009 Session Outline
1. Global Aviation Trends
2. Air Service Development Strategy
3. Financial Incentives & Negotiations
2 strategic transportation & tourism solutions
Global Aviation Trends Global Air Traffic
(Millions) Financial Credit Crisis and Global 2,500 H1N1 9/11, Recession Outbreak Economic Downturn & SARS 2,000 outbreak IATA forecasts Asian Economic 3.3% increase Flu Gulf War in 2010 1,500 and Recession
1,000
500
0 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009P
Source: International Civil Aviation Organization (ICAO) and International Air Transport Association (IATA). 4 Shift in Global Air Traffic
Passengers by Sector
(Millions) 2,500 Domestic International
2,000 35%
1,500
1,000 24%
65%
500 76%
0 1990 1995 2000 2007 2008
Source: International Civil Aviation Organization (ICAO). 5 Slowing Traffic Growth
6 Operating Profit – Global Airlines
Operating Profit ($ billions) 15
10
5
0
-5
-10
-15
-20 2001 2002 2003 2004 2005 2006 2007 2008 2009F 2010F
7 Source: Industry Financial Forecast Table (IATA Economics). Volatile Fuel Prices
Crude Oil Spot Prices January 2007 to November 2009
$160 Peak $147
$140
$120
$100 l e r r Current a b $79 r e $80 p
$
. S . U $60
$40
$20
$- 7 8 9 7 7 7 7 7 8 8 8 8 8 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ------l l l r r r y y y v v v n p n p n p u u u a a a a a a o o o a e a e a e J J J J J J M M M S N S N S N M M M
Source: Nymex. 8 Increasing Fuel Burden
Air Carrier Expenses
2000 2008
Fuel 24% Fuel 14% 29% 76% Other 52% Other 50% 34% Labour 21%
Labour
9 Source: Air Transport Association. w14 Traffic and Capacity – U.S. Network Carriers
Notes: Includes American Airlines, Continental Airlines, Delta Air Lines/Northwest Airlines, United Airlines and U.S. Airways. 10 Slide 10 w14 Will update to reflect Global carriers weatherillj, 11/2/2009 Industry-Wide Capacity Cuts
11 Consolidation: Mergers & Failures
EasyJet Gol Lufthansa Air France KLM go Varig Swiss KLM Martinair Austrian dba SkyBus Brussels Air Canada Delta Oasis Hong Kong Canadian Northwest Silverjet ATA US Airways America West XL Airways MaxJet Zoom FlyLAL Ryanair buzz Aviacsa Sterling EOS MyAir
SkyEurope Aloha Centralwings Nationwide 12 Airline Alliances and Passenger Share
American Airlines Aeroflot Air Canada South African Airways British Airways Aeromexico Air China Spanair Cathay Pacific Air France-KLM Air New Zealand Swiss Finnair Alitalia All Nippon Airways TAP Portugal Iberia Airlines China Southern Asiana Airlines Thai Airways Japan Airlines CSA Czech Airlines Austrian Airlines Turkish Airlines Lan Airlines Delta Air Lines bmi United Airlines Malev Korean Air Egyptair US Airways Qantas Airways Northwest Airlines LOT Polish Airlines Adria Airways Royal Jordanian Air Europa Luthansa Blue1 Air Norstrum Kenya Airways Scandinavian Airlines Croatia Airlines American Eagle Shanghai Airlines Continental Airlines BA Cityflyer Singapore Airlines Japan Transocean Air 14% Share 16% Share 24% Share 13 Growth of Low Cost Carriers
14 Growth of Low Cost Carriers
LCC Capacity Share by Region (YTD Aug-2009)
15 Intercontinental LCCs
16 Market Shift to Low Cost Carriers
• In addition to network airlines, charter carriers are losing market share to LCCs – particularly on short haul leisure routes
Charter Operator Market Share: UK to Short-haul Leisure Markets 100% 1998 2008 75%
50%
25%
0% CanaryIslands Cyprus Greece Malta Spain Total (excluding Canary Islands)
• Many charter operators have increased their focus on longer-haul destinations (Middle East, Asia, Caribbean), where competition from LCCs is less intense
17 Source: UK CAA. Cumulative World Aircraft Fleet Surplus
