AIRLINE

ISSUE 35 | JUL-AUG 2016

AIRLINE LEADER
LEADER

ISSUE 34 JUL-AUG 2016

THE STRATEGY JOURNAL FOR AIRLINE CEOS

THE SHAPE OF
INTERNATIONAL
AVIATION
MARKETS
IN 2025
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2025: Long haul market
growth,risk and reward.
And regulation
A
S IF WE NEEDED ANY REMINDER, national
boundaries and economic regulation are large
and often unpredictable checks on freedom of
behaviour, but Britain’s Jul-2016 vote to leave the
European Union still came as a shock to the system.
Brexit is a potential shock specifi ally to the aviation
system in several ways.
Most obviously it has created great uncertainty about the
future activity of the UK LCCs that have established outside
their home territory, and operate under the freedom of the
European single aviation market. The e is a better than even
chance that, once the dust settles, something close to the
status quo will be resumed. However that will not be without
many dramas and much unproductive expense along the way.
The e is also another important implication for the
international aviation community. Among its European
neighbours the UK has typically been a strongly more liberal
influence in ormulating policy and this has helped carry
the EU into territory where it would not otherwise have
ventured.
Thus – and this is not to d wnplay the enormous
contribution of bureaucrats on both sides of the North
Atlantic – were it not for the UK’s presence, there would
probably be no EU-US open skies agreement. Its presence
has helped tip the balance, or simply neutralise conservative
forces on many occasions.
The UK has o ten been a leading voice in the EU’s
formulation of open skies agreements with third countries.
Now, even though the process of formal withdrawal from the
Union can take two years or more, it appears that the UK’s
voice in aviation policy formulation will evaporate much
more quickly than that.
O
is tour aim
diffemake a
renc
e
This is b d news for a world in which the foundations
of the open skies movement appear to be under threat; the
selective assault of the US big three on the Gulf carriers,
similar moves in some parts of continental Europe to roll
back liberalisation and a ripple of anti-free trade sentiment
seemingly spreading from country to country.
As we examine in this issue the likely profiles of the
main long haul routes up until 2025, one brighter light is
shining in Asia Pacific The e, for the time being at least, the
market is open, innovative and growing fast. New entrant
airlines, experiments with multi-brand airlines, partnerships
and cross border investment are all producing a vibrant
marketplace, where mutual interest tends to congregate
around an open market environment.
China is a large and increasingly influential pa t of that
evolution and its airlines are beginning to make their
presence felt as they open new routes, engage in partnership
discussions and expand their long haul fleets and as
Beijing adjusts its international strategy to the needs of
its peripatetic public and of an expanding national fleet
there is some hope that this new voice will spread a liberal
message. The e is no doubt it will be a powerful voice by
2025, whatever the song it sings.
PETER HARBISON
EXECUTIVE CHAIRMAN
CAPA – CENTRE FOR AVIATION
AIRLINE LEADER | JUL-AUG 2016 1
 Contents
JUL-AUG 2016
www.airlineleader.com

6 OPINION
Digital transformation of

6
the airline business
Airline leaders clearly understand
the continual need to identify new
frontiers in aligned value.

10 OVERVIEW
Long haul international
markets in 2025:
partnerships, joint ventures
and new airlines

10
As the longer established markets,
while more predictable, become more
mature, the attraction of international
markets, especially Asia, becomes too
great to ignore.

14 FEATURE
Long haul low cost
in the ascendance;
an unpredicted feature

14
of long haul
international travel
The new generation will be more
akin to classical network airlines,
converting between short-long haul.

64 FEATURE
The world’s top 20
international airports in
2025 will mostly reflect hub

64
connectivity expansion
Given the nexus between economic
growth and airline activity, the global
economy will play a major part in
defining the overall outcom .

2 AIRLINE LEADER | JUL-AUG 2016

 18 42 48

26

54 60

34

Route outlook 2025 Regional markets

18 Asia-Europe 42 Latin America
Europe-Asia appears likely to be a truly innovative and world Weak economies offer opportunities for foreign investment tha
changing market. Air traffic between Europe and Asia h will reshape policies and joint venture prospects.
achieved consistently moderate growth, unlike the high speed
to rapid expansion between Asia and North America. 48 Gulf and Middle East
26 Asia-North America The Middle East long haul markets: The future will involve
partnerships, and some new large hub carriers.
China’s airlines begin to dominate North Pacific mar ets – and
to leverage transfer options. Despite a capacity restricted
environment, Shanghai Pudong, along with Beijing and other
54 Africa
Chinese airports and their home airlines are redefining th Route evolution in African international markets has always been
trans-Pacific mar et. defined by intra- frican protectionist policies that cause long
haul route networks to focus on Europe and, more recently, the

34 Europe-North America Gulf.

Europe to North America in 2025: A gradual evolution

influenced by mar et regulation and aircraft advances.
60 South Pacific
Immunised JVs appear likely to continue to dominate the North South Pacific mar ets will be defined by Chin ’s expansion. The
Atlantic, although their share will fall as LCCs and leisure airlines region is characterised by relatively liberal access regimes and
grow faster from a much smaller base level. by partnerships of varying levels.

EDITOR: Peter Harbison | MANAGING EDITOR: Liz Pinczewski | SUBEDITORS: Corinne Hitching & Blake Moore | DESIGN: Jenny Chen
SENIOR ANALYSTS: Head of Research: Liz Pinczewski; Chief Analyst: Brendan Sobie; Chief Financial Analyst: Jonathan Wober; Senior Analyst – North Asia: Will Horton;
Senior Analyst – Middle East: Simon Elsegood; Senior Analyst – Americas: Lori Ranson; Chief Airports Analyst – David Bentley; Profile Manager – Adam Basir
HEAD OF AVIATION DATA RESEARCH: Sharon Dai
ADVERTISING: Neisha Turner, Global Advertising Director (Suppliers) - nturner@centreforaviation.com | Melissa Stewart, Global Advertising Director (Airports) -
ms@centreforaviation.com

For all editorial enquiries or feedback, please email airlineleader@centreforaviation.com

Airline Leader is published by Airline Leader Pty Ltd. Please visit the website at www.airlineleader.com or write to us at PO Box N777, Sydney NSW 2001, Australia. To notify us of a change in address or to remove your
name from our mailing list, please call +61 2 9241 3200 or email airlineleader@centreforaviation.com. © Airline Leader Pty Ltd. Airline Leader is printed in Singapore by Times Printers.

AIRLINE LEADER | JUL-AUG 2016 3

QUOTES

On the record
IAG Malaysia
On the impact of Brexit decision:
“ The UK now becomes more attractive for
Airlines
tourists….Corporates were pausing on the On priorities under new CEO:
uncertainty, and now we don’t expect them
to bounce back as we would have expected
“ Malaysia Airlines has seen
great progress in the last 10
had the vote been ‘Remain.’ In the long run, such months with many turnaround initiatives
demand effects tend to even out ” working...Our costs are on track now however we
WILLIE WALSH, CEO cannot for one second take our eye off the ball...A
lot has been done, the profit seen in the last quarter
shows that the financial gap between revenue and

Delta Air Lines

On how to increase revenue as fuel costs rise:
“Airfares on close in bookings, or walkups,
are substantially lower than they were a
year ago….The encouraging sign is that we
cost has significantly closed, which tells us that we are
on the right trajectory. We need to move quicker and
more aggressively to keep the momentum for a strong,
”
sustainable future.
PETER BELLEW, NEW CEO

KLM
are able to produce the types of margins
that we are in this environment….We have
to be able to pass through the increased
cost of our service to our customers..We are at On the evolving strategy for US
a point where oil has moved off pretty persistently market:
off the lows ” “ All the places where we
PAUL JACOBSON, CFO have a strong connection to
the network of Delta work very
”
well.

Ethiopian Airlines
PIETER ELBERS, CEO

American Airlines
On how most African governments fail to understand the value
of aviation:
“ You need to take a long-term view, and On how airline industry losses are a
this has to come from government, and
not just the airline, since you need clear thing of the past:
policy. The government has to answer “Our industry has been
the question about whether it sees fundamentally and structurally
the airline as a strategic asset or simply changed…Things are different
business….Most governments do not have now...When down cycles come,
an understanding of the value of aviation but you won’t see losses...The bad
rather see it as a cash cow to pay for other things – they see it years won’t be cataclysmic. They will
as a Minister of Transport for the Rich, so they tax it too high, and just be less good than the good years. ”
constrain growth and service. ” DOUG PARKER, CEO
TEWOLDE GEBREMARIAM, CEO

4 AIRLINE LEADER | JUL-AUG 2016

Ryanair easyJet Virgin
On the impact of Brexit decision:
“ People will still
On the impact of Brexit decision:
“ Nothing
Atlantic
keep flying but I will change On how Norwegian
think there will overnight. is ‘relatively
be a degree Much depends small’ at
of uncertainty on the new present with
‘gigantic’
for the airline agreement the
growth plans:
industry for UK will reach
the next year of with EU member “
They’re
two while the UK states. The aviation industry knows someone we
works out how it will exit the EU and how to overcome challenges and compete with
if it remains in the single European deal with change, and that is exactly aggressively…We need to — and we
market...From our point of view, what we will do. ” do — take them very seriously. ”
there will be a downturn in the EU. CAROLYN MCCALL, CEO CRAIG KREEGER, CEO
Traffic will rise but people will be
lot more price-sensitive. Our fares
will probably decline, but we’ll gain
market share with our price and cost Emirates
advantage. In the short term it’s very On the lack of benefit from EU-level aviation deals:
challenging. IAG just issued a profit
warning. But in the medium and long- “ It is in the view of Emirates that we have more in the
current agreements than we anticipate the mandate
”
term, it’s good.
giving us...but we have a very high bar, and I guess the
MICHAEL O’LEARY, CEO
government and the airlines would be interested to
know how the mandate would improve that.” Sir Tim also

Cathay questioned whether EU-level agreements are a form of

protectionism, stating: “We get a parade of ministers asking us

Pacific
from various states within the EU to extend our operations to countries beyond their
countries...So we’re a little bit perplexed as to why you would try to change this and

On present ‘very challenging

introduce levels of complexity, but it is for the government of UAE to respond.”
TIM CLARK, CEO
environment’:
“ Our cargo

business has
been under
pressure for
some time
and recently
we have been
seeing more
weakness on the
passenger side of our business…..
We expect to see stronger passenger
demand over the summer, but the
outlook for the cargo business
continues to be uncertain. Overall
there is considerable fragility in
our business. The drive to contain
costs and improve productivity must
continue to be our key focus.”
IVAN CHU, CEO
AirAsia Group
On how India’s move from 5/20 to 0/20 is an improvement
but ‘not perfect’:
“ India is a complicated country. The fact that they have
actually done it, which is more than any other government
has done previously, is indeed a step forward. And we
continue to lobby, we continue to change and we continue
to seek better policies. But I applaud that they have done
something. At least, for the first tim , we have clarity and we
know what we need to do. That is not easy because there are so many vested
interests. Local airlines have been lobbying against the 5/20, they talk about
”
confusing credit systems and all this. But India is a fantastic market.
TONY FERNANDES, CEO

AIRLINE LEADER | JUL-AUG 2016 5

OPINION

DIGITAL
TRANSFORMATION
OF THE AIRLINE
BUSINESS

6 AIRLINE LEADER | JUL-AUG 2016


BY NAWAL TANEJA
Digitising the Airline Business:
why and how, presented in the last
issue of Airline Leader, raised some
questions about the “how” part of my
commentary. Airline leaders clearly
understand the continual need to
identify new frontiers in aligned
value – ways to enhance customer
experience and profit margins
simultaneously. While airline leaders
who have taken a deeper dive into
the value of digital transformation of
the airline business – implementing
new ways to compete to produce
value for customers as well as airlines
– do appreciate its value, they also
identify the enormity of the challenge
of digital transformation – from its
conceptual design, to the details of
its implementation, followed by its
flawless e ecution. Based on my recent
experience from working with a group
of airline executives in business and
strategy development and technology
enablement departments, let me start
at the conceptual design level – the
value of a digital operating system that
will help an airline get the most out of
its physical and human assets.
Airlines have clearly mastered the
deployment of physical hub-and-spoke
systems that (1) produce enormous
productivity gains in an airline’s use of
its physical assets (aircraft, crew, gates,
slots, maintenance staff, facilities,
and so forth) and (2) extend, at the
same time, the depth and breadth of
an airline’s network and schedules
to produce substantial value for the
airline’s customers. However, despite
the power and enormous value of
physical hub-and-spoke systems to
both airlines and customers, there are
limitations relating to their customer
centricity, scalability, agility, and
optimisation at the enterprise level.
On top of that, these systems
come with a zero sum game feature,
meaning that the assets coming in
are equal to the assets going out. The
figu e below shows a simple view of
the concept. If X number of airplanes
come into a hub, then X number leave
the hub. The optimisati n process
relates to the use of techniques,
processes, and systems to optimise
the use of physical assets. These could
be aircraft, crew, airports gates/slots,
subsidiaries, alliance partners (and now
JVs) to maximise the transportation of
traffic y volume and/or dollar value
or minimise costs, or a combination
of both to maximise profit based n
the input from related systems, such as
revenue management.
Moreover, the optimisation process
works within longer-term frameworks.
Fleet planning relates to years
and schedule planning is normally
conducted on an annual basis with
small changes made throughout
the year to account for variations in
demand based on season, day of the
week, and so forth. The d velopment
of the schedule, of course, pays
AIRCRAFT
CREW
PHYSICAL
GATES/SLOTS
HUB-AND-SPOKE
PARTNERS SYSTEM
PASSENGERS
attention to many operational
considerations (such as crew,
maintenance, and airport facilities) and
commercial considerations (such as
revenue from passengers and shippers).
The whole p ocess is complex and
difficult to dapt in real time to the
dramatically changing demand of
the marketplace from the viewpoint
of customers and airlines. Customers
want, for example, products that not
only meet their end-to-end needs but
also experience. Airlines want to be
able to plan in as close to real time as
possible.
The ans er is to work with a
digital operating system that wraps
around the physical hub-and-spoke
system to facilitate the development
of customer-facing innovations and
smart airline planning processes and
systems, such as digital hub-and-spoke
systems. One highly seasoned airline
executive with a thorough appreciation
of digital technologies helped to
develop the following analogy. A
rotary phone worked well with an
analogue operating system that
worked with a basic phone number,
copper wires, and integration of
various cables. Then when the digital
phone came, it was not a digitised
version of a rotary phone. It was
based on a digital operating system
that led to numerous customer-facing
innovations such as speed dialling,
caller ID, three-way calling, music
playing while on hold, and VoIP. Some
of these functions could conceivably
have been added to the rotary phone
AIRLINE LEADER | JUL-AUG 2016 7
OPINION
using the analogue operating system,
such as speed dialling and redialling,
but they would have involved an
incredible amount of complexity and
expense, not to mention ongoing
support. Other functions and features
would have been almost impossible
to develop, let alone make some
features integrated. The digital
operating system introduced many
more customer-friendly functions
by enabling the management of
information.
So, if an airline is to introduce
customer-facing innovations relating
to its products and services and, at
the same time, make the existing
planning systems smarter by providing
agility and scalability, new operating
systems are needed. These s stems
need to be digital in which the inputs
and outputs are still assets but they
now relate to information coming
from different functions and groups
such as sales, operations, customer
service, and loyalty (a digital hub-and-
spoke system). Moreover, they must
encompass software that integrates
data coming from different sources,
uses analytics to process the data, and
integrates functions to produce and
deliver aligned values. And, let us
not overlook the value of the digital
operating system as a platform for
app developers to enable an airline
to become a provider of mobility as
a service rather than seats from one
airport to another.
ub-and-Spoke Sy
ital H ste
g m
Di
erating S
l Op ys
ita
Dig
tem
PHYSICAL
HUB-AND-
SPOKE
SYSTEM
8 AIRLINE LEADER | JUL-AUG 2016
Airlines, of course, have vast
quantities of information. However,
as I have written many times before
and have observed within airlines
where I have worked, the information
tends to be transactional, unstructured,
and unconnected, warehoused in
different organisational silos within
the airline. And, although many
airlines also possess some analytics
(in some cases, quite sophisticated)
their use is neither comprehensive
within individual operational and
commercial functions nor spread
throughout the organisation. As such,
what I am suggesting is a different
conceptual system that is much more
organised. The in ormation gathered
is much more comprehensive, it is
connected, and its use is optimised
with the deployment of an equally
comprehensive set of analytics that
analyse the information, massage it,
and make it available for determining
what happened, why it happened,
what could happen, and what should
happen.
The old hub-and-sp ke system
represents an integration point where
growth opportunities are created.
This s stem is still needed as it is
still integral to the airline business.
However, the physical hub-and-spoke
systems are not unique (relative to
competition), not able to give an
airline a tightly integrated marketing
capability to produce aligned value,
and not able to handle an incredibly
large number of options in a very short
period of time and offer integrated
Uber’s digital operating system
enables the availability of “surge
pricing” that allows customer volumes,
driver availability, and taxi service
levels to be managed simultaneously.
solutions in almost real time.
A digital operating system, along
with a digital hub-and-spoke system,
will support a tightly integrated
marketing capability that will enable
an airline to sense quickly and
effectively customer needs and create
and deliver value propositions at an
accelerated pace. Think about ber’s
digital operating system that enables
the availability of “surge pricing”
that allows customer volumes, driver
availability, and taxi service levels to
be managed simultaneously and in
real time. Digital operating systems
can offer unforeseen product features.
Think about the time when e-ti keting
was explored by airlines. Did the
marketing groups envision the ability
to offer last minute specials enabled by
e-ticketing?
The integ ated nature of marketing
(enabled by a digital operating system)
will ensure the existence of the, often
missing, intra-functional and cross-
functional integration, and deliver
products and experiences based on 360
degree views of individual customers,
not to mention partners and competitors.
Equally important is the point that
the integrated and dynamic nature
of airline marketing, coupled with
the fundamental transformation of
the existing reservation and revenue
management systems, could reduce
airline schedule planning time from
12 months to more like a couple of
months, and possibly even enable an
airline to run without budgets, similar
to Aldi. AL
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OVERVIEW

LONG HAUL Despite the surge in Asia Pacific viation

markets, most notably Chinese, the US and
its airlines remain highly influen ial players

INTERNATIONAL
globally, so how those airlines and their
government behave will play a large role in
shaping the near term. With an apparently

MARKETS IN 2025:
lukewarm and leaderless US approach to
liberalisation, it has become a concern that its
influence wi l lean towards winding back open
skies; hopefully that is not the case, but the

Partnerships, joint ventures

former fi e in the belly is clearly lacking now.
As with other international long haul
strategies, the US airlines (and here Delta is a

and new airlines leader), along with many others, appear to see
various levels of bilateral partnerships as a vital
part of the future. For the major US operators
At IATA’s AGM and World Air Transport Summit in Jun-2016, Delta Air Lines there is a clear preference towards:
CEO Ed Bastian was asked what proportion of his airline’s operations would
be in 10 years on international routes – “50%”, was his simple response, on its • using closed, immunised JVs, generally
own and with partners. within the framework of the global
As the longer established markets, while more predictable, become more alliances to which the respective airlines
mature, the attraction of international markets, especially Asia, becomes too belong. Given the US government’s
great to ignore. Financial markets demand growth as well as profit, which position that these intrinsically anti-
means venturing into new and often differently competitive markets, not least competitive agreements are only
the Asia Pacific. This series of reports in Airline Leader reviews each of the permissible within an open skies
world’s main long haul markets and looks at how they might be characterised framework, the US big three may consider
in 10 years. it increasingly important to narrow the
description of “open skies” – including

B
defining “subsidy” and “fair competition”;
EHIND MR BASTIAN’S SIMPLE STATEMENT are some • codeshares of various kinds. Perhaps
important implications for the world’s aviation system. surprisingly, US airlines have for example
First of all, for Delta, he implicitly recognises that even more than a 30% share of Indonesia-US
though the US domestic system has been an oasis of profitabili y traffic – despite not op ating any services
for those airlines left standing after consolidation, the future growth must to Indonesia. This is chieved through
be outside the country. Secondly, it is hardly likely that Delta will be codeshares and interlines via various North
alone among the three major US airlines in having this outlook. In sum, Asian hubs; and
there will be a substantial expansion of US airline activity in international • acquiring minority equity shares in airlines
markets – and they will not be alone. in their key growth markets – in Delta’s
For the industry overall, it promises to rattle the foundations of case the North Atlantic (Virgin Atlantic),
international operations, both in sheer size of new entry, but also for the Latin America (GOL), China (China
likely impact on the regulatory framework and partnerships. Eastern). This p actice is likely to grow.
Currently, only 16% of Delta’s seats and 11% of its frequencies are
operated on international routes. These t anslate quite closely to the At the same time other governments and
180 million passengers it carried in 2015. However, Mr Bastian talked aviation markets are important ingredients in
in terms of changing the airline’s network mix “from 60:40 domestic-
international to 50:50”, so he was apparently using the measure of
available seat miles (ASMs). Since the British decision
The p obable impact of this planned expansion on regulatory norms
is less obvious and open to speculation. But a look at recent behaviour
to withdraw, there is now a
and pronouncements by Delta and other US majors may provide some question mark over the EU’s
foundation for projections of the likely future frameworks.
future posture.

10 AIRLINE LEADER | JUL-AUG 2016

the mix, with continually changing influenc .
In Europe, one of the liberalising influences
of the past decade, the liberal leadership has
come mostly from the UK. Since the British
decision to withdraw, there is now a question
mark over the EU’s future posture, as the much
more conservative and protectionist oriented
voices of Germany and France are likely to
hold greater sway within the Union.
The EU has also pl yed an important role in
pursuing other, more liberal approaches, such
as parallel (typically between EU states and
a country) and multilateral agreements (such
as between EU states and eg ASEAN, the
Association of South East Asian Nations).
The EU-US ag eement represents perhaps
the pinnacle of these endeavours, although
the achievement of single European skies is
often overlooked despite its massive impact on
European aviation – one that becomes obvious
when discussion begins about disentangling
easyJet and Ryanair. It is to be hoped that
Europe will not now fall back into a discordant
and inertial array of voices.
The e is more hope with the emerging, often more progressive and
pragmatic influence obse ved in Asia Pacific viation. This is not a
homogeneous region, stretching from China. Korea and Japan in the
northeast, through the vibrant aviation markets of Southeast Asia and
into India and the Middle East.
But the region does have some differentiating features in common. It
has:
• the world’s highest levels of traffic owth, current and projected;
• a profusion of new entrant airlines;
• the evolution of airline groups with a mix of separately branded full
service and LCC operations;
• an array of cross border joint ventures, many of them part of airline
groups;
• in Southeast Asia, the highest level of international (subject to
bilateral agreement) LCC activity in the world, with Northeast Asia
now trending in that direction; and
• several long haul LCCs, establishing the model against most expert
predictions.
Another feature has been the signifi ant acquisition of shares in foreign
airlines outside the region, with buyers seemingly taking a long term
view; these are mostly made by Chinese airlines and other investors.
The Indian subc ntinent, notably India, is embarked on an increasingly
AIRLINE LEADER | JUL-AUG 2016 11
OVERVIEW
liberal direction; and while intra-Middle East
routes are not (yet) liberally oriented, externally
the region’s prominent entities in world
aviation, the Gulf States, are noted for their
open trading markets.
Latin America too has become much more
fl xible in its approach to unravelling the
constraints of bilateral ownership and control
restrictions. The establishment of ATAM,
along with a variety of cross border full
service and mixed joint ventures has allowed
a rationalisation of a complex market, without
unduly restricting the level of competitive
options for travel. The Mexico ma ket in
particular is potentially active domestically and
– subject to US politics – an open skies zone
with the US.
The e have also been various foreign equity
investments in Latin American airlines,
generally linking in with partnerships of one
form or another.
Most of Africa meanwhile is sadly little
changed, still essentially protectionist internally
within the region and with a fragmented airline
system.
In sum, there is a developing contrast
between the growing conservatism of the
incumbent interests on one side and the newer,
more liberal attitudes of the higher growth,
previously less important markets on the other.
Each of these “regions” – some described
here embrace wide zones – has its own
characteristics internally. But they must
interact across the world and it is their
confluence that orms the basis of the report
in this issue of Airline Leader. Flying between
regions inevitably provokes variegations of local
characteristics, producing compromise; but as
is usual in international relations, it is generally
the stronger and their more influential vi ws
which prevail – if not immediately, then over
time.
In the tight environment of bilateral
agreements and their ownership and control
restrictions, market access is the currency; so
those which have the most to dispense are
able often to call the shots. That among other
reasons, is why the role played by China will be
increasingly important over the coming decade,
12 AIRLINE LEADER | JUL-AUG 2016
Predictability will not be the next decade’s
profile for routes involving Asia Pacific, and
in particular the Asia-Europe market.
as the balance of power shifts.
Inherent in all the strategies for long haul international operations is
finding wa s to circumvent the strict confines of wnership and control
provisions. Where it is generally impossible to merge across borders, or
to establish operations in another country, devices must be found. Until
now, the most pervasive of these has been the use of branded global
alliances (BGAs), Star Alliance, oneworld and SkyTeam. Between them
their membership includes most of the world’s major – and many minor
– international airlines, the main exceptions being Emirates and Etihad.
The BGAs a e not about to disappear and they appear to be important
in providing a basis for immunised JVs, the closest of all partnerships.
These bilate al JVs by corollary tend to lend some strength to their
broader alliance.
As noted consistently across the various route projections contained
in this series of reports, partnerships of various kinds, often crossing
BGA boundaries, are now proliferating and coming to take on a more
prominent role. Where they traverse two BGAs, the tendency is to
weaken the link with their multilateral partnership, one reason that the
Star Alliance has punitive provisions for such transgressions.
Minority equity acquisitions have also become much more a part of
the equation over the past decade. Necessarily these must be minority
shares, at a maximum 49.9% for bilateral purposes, or less if national
regulations so decree; thus while Delta may buy and control a 49%
share in Virgin Atlantic, foreign investors in US airlines must observe
the tighter US restriction that 75% of the voting interest be owned or
controlled by citizens of that country.
Etihad has made an art form of equity purchases, establishing its own
alliance of equity partners, linking them in FFPs and in such areas as
joint purchasing, as well as operationally.
And China’s HNA Group, parent of Hainan Airlines, is among the
new breed of global investors in airlines and the travel chain. The e will
undoubtedly be more.
These eatures combine variously among long haul markets. Most are
relatively predictable and their evolution will continue to exhibit common
strains – but predictability will not be the next decade’s profile or routes
involving Asia Pacific and in particular the Asia-Europe market. Here,
the potential for new entrant airlines and new city pairs is greatest; the
competitive permutations are enormous, as are the opportunities and
threats.
Asia Pacific is whe e the new world order will be formed, that is where
the innovation is greatest; and it is where the potential exists for usurping
norms that have – not always helpfully – weathered the test of seven
decades. AL
2016 Asia