4,500 18% World Fleet Surplus 4,000 Peaks in 2011 in 16%
3,500 Current Cycle 14% s u t l f e
p 3,000 12% o r e
l u F %
S
s d
t 2,500 10% l a e r
e o s l u F W l
2,000 8%
t l p f r a a t r u o
c 1,500 6% S r T i A 1,000 4%
500 2%
0 0% 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
Cumulative Surplus Surplus as % of Total Fleet
18 Source: The Airline Monitor, Jan/Feb 2009 New Generation Aircraft
• High capacity ‘consolidator’ aircraft • Airbus A380 - Boeing 747-8 550-850seats 467seats 15,000 km range 14,800 km range
• Medium capacity ‘hub buster’ aircraft • Boeing 787 - Airbus 350XWB 200 - 300 seats 250 – 350 seats 14,500 km range 16,300 km range
• Regional jets/turboprops • Bombardier CRJ 900 - Embraer 190 86-90seats 94–106seats 3,600 km range 4,100 km range • Very light jets • Citation Mustang 4 seats 2,100 km range 19 Policy Issues
• Air Policy • Open Skies • Infrastructure • ATC • Airports • Rates & Charges • Facilitation • Costs • Processing • Security
20 strategic transportation & tourism solutions
Air Service Development Why an ASD Program?
• Airline planners require detailed, accurate information to make new route decisions • But airlines do not have the resources to fully evaluate every market • A sound, well articulated business case, can convince airlines to introduce new air services • Airports/destinations can influence the airline planning process
22 Destination & Airline Objectives
• Air service development is a long term, strategic effort • Airlines will add service in order of expected profitability PRIORITY ROUTE • Different airlines pursue 1 2 different strategies 3 4 • Destinations can move up 5 the priority board with: 6 7 8 • Solid research & 9 analysis (always) 10 • Incentives (sometimes) 100 23 Airline Perspective
• New routes are a huge investment & risk to an airline
Aircraft Annual Passenger Type Seats Per Flight Requirements
Boeing 747 400 219,000
Airbus A340 280 153,300 Annual Boeing 767-300 220 120,450 Operating Cost: ~$50 million Boeing 737-700 140 76,650
Regional Jet 100 54,750
Note – Assumes 75% load factor. 24 Source – InterVISTAS Influencing Airline Decisions
• Airline questions for new routes: • How much can I stimulate the market? • How will the competition react? • How much market share will I achieve? • What will be the connectivity contribution? • Will the new route be a financial success?
• Airports/destinations can answer these questions and reduce uncertainty and risk
25 The ASD Process
• Required to quantify the true size of the existing Market Assessment air travel market on an O&D basis
ASD Strategy • Deficiency analysis and detailed route analysis
• Packaging & presenting the information to Business Case airlines
Evaluate and Negotiate • An appropriate incentive, in certain circumstances, helps airlines Airline Incentives commit to new air services
26 New Route Business Cases
• Business cases should include all information airline planners require: •Catchment area profile: demographics, economy, tourism, etc. •Airport profile: facilities, traffic •Market profile: market sizes, top city pairs, traffic leakage, etc. •Suggested service: frequency, schedule, aircraft, routing •Route analysis: market share, load factor, stimulation potential, self-diversion, etc. •Strategic considerations
27 Tourism Stakeholder Involvement
Provide Unique Data Guest origins, occupancy rates, ADRs, group potential, etc.
Adapt product to match target airline business models, where appropriate All inclusive, fly-drive, package tours, etc.
Support route development efforts Budget support, airline fam trips, etc.