Singapore, 15-16 November

The CAPA Asia Aviation Summit is the CEO airline summit for Asia. The Summit will cover the key issues
facing LCCs, full service carriers and hybrid carriers. The summit will bring together up to 30 CEOs of leading
carriers based in Asia, as well as those serving the world’s most vibrant aviation region. It will explore in depth
the key strategic and commercial issues driving the future of aviation in this region, including low cost airline,
hybridisation, full service carriers and global alliances, as well as the key ancillary/merchandising, distribution
and technology trends. It will also have a dedicated day on corporate travel and airport innovation.

Also part of the CAPA Asia Aviation Summit:

15 November
2016

The CAPA Aviation Awards for Excellence has been recognising strategic
leadership in the aviation industry since 2002. The awards are not driven
by customer surveys or sponsorship. They are independently researched by
CAPA and Heidrick & Struggles and selected by an independent international
ASIA panel of judges.

Southeast Asia 15 November

The summit delivers a deep focus on the biggest category of
corporate travel spend: air. The event will feature the views of key
INNOVATION SUMMIT 2016 corporate travel buyers, airlines, travel management companies
and the wider industry.

Asia 16 November
Airport, airline and technology/systems executives will
review the international and domestic market prospects for
SUMMIT 2016 airports in the Asia region and how airports are adopting and
benefitting from innovative new technologies.

With thanks to our Event Partners

CAPAAsia
CAPA AsiaAviation
AviationSummit
Summit capaevents.com/AAS16
capaevents.com/AAS16
FEATURE

LONG HAUL LOW COST

IN THE ASCENDANCE;
AN UNPREDICTED FEATURE
OF LONG HAUL
INTERNATIONAL TRAVEL

14 AIRLINE LEADER | JUL-AUG 2016


One of the undoubted game changers in long
haul markets will be long haul low cost operations.
There are already elements of this low cost
mentality in the Gulf carriers and notably Emirates,
whose spokes are all relatively long haul, using
widebody aircraft. But the new generation will be
more akin to classical network airlines, converting
between short-long haul.
That they can succeed owes much to the new
generation of smaller widebodies and, in Asia,
to the formation of multi-brand airline groups,
formed around a legacy airline.
The definition of “long haul low cost” is not
important. If it looks like a duck and quacks like
a duck and walks like a duck, it probably is a
duck. It is a different and new product and it has
the potential fundamentally to alter long haul
operations.
The goal is to provide a lower cost operation
on routes that cannot and will not support the
profile of premium/economy that characterises
the traditional long haul network airline. And,
where it is part of a group, it is able to provide
the foundation for a wider network, with differing
yield profiles.
F
OR THOSE WHO DOUBTED THE REALITY OF LONG HAUL
LCC OPERATIONS, the evidence is mounting that the future
of long haul is changing. The e are now 11 LCCs operating
scheduled routes longer than 7,000km – and more are on
the way, mostly accelerated by the arrival of new Boeing 787s and
A350s. Signifi antly too, more than half of them are subsidiaries or a
part of a full service airline group. In some basic ways they imitate the
connectivity of the traditional model, but with a scale able to be tailored
more effectively to certain city pairs.
Unsurprisingly they do not all conform to the same model; the two
Canadian North Atlantic operations are with 767s and rely less on
connecting fl ws. Where some come from greenfield oots, others, like
the Canadians and Eurowings, are conversions. For the time being, long
haul low cost operations only exist on Asia-Europe/Middle East and the
North Atlantic; other markets will surely follow.
Scoot is Singapore Airlines’ (SIA) medium/long haul low cost airline
subsidiary; it is part of a group which comprises a short haul low cost
airline, Tigerair, and a full service regional airline, Silk Air. Scoot is
now preparing to launch services to Europe in 2Q2017 and looks likely
to become the first CC with flights ver 10,000km since Malaysia’s
AirAsia X suspended services to Europe in 2012 (although AirAsia X is
talking of resuming service too).
AIRLINE LEADER | JUL-AUG 2016 15
FEATURE

But there are currently eight LCCs operating
longer routes than Scoot. Scoot’s longest current
route is Singapore-Jeddah, which it took over
from SIA in May-2016. Jeddah is Scoot’s
only destination outside Asia or Australia. The
Singapore-Jeddah route is 7,355km long.
Of the 11 LCCs operating scheduled routes
of at least 7,000km (or more than nine hours),
only two of those operate routes of at least
9,000km – Eurowings and Norwegian.
Lufthansa Group’s Eurowings launched services from Cologne to
Bangkok and Phuket in late 2015 using A330-200s. This attempt to
introduce a low cost long haul model into the Lufthansa Group is
designed to allow it to participate in lower yielding operations into Asia,
while at the same time Lufthansa forges full service alliances on routes
where premium traffic ws are stronger. As at Jul-2016, Cologne-
Phuket is the longest LCC route in the world at 9,386km; Cologne-
Bangkok is slightly shorter.

LCC/LCC GROUPS OPERATING SCHEDULED ROUTES OF AT LEAST 7,000KM: RANKED BY LENGTH OF

LONGEST ROUTE
SOURCE: CAPA – CENTRE FOR AVIATION & OAG
Note: based on scheduled routes for week commencing 04-Jul-2016
*Lion Air operates Jakarta-Jeddah most of the year but during the current week is operating Jakarta-Madinah

RANK LCC/LCC Group LONGEST ROUTE DISTANCE OUTBOUND BLOCK TIME INBOUND BLOCK TIME AIRCRAFT TYPE

1 Eurowings Cologne-Phuket 9,386km 11:50 12:30 A330-200

2 Norwegian Copenhagen-Los Angeles 9,024km 10:40 11:20 787-8
3 Jetstar Airways Melbourne-Honolulu 8,871km 10:05 10:55 787-8
4 Air Canada rouge Toronto-Athens 8,122km 9:40 9:50 767-300ER
5 Lion Air Jakarta-Madinah* 7,995km 10:30 10:30 A330-300
6 Azul Sao Paulo Campinas-Lisbon 7,921km 9:55 10:35 A330-200
7 Cebu Pacific Manila-Riyadh 7,775km 10:15 9:50 A330-300
8 WestJet Vancouver-London Gatwick 7,617km 9:30 10:00 767-300ER
9 Scoot Singapore-Jeddah 7,355km 9:00 9:25 787-8
10 Jin Air Seoul-Honolulu 7,350km 9:00 9:45 777-200ER
11 AirAsia X Kuala Lumpur-Jeddah 7,062km 9:30 9:00 A330-300

There are now 11 LCCs Norwegian Air and Eurowings are the other LCCs operating
Europe-East Asia routes. Eurowings became the second LCC in the
operating scheduled routes Asia-Europe market, after Norwegian launched services to Bangkok
longer than 7,000km. in 2013 with 787-8s. The orwegian LCC now serves Bangkok from
Copenhagen, Oslo and Stockholm. It became the first CC in the
Asia-Europe market since AirAsia X’s suspension of Kuala Lumpur to
London and Paris service. That oute was performed by A340s and, at a
time when network connectivity was still experimental, the rapid rise in
fuel prices undermined its financial p ospects. Kuala Lumpur-London is
10,600km.
Oslo-Bangkok is 8,665km, making it slightly longer than Stockholm-
Bangkok and Copenhagen-Bangkok. However it is slightly shorter than
Norwegian’s longest trans-Atlantic route – from Copenhagen to Los
Angeles. Copenhagen-Los Angeles is 9,024km long but Bangkok to
Oslo is a longer flight in te ms of duration.
The blo k time for Bangkok-Oslo is 12:20 compared with 11:20 for
Copenhagen-Los Angeles, so Bangkok-Oslo is the longest one-way

16 AIRLINE LEADER | JUL-AUG 2016

An LCC can also impose a powerful influence
on the efficiency of its parent company.
flight in the orwegian network. Only the Phuket-Cologne sector has
a longer block time, at 12:30, making it the longest LCC route by both
distance and scheduled flight tim .
As illustrated in the previous table, Jetstar Airways and Air Canada
rouge are the only LCCs other than Eurowings and Norwegian currently
operating scheduled routes of at least 8,000km. Melbourne-Honolulu is
Jetstar’s longest route and is also served with 787-8s. Toronto-Athens is
rouge’s longest route and was just launched as a new seasonal service in
Jun-2016, using 767-300ERs.
The abili y to use more than one long haul model in a particular
regional market provides an opportunity to compete more effectively
with other full service airlines, allowing better market coverage, tailored
to the profile of e ch route. It will work best where there is also an
appropriate (ie relatively seamless) ability to transfer between different
models within the group; but it can also offer advantages in allowing
transfers onto other “friendly” airline partners, full service or low cost,
thus expanding the range of partnership options too.
Qantas’ Jetstar was one of the first to do this for example now
connecting onto Qantas as well as foreign – in this case all oneworld
- airlines, Emirates, Finnair and SriLankan via its Singapore based JV,
Jetstar Asia.
Thus with its Scoot option SIA could transfer lower yielding routes
like Rome and Manchester to the long haul subsidiary. Both of these
are markets well covered by the Gulf carriers, so are highly competitive,
especially in the premium market. SIA currently serves Manchester
daily but with a one-stop product via Munich, so a non-stop would be
a considerable improvement in convenience. Asian competitor Cathay
Pacific laun hed nonstop service from Hong Kong to Manchester in
late 2014 and China’s Hainan Airlines launched services from Beijing to
Manchester in Jun-2016, giving Manchester two nonstop links to East
Asia.
A nonstop product in the Manchester market would enable the SIA
Group to compete more strongly with Cathay Pacific and the ulf
airlines. Emirates, Etihad and Qatar Airways all offer competitive one-
stop products from Manchester to several Southeast Asian destinations
and Australia, while travel on SIA currently requires two stops on all city
pairs except Manchester-Singapore.
Another example of the options created by having two brands to call
upon is Istanbul. SIA also serves Istanbul with fi e to seven weekly
flights (depending n the time of year). SIA has a codeshare with fellow
Star Alliance member Turkish Airlines that – if upgraded to a JV – could
lead to SIA maintaining a full service presence on the Singapore-Istanbul
route. Without a JV it could be challenging for SIA to compete with
Turkish, and transferring the route to Scoot could be a viable alternative.
Rome is another case in point: currently served by SIA with only two
to three weekly flights depending on the time of year. Transferring Rome
to Scoot seems a real option, given that it is
hard to maintain a premium position in any
market with such a thin schedule.
In reality these new long haul LCCs are
inevitably hybrids; for example they cannot
achieve signifi antly higher utilisation than
their legacy counterparts, although typically
they do tend to do a little better. Th y may also
often have a small premium cabin, even with
lie flat seats and to operate effectively, they
will engage in connectivity, ideally at each end.
Many features are similar – but they are not
the same.
The e are important parts where they do
differ from their older counterparts. Just the
fact of being new means being relieved of
much legacy baggage. Th y have a low cost
mentality, flatter mana ement structure, can
be more nimble and many more – reasons that
have existed for many years.
Where they are independent, like AirAsia
and Norwegian, they will generally need to
mimic the full service airlines’ connectivity
more directly, while remaining among the
lowest cost operators in the world. But where
they are one part of an airline group, the
equation can provide even greater flexibili y, as
demonstrated above; they can be mainly point
to point on routes where a more costly operator
cannot survive, and they can be better money
spinners where previous network operations
were marginal.
Moreover, an LCC – short or long haul -
can also impose a powerful influence n the
efficie y of its parent company. The point
is powerfully illuminated by Alex Cruz, the
new CEO of British Airways, a part of the
International Airlines Group. He was recently
appointed from Vueling, one of the Group’s
LCCs, bringing with him years of experience
as that airline’s highly successful CEO.
As reported in Business Traveller in May-
2016, Mr Cruz said to a media conference:
“You need a mindset and here I am. Do you
think I’m satisfied that to app ove a project
we need nine people? No. Will we be a better
airline if it only takes two people to approve
that project? Yes. Will we be more agile? Yes.
Most people in BA know this. I’ve got the top
managers speaking about this. Now we need to
do something about this.” AL
AIRLINE LEADER | JUL-AUG 2016 17
OUTLOOK
Europe-Asia appears likely to be a truly
innovative and world changing market
Air traffic between Europe and Asia has
achieved consistently moderate growth, unlike
the high speed to rapid expansion between
Asia and North America. Yet, with the exception
of a handful of smaller airlines with niche
connecting opportunities, like Finnair and LOT
(and Norwegian), the potential for organic growth
is limited. JVs are gradually becoming more
T
HE CONVERGENCE OF ASIAN
FLOWS TO EUROPE HAS BEEN
UNDERLINED by Gulf airlines in the
south and mostly Chinese airlines
in the north. Because of their geography,
Gulf airlines have only moderately circuitous
connections between Southeast Asia and
Europe. The lo al market has adapted quickly
to travel on the Gulf airlines. Northeast Asia
is more difficul The mo e northern geography
of the region means greater circuitry is
introduced to European connections, with the
backtracking highest for the prime markets like
Beijing, Seoul and Tokyo.
The Japanese ma ket is mostly focussed on
saving time and has a strong preference for
using Japanese airlines. Korea has been frugal
with traffic ights, leaving the Gulf airlines
with a single daily flight e ch. The e are
however some signs of optimism in China for
18 AIRLINE LEADER | JUL-AUG 2016
common, bringing opportunities but also challenges as they overlap, due to
the convergence of the European-Asian market.
It has in effect been two markets, one segment from Europe to Northeast
Asia and another Europe to Southeast Asia. With a few exceptions, neither
region acted as a hub for the other, in contrast to Asia-North America or North
America-Europe, where the geography of each region is sufficiently close that
European airports can be a hub for the region. Northeast Asia is however a
hub for Southeast Asian traffic to/from North America.
Gulf airlines – Emirates especially – given the Chinese government’s top-
level initiative to be linked to the Middle East.
On northern routes, Chinese airlines are increasingly imposing their
stamp on Europe traffic ws, wresting back market share from airlines
and hubs that fed off their ma ket while Chinese airlines were under-
represented. Th y now have the opportunity themselves to become hub
airlines, for example replacing Seoul Incheon’s role as a hub for Japanese-
Europe traffi Mainland Chinese airlines already have an established
position in the Taiwan-Europe market.
Some Chinese hubs will also be favourable for Southeast Asian
connections. Backtracking and connections may be disadvantageous, but
the lower cost base of Chinese airlines and their available capacity can
place favourable fares on the market. Some emerging hubs, like Kunming,
expect their intercontinental forte, even if small for a while, to be between
Europe and Southeast Asia.
The hallenge in Southeast Asia will remain the Gulf airlines.
Lufthansa and Singapore Airlines together account for about 27% of
non-stop Southeast Asia-Western Europe seat capacity. But when also
counting passengers fl wn through all connecting points their share of
the market is only 13%, according to OAG Traffic nalyser data for 2015.
AVERAGE DAILY SEATS FROM GULF CARRIERS (GULF- GULF CARRIER AVERAGE DAILY FREQUENCIES TO
SOUTHEAST ASIA), LUFTHANSA (WESTERN EUROPE- NORTHEAST AND SOUTHEAST ASIA: 2005-2015
SOUTHEAST ASIA) AND SIA (WESTERN EUROPE- SOURCE: CAPA - CENTRE FOR AVIATION AND OAG

SOUTHEAST ASIA): 2005-2015 60

SOURCE: CAPA - CENTRE FOR AVIATION AND OAG

20,000 50

18,000
40
16,000

14,000 30
12,000

10,000 20

8,000
10
6,000

4,000 0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
2,000
NE Asia Frequencies SE Asia Frequencies
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Gulf Seats Lufthansa Seats SIA Seats

AIRLINE LEADER | JUL-AUG 2016 19

OUTLOOK
Emirates alone has 12% of the market, and
once Etihad and Qatar Airways are added,
27% of passengers between Southeast Asia and
Western Europe now transit with the three
Gulf carriers.
The ulf airline influence is s ill growing.
Oman Air is for example sprouting as a new,
albeit smaller, airline. A second London
Heathrow service and new Manchester flight
reflect opportunities in the outbound European
market. Kuwait Airways, although not close
to even Etihad in size, is planning growth and
will need higher connecting traffic to sustai
limited O&Ds. Emirates has placed its 615
seat two-class A380 behemoth on service to
Bangkok and, airports permitting, would like it
elsewhere in Southeast Asia.
The lar est southeast Asian airline fl ing into
Europe is Singapore Airlines, which is second
overall behind Lufthansa. SIA’s strategy, seen at
other Asian airlines too, is to focus connections
on smaller Asian points Gulf airlines do
not serve. That st ategy is starting to come
ASIA-EUROPE ANNUAL SEAT CAPACITY
OF TOP 10 CARRIERS: 2005 AND 2015
SOURCE: CAPA - CENTRE FOR AVIATION AND OAG
2,000K
1,500K
1,000K
500,000
2005 2015
Lufthansa Qantas Singapore Airlines
KLM Finnair Cathay Pacific
British Airways Air China Thai Airways
Air France Malaysia Airlines Japan Airlines
20 AIRLINE LEADER | JUL-AUG 2016
For the time being they lack scale, a solid
transfer experience and premium traffic,
but this will change remarkably by 2025.
under fi e as Qatar for example launches service to thinner markets like
Krabi. Gulf airlines have also used Bangkok Airways’ excellent regional
network to access smaller markets while other partnerships have formed:
Emirates with Jetstar Asia in Singapore and more recently Malaysia
Airlines.
Despite the Gulf airlines making inroads in the Europe-Asia market,
it took until 2015 for Singapore Airlines and Lufthansa to announce
a JV. Seemingly mutual distrust diverted their attention from the real
threat. The immediate ocus is not growth but preserving market share
and, possibly, yields. The sl w build-up of the relationship – in time and
market coverage – reflect the deep c nservatism at Singapore Airlines.
In contrast, Malaysia Airlines bit the bullet. It has exited its European
routes except for London Heathrow, itself even marginal. A number
of destinations were cut before its partnership announcement with
Emirates.
Thai Ai ways was once number two in the market, larger than even
Singapore Airlines. It has fallen behind not only SIA, but Air France and
Turkish Airlines have overtaken it too. Thai has lost uch ground, and
even a new pragmatic management team may be unable to reverse years
of market share decline. But Thai unlike SIA, has greater independence
and it should not be ruled out that Thai too orms a partnership with
a Gulf airline. A Gulf partnership with SIA is probably too radical for
staunchly independent SIA.
Southeast Asia’s smaller flag ai lines – Vietnam Airlines, Philippine
Airlines, Garuda – are each now planning growth but without a strong,
or necessarily profitabl , strategy.
While the Europe-Asia market is also about airlines from a third
region – the Gulf – a fourth region is also relevant: Australia. Australia,
with New Zealand, is typically the largest offline m ket for a European
airline. Its market size may be more signifi ant than some online Asian
markets. This t affic has hist ically fl wed over Southeast Asia but has
shifted to the Gulf and is now poised to shift again over coming years –
to mainland China.
With mainland Chinese airlines theoretically having larger O&D
demand on Europe-China and China-Australia flights they are in a
strong position to discount connecting traffi For the time being they
lack scale, a solid transfer experience and premium traffi but this will
change remarkably by 2025. China Southern has coined the “Canton
Route” for its aspiration to have a play at the Australia-Europe market
by having it transit in its home of Guangzhou. Although well marketed,
with the public surprisingly catching on, the traffic is st l understandably
small, given the large capacity levels fl wing over the Gulf and Southeast
Asia. Shanghai and Beijing can make a play too, and their O&D traffi
will be stronger than China Southern’s. Korean Air and peers never
aggressively pursued the Australian market, let alone connections to
Europe.
European airlines were initially the leader in opening secondary
Chinese cities, made possible by subsidies. This ma ket has plateaued
with exceptions from Finnair, which is basing its future on long haul
flights to Asia Given its geographic advantage for Northeast Asia, and
the dominance of Gulf airlines in Southeast Asia, it is Northeast Asia
that is most appealing for Finnair and is where growth will primarily be.
China is the largest opportunity for Finnair, as is typically the case in
Northeast Asia.
Links from secondary Chinese cities to Europe are now mainly being
added by Chinese airlines while secondary cities are also now adding
long haul flights to ustralia and North America. If allowed by Chinese
regulators – and there is cause for optimism – Gulf airlines will have
an increasing role in secondary Chinese markets. Chinese airlines each
have only a handful of cities with non-stop service to Europe. Gulf
airlines can access far more Chinese cities, although Chinese airlines, and
their European partners, will benefit f om each other’s behind gateway
networks.
The ole of hubs has been especially important for the growth of
Europe-Asia routes. Air China serves Frankfurt, the hub of fellow Star
member Lufthansa, from four Chinese cities. Brussels Airlines’ ascension
to Star in 2009 saw Asian airlines (such as ANA) over the years add
flights to the hu .
China will re-shape, in a small way, the function of hubs and
partnerships, as new major cities join the international aviation system.
China’s hubs today are mostly along the eastern coast. Offici ly,
Chengdu (population, depending on administrative boundaries, 7-15
million) has been elevated to a hub, joining Beijing, Guangzhou and
Shanghai. Chongqing, in close proximity to Chengdu in western China,
is not far behind Chengdu in size and air links. Other western China
hubs like Kunming, and to a lesser extent Urumqi, are eyeing growth.
The loser proximity to Europe of these new hubs means re-shaping
the concept of long haul flights eeding short haul flights Instead,
these points allow two medium haul flights At the extreme, at Sichuan
Airlines’ Chengdu base, Frankfurt is closer than Sydney. Even London,
which Sichuan Airlines does not serve, is closer to Chengdu than it is
to Sydney. Although Air China has a grip on Chengdu, the Chinese
airlines are still contesting the right to develop a western hub.
New aircraft technology could allow for a far western Chinese hub to
reach thinner European cities. Beyond China transfer traffic need nly
be small: routing over Chengdu to another Chinese city is potentially
shorter in distance than via Beijing or Shanghai. A smaller hub will
also theoretically provide a faster transfer process and have less need to
operate in congested airspace.
Partnerships would need to take into account the Europe-China
flight not coun ing for as much of the total trip revenue. Expanding the
scope of JVs to behind gateway markets, a complicated calculation, could
become more necessary.
Hub changes are having impacts elsewhere. The expanded ne work
of international flights and in particular daytime services, at Tokyo
Haneda Airport is allowing some traffic to w back over Haneda from
Seoul Incheon. When, a few years ago, Japan’s
international flights most y departed from
Tokyo Narita, international demand from
other Japanese cities would use Seoul Incheon.
Incheon had the advantage of same-airport
connections from a regional Japanese point
onto a long haul flight whereas transferring in
Tokyo meant switching from domestic Haneda
to international Narita. A Haneda domestic-
international connection still requires a
terminal transfer across a runway, but it is now
a stronger proposition.
Japanese airlines have focussed on end-to-
end partnerships in Europe, in contrast to
the way they have carved a role as a transfer
point for North America-Asia traffi ANA,
as is the case in general, has been growing
internationally while JAL is not adding
capacity, partially held back by restrictions
imposed during its bankruptcy re-structuring,
and partially because JAL’s organic growth is
very conservative.
The Ko ean airlines are growing carefully.
Th y are deeply worried about Gulf airline
inroads and hence fie cely lobby against
allowing them additional traffic ights.
Japanese airlines instead have cemented
partnerships, ANA especially, since it has
historically (but no longer) been the underdog
that needed to be creative to advance. Its
relatively rapid growth would not have been
possible without the Lufthansa Group in
Europe, with whom it has a JV. The AL-
British Airways JV, extended to Finnair and
soon Iberia, is not as important given that
partnership’s smaller size and stronger focus on
O&D instead of connecting traffi
Star Alliance’s Asiana has an ambivalent
relationship with many and is a deeply localised
airline in its passenger target and ability to
do business with others, allowing SkyTeam’s
Korean Air awkwardly to have a partnership
with Star’s Lufthansa. European airline interest
in Korea is different from Japan: Korea’s
geography is compact enough that there is
limited need for access behind Seoul. The e is
Busan, but even that city, like others in Korea,
is better accessed by high speed rail to Seoul.
Europe-Asia JVs are proliferating but
remain a patchwork: Lufthansa is most active,
with three JVs covering Asia: with ANA, Air
AIRLINE LEADER | JUL-AUG 2016 21
OUTLOOK