Contribute to incentive funding Route Development Success Quantify incremental benefit and invest
28 strategic transportation & tourism solutions
Financial Incentives Incentive Background
• Destinations have become increasingly aggressive in pursuing new services •Portland-Tokyo: $3.5 million •Pittsburgh-Paris: $5.0 million •Baltimore-London: $5.5 million • Airlines often demand risk sharing programs • Incentives can be a good investment, if used properly
30 Best Practices - Incentives
• Not all new services are equal • Will the new service provide incremental benefit for the destination? • Blanket approach may not accomplish goals • Align incentives with ASD goals
• Consider impact on existing services • How will incumbent airlines react? • Avoid existing routes
31 Best Practices - Incentives
• Should only be used to help a new service grow to maturity • Service must be self-sustaining in medium term • Limited to 1-2 year term
• Should not be used to “buy” air services • Carriers will drop routes when incentive expires • This causes more harm than good
32 Best Practices - Incentives
• Air service checklist - will the route be: • Strategically important? • Marginally (un)profitable? • Self-sustaining in the short term? • Service must meet all three criteria • Qualifying services: • New routes only? • Increases on existing routes? Does this work?
• Service retention incentives? 33 Types of Incentives
• Common types of incentives: • Airport fee concessions • Start-up cost reimbursement • Operating cost reimbursement • Direct subsidy • Revenue guarantees • Marketing support • Ticket trusts/travel banks • Designed to impact either the supply of or demand for air services 34 Choosing the Right Incentive
• Must be determined case-by-case • Varies by route and type of service • Depends on airline needs • Network development strategy, fleet constraints, growth potential, philosophy • Source of perceived risk • Traffic stimulation potential • Cost control • Community’s ability & willingness to pay
35 Determining Incentive Level
• What amount is required? • Too much would be wasted money • Too little and the airline will walk away • Rules of thumb: • % discount on fees • % of breakeven revenue (revenue guar.) • Set amount per seat (airport start-up & marketing) • The amount depends on the structure, and the analysis
36 Determining Incentive Level
• Put the risk into perspective • Why a lot may not be enough:
$12 Airline: Opportunity Cost $10 Breakeven
$8 Community: $1 million incentive $6 10% risk
$4 Airline: $10 million B/E revenue requirement $2 90% risk
$0 37 Regulatory Considerations
• Governments are increasingly intervening in airline incentives •EC guidelines on state aid •FAA restrictions on airport funding
• If incentives are restricted, new routes must be based on profit potential •Trial & error becomes more risky •Route analysis will be critical
38 Limits of Incentives
• Most airlines will only start new services they believe will be viable in the long term without incentives
• Incentives will not overcome: • A weak business case • Product mismatch
• So focus on the fundamentals
39 Airport Fees as Incentives
• Airport fees and ground handling charges account for 20% of total costs for both Ryanair and Aer Lingus • But Ryanair’s are much lower in absolute terms
Unit Cost/Passenger (EUR)
120
100 Ryanair’s average revenue Other Costs 80 per passenger is €49. (Incl. Fuel) If they were paying the 60 Airport Fees & same airport fees as Ground Handling Aer Lingus, their business 40 model would not be sustainable. 20 To attract Ryanair and 0 similar airlines, airports Aer Lingus Ryanair must offer low fees. 40 The Challenge…and solution
• How can airports afford aggressive airline incentives/fee discounts and still fund route development marketing in a difficult economy?
Investment in New Marketing & Air Services Fee Discounts The solution: Develop and maximise non-aeronautical revenue streams: • Retail & duty free • Food & beverage • Parking • Loyalty & premium programs Incremental Additional Airport Flights & • Land development Revenues Passengers
41 InterVISTAS Health Check
1. Benchmark against best practices: • Sales performance and • Retail space data 2. Visual observation: • Flow, quality, lay-out, customer behaviour, in-store circulation, boarding calls & security processing 3. Interviews with key players: • Airport • Main retailer 4. Identify Quick Wins: • Immediate elements to improve, including quick cash- generating/temporary retail additions 5. Air Service Diagnostic: • Identify air service deficiencies, appropriate air service levels, priority routes and target airlines
42 Airport Revenue Recovery Program
Move from Short-term Short-term Tactics • Health check Revenue Recovery • Leakage recapture plan to • External funding plan
Long-Term Long-term Strategy • Commercial revenue Revenue Growth development strategy • Air service development strategy
43 Questions
Paul Ouimet Executive Vice President [email protected]
Hans Mohrmann Executive Vice President [email protected]
44