ASIA-EUROPE ANNUAL SEAT CAPACITY OF TOP 10 CARRIERS: LUFTHANSA GROUP (AUSTRIAN=OS,

2005 AND 2015 LUFTHANSA=LH AND SWISS=LX) AND
SOURCE: CAPA - CENTRE FOR AVIATION AND OAG SINGAPORE AIRLINES (SIA) NONSTOP
14,000 ASKS BY MARKET SEGMENT BETWEEN
WESTERN EUROPE AND SOUTHEAST
12,000
ASIA: 25-JUL-2016 TO 31-JUL-2016
SOURCE: CAPA - CENTRE FOR AVIATION AND OAG
10,000
5% 4% 8%
8,000
7%
16%
6,000
JV CAPACITY:
33%
4,000 NON-JV
6%
CAPACITY:
2,000 67% 3%

0 51%
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yo

re

ng

ya

ng
ai

ou
ko

ak

da
n

ijin
gh

po

go
k
Ko

nji

ya
Se
To

ng

Os

ng
Be
an

ga

en LH Germany - Singapore SIA Other Western Europe

Na
Na
ng

Ba

Qi
Sh

Sin

Sh
Ho

SIA Germany - Singapore LH Other SE Asia

SIA Switzerland - Singapore LX Other SE Asia
Swiss Lufthansa Austrian LX Switzerland - Singapore OS Other SE Asia

China and one with Singapore Airlines. As Air
China reshapes to offer sixth freedom traffi
in coming years, it will target Japan and even
Southeast Asia. Air China will also play its
hand with connections to Australia and New
Zealand, but not as prominently as China
Southern is already doing.
The e are very loose and limited partnerships
between both China Eastern and China
Southern and members of the AF-KLM
Group. For its European debut, Xiamen
Airlines is relying on a JV with fellow
SkyTeam member KLM; both serve Xiamen-
Amsterdam. Smaller Chinese airlines are less
fortunate as they do not have an immediate
European airline to call on. Th y consequently
tend to focus on low yield but relatively stable
tour agency sales that, over time, can migrate
to FIT.
The JV pat hwork could grow more
colourful. Air France-KLM need a stronger
solution, especially for Southeast Asia and
offline ccess to Australia. A JV with Etihad
has been discussed for a few years but Air
France has a well known antipathy for the Gulf
airlines.
Air France and Singapore Airlines were
reported to be considering a deep partnership, even JV, in the France-
Singapore market. This could c eate some difficultie given the new
JV with Lufthansa. The f ct that there is any discussion at all is due to
France being a strong enough market for SIA that it does not want to
leave access via Lufthansa hub connections.
Oneworld’s British Airways would like to form a JV with SkyTeam’s
China Eastern, which senses an opportunity to be at the core of a
partnership rather than fight or attention in a SkyTeam-dominated
China-Europe market.
Chinese partnerships have the potential to reshape global aviation.
BA’s advances also highlight how airlines are shifting from Hong Kong
to mainland China as the preferred, larger destination, and market for
partnerships. This could also eflect a eeling that there are better deals to
be done than with Hong Kong’s Cathay.
LCCs will grow faster in the Europe-Asia market than the market
average but from a very low base. Their oppo tunities will be relatively
niche. Until the arrival of the new generation of smaller widebodies it
was generally considered that the long haul LCC sweet spot is around
eight or nine hours, after which point fuel takes up such a large portion
of operating costs that the portion LCCs can differentiate on is limited.
New generation airlines like Gulf carriers are almost effectively long
haul LCCs given their greater efficiencies and wer cost structures,
which European airlines – even LCCs – struggle to compete with.
European long haul LCCs, Norwegian and Eurowings, have so far
focused on Thailand a predominantly leisure market. To some extent
they are replacing historical charter airline capacity following the
shrinkage of the charter model in Europe and the UK especially. Gulf

22 AIRLINE LEADER | JUL-AUG 2016

Although tempting to portray this as a airlines will have advantages providing one-
stop service from a number of UK cities to
model for future replication, Singapore smaller Southeast Asian points, like Krabi,
Airlines’ cost base is relatively high. that LCCs would struggle to compete on
with partnerships at both ends. AirAsia X has
talked of resuming service to Europe, and may
be further encouraged as SIA’s Scoot plans to
commence in 2017.
Scoot’s foray into Europe is largely at the
behest of owner Singapore Airlines. SIA is
looking to transfer some routes to Scoot,
having decided the thinner 777-200ER
EUROPEAN DESTINATIONS FROM SELECT ASIAN CARRIERS: markets are better suited to Scoot’s 787-8s
JAN-2010, JAN-2016 than Singapore Airlines’ larger A350s or even
SOURCE: CAPA - CENTRE FOR AVIATION AND OAG 777-300ERs. Feed from Scoot’s network and
15
that of Tigerair, Singapore Airlines and Silk
Air will be critical.
Although tempting to portray this as a
model for future replication, Singapore
10
Airlines’ cost base is relatively high. Airlines
with more competitive cost bases would not
necessarily see cost advantages in a long haul
LCC. Singapore Airlines’ premium product
is very generous and the airline is reluctant to
5
discount, leading to empty seats; other airlines’
premium products are more of a compromise
and are more frequently discounted. Front-end
revenue signifi antly changes the equation of
0
Air China ANA Cathay China Hainan Korean Malaysia Singapore Thai flight p ofitabili y and if those seats are not
Pacific Eastern Air Airlines Airlines Airways fi led, it is hard to maintain a yield premium to
2010 2016 justify the higher costs.
Over the next decade and despite some
HONG KONG AND MAINLAND CHINA SEAT CAPACITY OF MAJOR development on the LCC front, new market
entrants will continue to be from the Asian
EUROPEAN CARRIERS: 06-DEC-2015 TO 12-DEC-2015 end, and in particular mainland China. Some
SOURCE: CAPA - CENTRE FOR AVIATION AND OAG
additional European airlines will also enter
12,000 or increase service. Iberia in 2016 returned to
Asia, and Aer Lingus, also part of the IAG
10,000 Group, is also likely to do so. Market share
gains will be made by Turkish Airlines, Finnair
8,000 and Aeroflot as th y leverage their hubs. LOT
is also emerging as a smaller player in this
6,000 category.
Aeropolitical limits affect Northeast and
4,000 Southeast Asia differently. Southeast Asia is
relatively liberal, the main constraints being
2,000 accessing slots at congested European airports
for those airlines looking to grow. European
0 airports are eager to secure connectivity from
Air France British Airways Finnair KLM Lufthansa Swiss
new airlines.
Hong Kong Mainland China The p oposed EU-ASEAN open skies

AIRLINE LEADER | JUL-AUG 2016 23

OUTLOOK
agreement would potentially change the shape
of the market, although the withdrawal of the
liberal voice of the UK from among the EU
negotiators will cast a cloud over those talks.
Such an agreement would create a standard
access regime across each region and for
example allow an EU airline to fly to ASEAN
from any EU airport other than one in its
home country, and an ASEAN airline to fly to
the EU from an ASEAN airport other than
one in its home country. So Lufthansa could
fly ondon-Bangkok while Singapore Airlines
flies Jaka ta-Amsterdam.
Yet the history of EU-US open skies shows
such routes are unlikely to eventuate; EU and
ASEAN airlines rely on their hubs and would
find it difficult to sustain a vice without
their local hub. Pragmatically, slot constraints
at key airports would make it difficult t
launch a service. It would be more attractive to
use a slot on a local rather than long haul flight
not touching a hub.
Long haul LCCs, with their propensity to
operate from outside their home base, may
benefit f om additional access, but their growth
as noted will be relatively limited. Norwegian
International could operate on the strength of
its London Gatwick hub, but Norwegian also
has a Norwegian UK license. Early indications
are that one third of Eurowings’ traffi
connects onto the long haul flights The e
could be some value of open skies in allowing
Eurowings to operate from one of its hubs
outside of Germany, such as Vienna.
The t affic ights situation is more complex
in north Asia. In some markets, European
airlines account for all or most of the market
from their country to China, such as Finnair
and SAS. But in markets like Germany, which
has bilateral rights, its airlines are unable
to use them in full as they cannot secure
Russia overflight ights. This is not a Chinese
restriction but one which hampers German
airlines’ expansion. Extending the EU open
skies mandate from Qatar/UAE/Turkey to
China appears to be a leap for both the EU
and China.
Wherever traffic om China is involved,
reduction of visa restrictions has an important
impact on market growth; US traffic spike
24 AIRLINE LEADER | JUL-AUG 2016
Europe-Asia is arguably the global long
haul market that features the strongest
competitive elements.
once the two sides concluded a 10 year visa exchange. Schengen visas are
going in the opposite direction as new requirements make it more time
consuming and logistically challenging to acquire a visa. It is yet to be
seen if this implementation period is smoothed out or presents a medium
term challenge until there is near liberalisation of visas.
The UK ma ket has been disadvantaged with Chinese visitors as
its visa only grants access to the UK; a Schengen visa grants access
to the entire bloc. A Chinese tourist on a Schengen visa can take in
multiple countries, a popular way of visiting Europe. The UK is lo king
to piggyback by pairing its visa with a Belgium-issued Schengen visa.
The B exit referendum and resulting decline of the British pound may
increase the UK’s appeal to Chinese visitors. However, this and other
inbound growth is unlikely to offset the large decrease in UK outbound.
Europe-Asia is arguably the global long haul market that features the
strongest competitive elements. At present North America-Asia and
North America-South America may be characterised as wins for the
consumer with overcapacity, but fundamentally the structure of Europe-
Asia is the most difficult or airlines. The e are strong, established
competitors on either side with hubs throughout the region and strong
intermediaries.
The t ans-Atlantic is controlled between three JV entities while the
trans-Pacific lar ely relies on Northeast Asian hubs with no intermediary
options or large-scale fi th freedom services.
The oppo tunities for such orderly development in Asia-Europe are
less obvious. The lar e number of markets at each end of the market and
the great variety of airlines and legal systems will make similar coherence
difficult to chieve.
Few markets can be protected from competition. Japan appears safe
but there is a capacity exodus and over the next few years, Japan’s airlines
must either reduce costs dramatically or allow more cost effective airlines
to supplant them. Korea is keeping the Gulf airlines at bay but has
already unleashed opened access to Chinese airlines, a larger threat in the
long term.
Southeast Asian airlines meanwhile have arguably missed
opportunities to adjust to the new reality of competition by seeking new
partners and business solutions. Th y are experimenting actively, for
example, by establishing groups and cross border JVs.
Overall, Europe-Asia appears likely to be a truly innovative and world
changing market. China’s ascendance inevitably will generate massive
change, both in terms of new entry and routes, but also in influencing
the nature of the bilateral system. And, from north to south, it is already
apparent that this fast growing region is capable of great innovation and
of absorbing high levels of competition. AL
 Aviation Sessions
Targeted more so for the aviation
Plenary attendees. These sessions will consist of
airline CEO keynotes, Airline Boardroom
...plus
General Sessions discussions, an Airline & Airport Education
of which both the aviation Networking Planning Masterclass and
2016 SUMMIT attendees and corporate travel aviation panel discussions on topics
Breakout Sessions
targeted for the corporate
FORMAT:
attendees will be invited to such as low cost long-haul, the future of
the Grand Ballroom travel attendees
aviation competition, digital disruption
as one in airlines/travel, what hot new travel
technologies exist which will be and
many more

The General Sessions and Aviation discussions include:

• General Session: Big Picture of Aviation: Unravelling the Complexities of
Today’s Aviation Landscape
• Airline CEO keynotes
• Airline Boardroom: Leadership & inspiring your people
• Low cost long-haul and the future of trans-Atlantic & European aviation
• The future of aviation competition, WTO Principles
• General Session: Are They Listening? Straight Talk on the Gaps Between
Current Airline Options and what Corporations & Travellers Really Want
• CAPA Airline & Airport Network Planning Masterclass - Strategies for
success in Asia
• Book, Buy, & Pay: Changing the Core of How Business Gets Done
• Digital disruption in airlines/travel
• The IT Developers’ Garage: What are the hot new travel technologies?
• Closing General Session: Product Culture Shock and Compromises. Is
‘seamless travel’ just bollocks?

View the agenda via capaevents.com/global16

CONFIRMED SPEAKERS

Pieter Elbers Vitaly Saveliev Jos Nijhuis David Scowsill John Byerly
CEO Chairman & CEO CEO President Consultant
KLM Aeroflot Amsterdam Airport Schiphol WTTC John R. Byerly

Bernard Gustin Arif Wibowo Mike Whitaker Giorgio Callegari Patee Sarasin
CEO CEO Deputy Administrator Deputy General Director, CEO
Brussels Airlines Garuda Indonesia Airlines U.S. FAA Strategy & Alliances Nok Air
(invited) Aeroflot

CAPA/ACTE Global Aviation & Corporate Travel Summit capaevents.com/global16

OUTLOOK

China’s airlines begin to

dominate North Pacific
markets – and to leverage
transfer options
Despite a capacity restricted environment, Shanghai Pudong, along with
Beijing and other Chinese airports and their home airlines, are redefining
the trans-Pacific market. There is a distinct shift towards China and Chinese
airlines. In 2016 this future is easily apparent. Chinese airlines consider North
America their greatest long haul opportunity: whereas growth markets like
Australia are mostly outbound China leisure and Europe is over-competitive,
North America has strong traffic in both directions. This includes a profile
of leisure and corporate passengers and is less fragmented in terms of the
number of operators, compared to Europe-Asia.
The trans-Pacific market can be expected to grow significantly at least until
2020. Consolidation in some form should be occurring by 2025. Chinese
airlines themselves could be consolidated, from those airlines within the HNA
Group, to Beijing’s reportedly considered Air China-China Southern merger.
Other Asian airlines could form deeper partnerships or merge depending on
the ownership environment.

T
HERE IS GREAT POTENTIAL FOR MORE AND DEEPER
PARTNERSHIPS ACROSS THE PACIFIC. Whereas three joint
ventures ( JVs) account for some 80% of trans-Atlantic capacity,
two JVs – between ANA and United, and JAL and American
– account for approximately 20% of trans-Pacific apacity. And these
partnerships will not be easy, given the need to interweave multiple hubs
and their varying legal codes.
Despite Shanghai Pudong in 2015 being Asia’s fourth largest airport
and 13th in the world, the number of transfer options are few; the
constraints of runways and airspace in 2015 meant Pudong was less of
a hub and more focused on Shanghai originating/departing traffi By
2025 Pudong will be a contender for the largest airport in Asia and as a
major hub, particularly for the trans-Pacific ma ket.
The t ans-Pacific ma ket this decade has grown whereas the second
half of the previous decade was relatively flat unlike Europe and Asia
and North America-Europe. Those uch bigger markets are now
slowing. Between 2005 and 2008 average daily flights be ween Europe-
Asia increased by 24%, trans-Atlantic services increased 16% and trans-

26 AIRLINE LEADER | JUL-AUG 2016

Pacific inc eased by only 6%. The ma kets slumped during the global
financial c isis but Europe-Asia traffic ebounded in 2010 followed by
the trans-Pacific in 2011
Trans-Atlantic did not rebound until 2015, a period that coincided
with the introduction of JVs. Since 2011, trans-Atlantic has grown 7%,
Europe-Asia 13% – but trans-Pacific is up 27% In 2005, there were 25%
as many trans-Pacific flights as ans-Atlantic; in 2015 this has grown to
34%.
The e is some distortion as the trans-Atlantic has smaller aircraft types,
even narrowbodies, while trans-Pacific is haracterised by large and very
large aircraft. But that alone does not account for the difference in size:
approximately 451 daily trans-Atlantic flights in 2015 c mpared to 401
between Europe and Asia but only 154 on the trans-Pacific
8% growth was observed in 2014 and 2015 on the trans-Pacific and
for mainland China to North America the growth was approximately
20%. Indexed to 2005, Air China is the second fastest growing airline on
the trans-Pacific just behind ANA. Those wo stand out the most, but
that is for growth. In absolute size United is the largest by far. Delta and
Cathay are the next largest followed by Korean Air, ANA, Air Canada
and American. Cathay has shot up while JAL has lost market share.
Korean Air’s leading position amongst Asian airlines has been surpassed
by Cathay with ANA now not far behind.
Accelerated growth from Chinese airlines will further re-shape market
positioning in coming years. The e is already a clear shift away from
previous hubs like Tokyo as Beijing and Shanghai gain prominence.
Chinese airline expansion has prompted competitive responses and the
market is characterised by over-capacity. Chinese expansion is bringing
Since 2011, trans-Atlantic
has grown 7%, Europe-Asia
13% – but trans-Pacific is up
27%.
new entrants to the market. The e had been
minor consolidation as United merged with
Continental (which had some Asian flights)
and Northwest merged with Delta (which had
minimal Asian flights) US Airways, which
merged with American, did not fly to Asia
Mainland China will continue to be the
source of new entrants, following the general
trend of faster growth outbound China than
outbound North America. Airlines see the
trans-Pacific as aspi ational and profitabl .
Even Chinese airlines that hardly fly outside
of China have widebody and trans-Pacific
aspirations. Besides them, Hong Kong Airlines
(affiliated with the mainla ’s HNA) and
Southeast Asian airlines could see an entry/
re-entry in addition to LCCs. From North
America, WestJet is most likely to enter Asia
with JetBlue first like y to try its hand at long
haul in Europe. Expansion of market players
AIRLINE LEADER | JUL-AUG 2016 27
OUTLOOK

The market balance tipped AVERAGE DAILY TRANS-PACIFIC FLIGHTS FROM THE 10
LARGEST CARRIERS: 2005-2015
in 2015 when Chinese SOURCE: CAPA - CENTRE FOR AVIATION AND OAG
airlines for the first time Note: To Canada and mainland USA only

operated more capacity to 25

the US than US airlines did

to China. 20

will occur before consolidation (such as of

15
Chinese airlines, especially HNA) and then
near-consolidation through JVs.
Compared to 10 years ago, aeropolitics is
not a notable hindrance to growth – except in 10
China. The US has open skies ag eements with
Japan (excluding Haneda), Korea and Taiwan
and a liberal market for passenger flights to 5
Hong Kong. Southeast Asia is also liberal or
open skies (Singapore). The nly concern may
be if slots become protectionist weapons as 0
JVs and consolidation re-shape the market, 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
creating imbalance. Unlike Southeast Asia,
China or the Gulf, Northeast Asia’s airlines are
United Delta Cathay Pacific Korean Air ANA
mainly privately owned, so state subsidies do
not come into play. Air Canada American Airlines JAL EVA Airways Air China
This lea es China. It is a signifi ant
aeropolitical question for Canada and the US,
as it has been for some time – but for changing INDEX OF DAILY TRANS-PACIFIC FLIGHTS FROM THE 10
reasons. Historically it was the US that pushed LARGEST CARRIERS IN 2015: 2005=100
for liberalisation and more traffic ights since SOURCE: CAPA - CENTRE FOR AVIATION AND OAG
it was US airlines that used up their capacity Note: To Canada and mainland USA only

allotments faster than Chinese counterparts. 300

The ma ket balance tipped in 2015 when
Chinese airlines for the first time ope ated
more capacity to the US than US airlines did 250
to China.
US-China open skies has become a
200

US-CHINA DAILY PASSENGERS (EACH WAY)

SOURCE: DELTA
150
China POS US POS Average
4,260

3,859 100

3,495
9,184
2,952 6,251 50
4,254 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
2,016

2,010 2015 2020E 2025E United Delta Cathay Pacific Korean Air ANA
% China POS ~40% ~70% Air Canada American Airlines JAL EVA Airways Air China

28 AIRLINE LEADER | JUL-AUG 2016

more complex option. The US was the o iginal global champion of
liberalisation, while China preferred controlled markets. Despite tactical
protectionist opposition by the US Big Th ee against the Gulf airlines
in 2015, the US looks likely to stand behind its open skies policy.
Paradoxically, Delta is likely to be an advocate for a US-China open skies
agreement, as that would enable it to form a JV with China Eastern, its
first in Asia American Airlines and United already have JVs with their
Japanese partners, leaving Delta partnerless.
The near-te m concern of the US is opportunity to compete by
accessing slots in China’s constrained major airports. Slots have
been Canada’s concern too, although Air Canada and the Canadian
government long ago gave up any notion that the Canada-China market
would be more balanced like US-China. Canada overall maintains
relatively open access to Asian airlines, in contrast with its policy towards
the Gulf and other markets such as Panama.
Slots have been a long-running issue for US airlines. American
Airlines in 2010 infamously had to cancel its Chicago-Beijing inaugural
service within a day of departure when Beijing failed to provide expected
daytime slots. More recently (of the public matters), United Airlines in
2014 announced plans to launch a second daily San Francisco-Shanghai
Pudong service. United has had to postpone the service multiple times
until, most recently, Oct-2016, but as of Jun-2016 the second daily flight
has not been made available. United has blamed the lack of slots at
Shanghai Pudong.
The l ck of slots comes with inconvenient contradictions. Delta was
meanwhile able to add a Shanghai flight likely due to the backing of
partner China Eastern, which is the main airline in Shanghai and thus
has signifi ant influenc , from politics to slot allocation. Pudong has
also opened a new runway and in 2015 the number of international slots
CHINESE AIRPORTS WITH CANADA/US SERVICE, AND CANADA/
US AIRPORTS WITH CHINESE SERVICE (LEFT AXIS) AND
AIRPORT PAIRS (RIGHT AXIS): 2006-2016 slot situation, has sought to convey that access
SOURCE: CAPA - CENTRE FOR AVIATION AND OAG
20
15
10
5 may encourage American Airlines to re-think
0 0
2006 2007 2008 2009 2010 2011 2012 2013 2014
Chinese Airports Canada/US Airports Airport pairs
With an opaque slot
allocation process, this
suggests a level of selective
protectionism.
increased by 12%. In fact, Pudong in 2015
added more passengers (8 million) than any
other airport globally (including Dubai’s 7.5
million growth).
With an opaque slot allocation process, this
suggests a level of selective protectionism.
Air Canada faces slot challenges in both
Shanghai and Beijing, the hub of fellow Star
Alliance member and proposed JV partner Air
China. This pe haps alludes to the ambivalent
relationship between the two historically,
and future uncertainty of a JV facilitated at
a government level. Air Canada has spoken
over the years of wanting to add a Calgary-
Beijing service (opened by Hainan Airlines
in Jun-2016). Until Air Canada is able to
use its under-utilised capacity allocation, it
seems unlikely Canada will be inclined to give
Chinese airlines more traffic ights, which have
been exhausted.
Chinese airlines are approaching their
capacity limit to the US from primary Chinese
cities. US airlines are already at the limit with
a regulatory debate between American and
Delta over who can use the last allocation. Air
China, which has born the flak or the Beijing
will be fi ed with the second Beijing airport
by the close of the decade. Yet Pudong’s slot
50 expansion shows available slots are not for all.
The US-China bilate al sets different
40 allocations for primary and secondary cities.
The Chinese ai lines will continue to be the
primary users of secondary city allocations.
30
United serves three secondary markets
(Chengdu, Hangzhou and Xi’an) and intends
20 to open approximately one new city each year.
Low fuel prices and a fleet of Boeing 787s
10
its absence outside Beijing and Shanghai,
while Delta – with a partner and without new
aircraft technology – may remain absent from
2015 2016
smaller gateways.
Chinese airline accounts openly disclose
AIRLINE LEADER | JUL-AUG 2016 29
OUTLOOK

subsidies – about USD1 billion in 2014 – but
Delta, the loudest of the complainants against
“subsidies” to the Gulf carriers, is sensitive to
the differences in calling out Chinese versus
Gulf airlines. Yet Chinese airlines, themselves
masters of protectionism, have some concerns
the US airlines will turn their anti-Norwegian
and anti-Gulf campaign to Chinese airlines
and other new airlines from Asia. As with
many “principles”, there may be exceptions, in
this case because the US airlines are anxious to
gain access to the Chinese market.
Long haul LCCs AirAsia X and Cebu
Pacific h ve not encountered regulatory
problems so far in serving the US. The p ospect
of long haul Asian LCC service is signifi ant
in the 2025 timeframe as market growth
approaches maturity, Asian LCCs gain greater
recognition (especially in Northeast Asia)
and JVs inevitably moderate competition. The
LCC model could be of particular interest
in China, where outbound traffic is ten
leisure and extremely price sensitive. Beijing’s
Capital Airlines has contemplated becoming
an LCC. It is part of HNA, which has short
haul LCCs and established the world’s first
LCC alliance. Given the size of the domestic
market, and Beijing’s encouragement of LCC
establishment, a proliferation of Chinese
LCCs, short and long haul, is likely over the
next decade. China, subsidies and LCCs would
seem to be a trifecta of annoyance to US labour.
Chinese aeropolitics impacts the trans-
Pacific market conce ning more than just
Canada and the US. It is also relevant
for Korea and Taiwan. Korea has been an
important transit point for China-North
America traffic with K ean Air in particular
leveraging its ideal geography, proficient eoul
Incheon hub and large network of Chinese and
North American destinations (more than any
other Asian airline) to create more one-stop
options than US or Chinese airlines; it is an
Emirates of the trans-Pacific
Delta has pointed out that intermediary
Air and Asiana effectively cannot grow China-North America traffi
An added bonus, from a Chinese perspective, is that Korea as a
destination has grown in popularity with Chinese visitors, which can
see Korean carriers give preference to higher-yielding O&D traffic tha
connecting North American itineraries. This O&D g owth is well-suited
to Korea’s LCCs, which are in favour of liberalisation with China while
Korean Air and Asiana now worry China open skies will benefit others
more than themselves.
Taiwan has not been a hub for mainland China-North America.
Mainland China’s complex set of aeropolitics for cross-Strait flights
has effectively prohibited Taiwanese airlines from carrying mainland
Chinese passengers beyond Taiwan. The ai lines were allowed to carry
other passengers, but high demand for cross-Strait flights eturned a
healthy yield that would have to be sacrificed or lower yielding transit
traffi The t ansit policy was revised in 2015. As expected with China’s
incremental changes, cross-Strait transits were offered from an initial
three cities: Chongqing, Kunming and Nanchang. Th y are relatively
small markets for Taiwanese airlines; what the airlines want is access
from primary cities.
Incremental additions were expected, but this plan is now uncertain
following Taiwanese elections that brought to power a party which is
less Beijing friendly. Repercussions are already in sight as Beijing limits
the number of cross-Strait visitor permits. It is this instability that made
China Airlines and EVA Air unwilling to make signifi ant expansion
plans. EVA Air saw a conservative 3% increase in trans-Pacific t affic i
allowed access to mainland source markets.
In comparison, Japan – like Korea – has favourable geography and
airlines with strong North American markets. But with their high cost
base, Japan is pragmatic about its airline opportunities. The ma ket
between Japan and China is already liberalised (with usual Tokyo
exceptions) and Japan has been following a broad open skies agenda with
its neighbours as it seeks to stimulate inbound tourism.
NORTHEAST/SOUTHEAST ASIA-NORTH AMERICA FREQUENCIES
BY AIRCRAFT TYPE: 1H2006 VS 1H2016
SOURCE: CAPA - CENTRE FOR AVIATION AND OAG
A340
1%
777
1H2016
A330 A380 747 767
54%
787
10% 4% 9% 7% 16%
DC-10/
A330 MD-11
3%
3%

airlines such as Korean Air have a larger share 777

1H2006 A340 747 767
of the China-North America market than 12% 48% 7% 28%
do intermediaries in other market segments.
As China seeks to accelerate its own airlines’
0% 20% 40% 60% 80% 100%
growth, China-Korea liberalisation has stalled.
Without additional feed from China, Korean All JV’s with ATI Turkish Russian/CIS LCCs Leisure Groups Fifth Freedoms

30 AIRLINE LEADER | JUL-AUG 2016

By 2025, when the most recent freighters
are starting to age, there could be business-
changing decisions for the combination
airlines to end dedicated freighter service.
At an aircraft level, the trans-Pacific market is hanging too. The
Queen of the Skies has been de-throned: the 747 accounted for
approximately half of trans-Pacific c ossings in 1H2006, but in 1H2016
accounted for only 9%, a figu e that will decrease as Delta and United,
and others, retire 747s. The perspecti e from Boeing is upbeat: its 777
accounts for 54% of flights in 1H2016 up from 28% in 1H2006. The
787 accounts for a further 16%. With other models, Boeing accounts
for 85% of trans-Pacific flights in 1H201 Not only is this unchanged
from 1H2006 in terms of market share, it represents signifi ant volume
growth.
Market share by 2025 will swing in Airbus’ favour, but Boeing will
surely still dominate. Airlines are taking delivery of A350s, with JAL so
far most prominent in planning to replace its (modest) 777-300ER fleet
with A350s. Boeing’s 787 backlog is strong with the 777X to follow.
Trans-Pacific A380 and 747 fami y flights a e numbered.
Trans-Pacific passen er developments have impacted the freight
sector, more relevant for Asian airlines than North American passenger
counterparts, who have disposed of freighter aircraft. Airlines see the
trans-Pacific cor idor as their most important lane for freighters.
The olume of passenger flights has xceeded cargo growth, and new
aircraft come with more belly space available to freight, depending
on operational factors. This is not the nly factor in the future of air
freight but is a signifi ant consideration. By 2025, when the most
recent freighters are starting to age, there could be business-changing
decisions for the combination airlines to end dedicated freighter service.
Passenger aircraft cannot fi l every cargo demand – and typically is
governed by more liberal market access provisions – but the more niche
opportunities may no longer be worth pursuing. The olatility of the
cargo sector contrasts with how Asia’s airlines tend to prefer consistency
and conservatism.
Making a call on the future of air cargo is just one perhaps profound
decision operators will need to decide in the future. The e are existential
matters, perhaps best summarised as push and pull relationships. Broadly
there are the relationships between mainland China and Hong Kong
and Taiwan, with implications for competing hubs and airlines. Closer
cooperation between Hong Kong and Shenzhen airports could be
difficult but benefici
Consolidation, along with JV partnerships and other close
relationships, may emerge, if the North Atlantic is a model. But a host
of new entry, new routes and rapid market growth could mean that
fragmentation will rule beyond a 10 year horizon; there is still much
growth to be had.
Air China’s ownership of Cathay Pacific in 2016 is just under the
threshold that would trigger a takeover
offer. Mergers, consolidation and changes of
alliances should not be ruled out. Asia’s airlines
increasingly feel global alliances are anchored
on the trans-Atlantic and not reflecting Asian
growth and the needs of local members.
Growth of Northeast Asian and North
American airlines has caused Singapore
Airlines to lose North American market share.
Singapore Airlines is not the only Southeast
Asian airline looking to grow in North
America, but it tends to be perceived by peers
outside the region as a grave threat and one
whose growth is a far greater threat than any
other Southeast Asian airline; this speaks to
the competency and brand power of Singapore
Airlines.
Philippine Airlines is from one of the three
so-called “VIP” markets – Vietnam, Indonesia
and the Philippines – that have been key source
markets for trans-Pacific g owth. Local airlines
have been curtailed in serving North America
themselves due to a combination of factors:
geography limiting commercially viable non-
stops (except from the Philippines), US FAA
category downgrades, and the airlines being
more focussed on other routes – but this is
changing.
Last decade it was Thai Ai ways that joined
Singapore Airlines in non-stop fl ing. Thai
has now entirely exited the North American
market, as has Malaysia Airlines. Thai
however is considering a re-entry. Malaysia
Airlines is likely to avoid North America as
its management team implements a sharp
restructure. Malaysia Airlines new CEO Peter
Bellew succinctly remarked: “We will stop
doing things that lose money.”
The hallenge – perhaps fla ed analysis – is
how to calculate a profit or loss Smart airlines
continue business practices that directly lose
money but are justified (or ven profitable)
when valuing the wider contribution to brand
and image – an aspect difficult to quantify bu
one on which senior managers and the board
can spend signifi ant time. Vietnam Airlines
has been considering a North American entry.
ANA’s minority stake in the airline could open
Tokyo as a transit point for Vietnam Airlines.
Or at the very least, the stake ensures ANA
partially benefits f om Vietnam Airlines’
AIRLINE LEADER | JUL-AUG 2016 31
OUTLOOK

TIMELINE OF SINGAPORE AIRLINES’ ULTRA LONG HAUL HISTORY AND US GULF COAST JET FUEL SPOT PRICE
PER GALLON (USD): 1990-2015
SOURCE: CAPA - CENTRE FOR AVIATION AND US EIA

$3.50

$3.00

$2.50
May - 1998: SIA
signs LoI for 5
$2.00 A340-500s with 5
options.
Deliveries to start in
$1.50 2002.
Fuel: $0.42
Feb-2004: SIA’s Oct-2015: SIA to
$1.00 Nov-2013:
first resume
SIA’s final
ultra-long-haul ultra-long-haul ultra-long-haul in
$0.50 A340-500 flight , A340-500 flight, 2018 with
to Los Angeles from Newark A350-900ULR.
Fuel: $0.93 Fuel: $2.83 Fuel: $1.40
$0.00

growth. Southeast Asian transfer traffic an
be larger than China’s, perhaps implying that
other airlines should look at partnerships or
equity in Southeast Asian airlines – either to
facilitate or limit growth from the Southeast
Asian airline.
Airlines not considering ultra long haul non-
stops will need to seek fi th freedom rights,
a sensitive topic and one which governments
(against the strong advice of their airports)
are reluctant to dispense. As Asian hubs assert
themselves and focus shifts from national
airlines to the aviation economy, fi th freedom
rights will likely be more accessible. This
applies particularly to Southeast Asian airlines
– including airlines not currently in the market,
like the long haul low cost operators, both
independent and part of network airline groups.
These CCs, include airlines such as AirAsia
X, Scoot and even perhaps Jetstar; there will be
more. A feature of the Asian market, they may
raise multi-dimensional regulatory issues with
the increasingly defensive US operators, as they
seek to combine fi th freedom rights with cross border JVs.
The ulf carriers too are on the horizon. Emirates already has some
fi th freedom rights but would like stronger city pairs, a less cut-throat
local environment that has come with high capacity growth, and for now
is focused on the Dubai hub. Globally such flights – Osaka- os Angeles
or Auckland-New York – could upset prospective partners, or at the very
least, question if they should be incorporated into a JV model like those
that increasingly span long haul markets.
As Southeast Asian airlines plan non-stop flights to orth America
(generally operating under liberal access regimes), and Gulf and other
airlines consider under-served city pairs, more ultra long haul routes will
be introduced. The fa ourite – perhaps only – equipment so far is the
A350-900ULR. Singapore Airlines has committed to fi e of the type to
allow it to resume non-stop Los Angeles and New York service, and a
third city will be added. Philippine Airlines and Garuda Indonesia are
also interested. A Garuda Jakarta-New York JFK non-stop would be
approximately 500 miles (5%) longer than Singapore Airlines’ Singapore-
New York (Newark) service. Although it would seem Garuda would need
to build on what Singapore Airlines plans, the proposition from Garuda
is signifi antly different. The hallenge is greater than another 500 miles
of fl ing.
The ingapore and Jakarta markets are not comparable (and even
Singapore Airlines may not be able to make its flights int insically

32 AIRLINE LEADER | JUL-AUG 2016

 In this market it will
be the new forces of
the airline world that
determine its shape.
profitable) For local traffi Singapore is a major business centre
where businesses are willing to pay a premium for non-stop flights
and the Singapore Airlines service. The Jaka ta market is not as sticky.
Connecting traffic mes into the equation as a non-stop North
American flight a lows Singapore and Garuda to offer most important
customers outside their home markets a one-stop, instead of two-stop,
proposition. Jakarta’s more southern positioning makes it a hub for few
cities given the backtracking involved.
Government policy is an important factor. The ingaporean
government is well aware Singapore Airlines is perhaps its greatest
marketing tool. The e is perceived value in keeping the airline in core
markets, and a reluctance to entirely cede segments. Hence, after United
announced non-stop San Francisco-Singapore 787-9 flights Singapore
Airlines said it would offer non-stop San Francisco flights with its
regular A350. Indonesia meanwhile has not been concerned by Garuda’s
relative absence in international markets.
With no seismic change in aircraft technology planned by 2025, these
ultra long haul flights an only be an effort to retain market relevance.
This applies both to c nsumer brand recognition, but also potentially in
making the airline more valuable to potential partners. Otherwise, the
market has gone elsewhere: intermediary airlines and their hubs have an
advantage for most of the market. Long haul is cheaper to operate than
ultra long haul, and there are city pair and frequency advantages. Even if
Singapore Airlines can offer non-stop service to four North American
cities, it would be no more than once a day. Cathay for example serves
New York fi e times daily and Los Angeles
four and also has a wider North American
network (seven cities), while Korean Air is the
leader in North American destinations (12).
Emirates is not far behind Korean Air with
11 US destinations. Emirates and other Gulf
airlines have gained market share between
Southeast Asia and the North American
market, with the east coast being more
favourable to their geography than the west
coast, where routings through Northeast Asia
are much shorter. Gulf airlines are opening
points to smaller Asian destinations (Qatar to
Krabi) and serve North American cities that do
not have non-stop service to Asia (Emirates to
Orlando, Qatar to Philadelphia).
While Singapore Airlines and United appear
to believe they are competing against each
other, others in reality are their primary targets.
Singapore and United would be better off
working together against the wider common
enemy.
At this stage in its development, it is
cooperation that will delineate the future of
the very long haul trans-Pacific market with
its mass of unserved city pairs. This wi l have
global implications as airlines seek partnerships
that make sense even if not within global
alliances or other established orders.
Oneworld’s American and SkyTeam’s Korean
Air have a small partnership but seem open to
more. Historical relationships prevail, hence
the JAL-China Eastern relationship remains
strong. Past foes or ambivalent feelings will
need to be patched up. Alternatively, a new
partnership could be an opportunity fina ly to
overtake an old competitor.
The high l vel of anticipated growth will
ensure many options for new directions. The
history of other markets is an indicator but no
guarantee of the future.
In this market it will be the new forces of
the airline world that determine its shape;
proliferating and diversifying airline models
(long haul low cost and cross border JVs cut
their teeth in Asia Pacific) tailored forms of
market access – perhaps more liberal than in
the old world; all of these promise a varied
and exciting future for Asia-North America
aviation. AL
AIRLINE LEADER | JUL-AUG 2016 33
OUTLOOK

EUROPE TO NORTH
AMERICA IN 2025
A gradual evolution influenced
by market regulation and
aircraft advances
Immunised joint ventures (JVs) appear likely to continue to dominate
the North Atlantic, although their share will fall as LCCs and leisure airlines
grow faster from a much smaller base level – assuming the market remains
sufficiently liberal. LCCs like Norwegian, WestJet, WOW air, Air Canada rouge
and Lufthansa’s Eurowings, will continue to grow the market and their own
market share. (Norwegian’s rate of growth may depend on whether or not it is
given final approval for its Irish subsidiary’s US foreign carrier permit.)
As long haul low cost operation evolves into a more connective model,
others can be expected to adapt to the North Atlantic conditions. Meanwhile
US LCCs, most likely JetBlue, may start trans-Atlantic services with narrowbody
aircraft as new suitable equipment arrives. The US majors are unlikely to set
up LCC subsidiaries in this market. Turkish Airlines may eventually join the
Atlantic++ JV within the Star Alliance as it grows rapidly to North America. If
the UK’s existing traffic rights cannot be recreated post-Brexit, British Airways
and Virgin Atlantic could be forced out of their respective JVs. This currently
seems highly unlikely, but is a possibility while the future UK-EU relationship
remains unknown.

34 AIRLINE LEADER | JUL-AUG 2016

A
FTER DECADES OF UNPROFITABLE OPERATION IN For the time being, the
THE WORLD’S MOST VALUABLE PREMIUM MARKET,
consolidation in the domestic US market has provided
market is defined largely by
a platform for establishing three intense JV partnerships based the traditional hub-to-hub
around the major global alliances. An important part of predicting the
shape of this market in 10 years time depends on whether this system
system.
will continue. It also will depend on the way route networks develop.
For the time being, the market is defined lar ely by the traditional
hub-to-hub system; this in turn is a feature of a combination of aircraft
efficiencies and the minance of flag arriers. Each of these features
is undergoing change; new city pairs are developing and smaller, twin
jet operations are allowing point-to-point operations – along with
new airlines – to reshape the market. This wi l greatly influence the
competitive dynamics over the next decade, assuming the continuation
of a relatively liberal access environment. The e have however been
signs over the past two years that some forces will seek to limit new
competition and, if unchecked, could signifi antly hinder that future
development.
In terms of its current leading participants and their share of ASKs,
the North Atlantic market has different nuances depending on how it
is divided up. The top 10 ai lines – effectively operating as three – by
number of ASKs between Europe and North America for the summer
2016 season, control 73.7% of ASKs.
The list is he ded by the US Big Th ee of Delta, United and American.
The le ding European airlines in this market are British Airways and
Lufthansa, but Air France ranks behind Air Canada. Virgin Atlantic,
Turkish Airlines and KLM complete the top 10. In total, there are 54
airlines operating on the North Atlantic in summer 2016, according to
OAG.
If the list is rearranged according to airline groups, the top 10 control TOP 10 AIRLINES BY SHARE OF ASKS
82.7% of ASKs. European groups IAG and Lufthansa Group leapfrog BETWEEN EUROPE AND NORTH AMERICA
the US Big Th ee to claim the number one and number two positions. SUMMER SCHEDULE 2016
Air France-KLM takes the sixth rank, behind the US three and ahead of SOURCE: CAPA - CENTRE FOR AVIATION, OAG SCHEDULES
Virgin Atlantic and Turkish. The number 10 slot is taken y Canadian ANALYSER
leisure airline Air Transat.
But to get a full picture of the competitive situation, it is necessary to RANK AIRLINE SHARE OF ASKS
account for the immunised JVs on the North Atlantic. This is the ma ket 1 Delta Air Lines 11.9%
where the revenue sharing JV concept on a market scale was pioneered.
Participants in these arrangements are legally permitted to coordinate 2 United Airlines 10.4%
prices and schedules, a practice that would otherwise be prohibited as 3 American Airlines 9.8%
collusion. As such, and although they still operate their own aircraft
4 British Airways 9.4%
and under their own brands, each JV is, in effect, a single economic unit
acting to all intents and purposes as a single competitor. 5 Lufthansa German Airlines 8.9%
The th ee leading JVs on the North Atlantic are based on the leading 6 Air Canada 6.4%
trans-Atlantic operators within each of the three global alliances. The 7 Air France 5.2%
Star Alliance’s ‘Atlantic++’ JV (United, Air Canada, Lufthansa, SWISS,
Austrian, Brussels Airlines) is the largest competitor, followed by the 8 Virgin Atlantic Airways 4.8%
JV within SkyTeam (Delta, Air France, KLM, Alitalia) and that inside 9 Turkish Airlines 3.7%
oneworld (America, BA, Iberia and Finnair). 10 KLM-Royal Dutch Airlines 3.1%
These th ee JVs each have more than 20% of the market and they
control 71.7% of North Atlantic ASKs between them in summer 2016. All others 26.3%

AIRLINE LEADER | JUL-AUG 2016 35

OUTLOOK

The next lar est operator, Virgin Atlantic, has
4.8% of ASKs and operates in a separate JV
with Delta. All told, the four JVs control 76.6%
of the market. IAG’s Aer Lingus is expected to
join the JV within oneworld by 2017 and this
would take the total JV share to 78.3%.
Treating the three main JVs as three single
competitors, the top 10 operators control
89.3% of ASKs on the North Atlantic in
summer 2016, considerably more than the
73.7% figu e attributable to the top 10
individual airlines.
After the three main JVs, Virgin, Turkish
and Air Transat, the top 10 is completed by
Norwegian, Aer Lingus, SAS and airberlin.
Once Aer Lingus moves into the oneworld
JV, Icelandair will be promoted to the list of
top 10 competitors, which will then control
90.6% of the market in aggregate (based on the
summer 2016 figu es from OAG).
The sha e of North Atlantic capacity covered
by the three immunised JVs peaked in summer
2014 at 80.0% of ASKs. As noted, the JVs’
share in summer 2106 is 76.6%, or 78.3% if
Treating the three main JVs as three single
competitors, the top 10 operators control
89.3% of ASKs on the North Atlantic in
summer 2016.
Aer Lingus is included in the oneworld JV. This m y be down from the
peak, but is much higher than the 23% share that was in immunised JVs
10 years ago.
The summer of 2014 was the last time that the sha e of North Atlantic
capacity inside a JV increased in the summer schedule compared with
the previous year. In that summer, US Airway’s capacity joined the JV
within oneworld, as a result of its acquisition by American Airlines, and
Virgin Atlantic’s capacity entered its JV with Delta.
SHARE OF EUROPE-NORTH AMERICA ASKS THAT ARE OPERATED
WITHIN ALL JVS* WITH ANTITRUST IMMUNITY, SUMMER
SCHEDULE 2006 TO 2016
SOURCE: CAPA - CENTRE FOR AVIATION, OAG SCHEDULES ANALYSER
90%
80%
2%
5% 5%
5%
70%

TOP 10 COMPETITOR ENTITIES* BY SHARE

60%
OF ASKS BETWEEN EUROPE AND NORTH
AMERICA SUMMER SCHEDULE 2016 50%

SOURCE: CAPA - CENTRE FOR AVIATION, OAG SCHEDULES 40%

ANALYSER
SHARE OF 30%
RANK AIRLINE OR JV 72%
ASKS 44% 43% 55% 75% 73% 72% 75% 74%
20%
1 Atlantic Plus Plus^ 29.1%
23% 23%
10%
2 Delta/Air France/KLM/Alitalia 21.7%
0%
3 American/BA/Iberia/Finnair 20.9% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

4 Virgin Atlantic** 4.8% JV’s in 3 global alliances Virgin Atlantic Aer Lingus

5 Turkish Airlines 3.7% *Note that capacity share shown for the three global alliances relates only to ASKs in the JVs that operate
within the alliances and not to all alliance capacity on the North Atlantic; Aer Lingus has not yet joined the
6 Air Transat A.T.Inc. 2.4% oneworld JV, but is expected to do so by 2017
7 Norwegian 1.9%
8 Aer Lingus 1.7%
This market dominance is like y to be the highwater mark under this
9 SAS 1.6% type of regulatory oversight. The d op in the JVs’ combined share of
10 airberlin 1.5% North Atlantic ASKs between summer 2014 and summer 2016 has been
All others 10.7% accompanied by an increase in the share operated by leisure groups and
LCCs. These n w participants might loosely be termed disruptors and
^United/Air Canada/Lufthansa/SWISS/Austrian/Brussels Airlines give some comfort to those who worry about the anti-competitive effect
*Treats immunised JVs as a single entity
**Virgin Atlantic’s North Atlantic capacity operates in a JV with Delta of the JVs.
(separate from Delta’s JV with AF-KLM and Alitalia) Airlines owned by leisure groups (primarily Th mas Cook Group and

36 AIRLINE LEADER | JUL-AUG 2016

TUI Group) have grown their share of ASKs from 1% in summer 2014 and the top 20 for 71.2% (week of 21-Sep-
to 2% in summer 2016, while the share operated by LCCs has increased 2016, source: OAG).
from 1% to 3%. Note that these LCC figu es do not include airlines that Of the major hubs London Heathrow is
are designated as LCCs, but which are also owned by a leisure group the largest airport by ASKs on the North
(and so already included in the share operated by the leisure groups). Atlantic; it is followed in the top fi e by New
The c mbined 5% of North Atlantic ASKs operated by leisure groups York JFK, Paris CDG, Frankfurt and Toronto.
and LCCs in summer 2016 is higher than it has been for any summer The top 10 a e completed by Amsterdam,
season over the past decade. Norwegian, WestJet, WOW air and New York Newark, Chicago, Los Angeles and
Lufthansa’s Eurowings are leading the LCC growth. Washington Dulles.
The e has been an increase in Turkish Airlines’ share of ASKs between The num er of routes is increasing. Based
Europe and North America, from just under 3% in summer 2014 to on OAG data for the week of 12-Sep-2016,
almost 4% in summer 2016. Turkish Airlines had considerably less than there are 411 passenger routes between Europe
1% of ASKs on the North Atlantic in summer 2006. and North America in summer 2016. This
The sha e of ASKs between Europe and North America operated by compares with 349 routes in the equivalent
airlines from Russia and the Commonwealth of Independent States
has also increased, from 2% in summer 2011 to 4% in summer 2016.
The sha e of North Atlantic ASKs fl wn by fi th freedom operators has TOP 20 AIRPORTS BY SHARE OF ASKS
remained steady at 2% since summer 2011, but has fallen from 3% in
BETWEEN EUROPE AND NORTH AMERICA
summer 2006.
The sha e of airlines that are not in a JV, are not LCCs or part of 12-SEP-2016 TO 18-SEP-2016
SOURCE: CAPA - CENTRE FOR AVIATION, OAG
leisure groups, Russian/CIS airlines, fi th freedom operators or Turkish
Airlines has dropped from 16% in summer 2011 to less than 8% in SHARE OF
RANK AIRPORT
summer 2016. ASKS
By comparison with the airlines operating on the North Atlantic, the 1 London Heathrow 10.5%
airports that have services between Europe and North America form a
2 New York John F Kennedy 9.2%
more fragmented market. The top 10 ai ports account for 50.9% of ASKs
3 Paris Charles de Gaulle 5.4%
4 Frankfurt 5.1%
SHARE OF EUROPE-NORTH AMERICA ASKS THAT ARE OPERATED
5 Toronto Pearson 4.2%
WITHIN ALL JVS* AND BY OTHER MAIN CATEGORIES OF AIRLINE,
SUMMER SCHEDULE 2011 TO 2016 6 Amsterdam Schiphol 3.9%
SOURCE: CAPA - CENTRE FOR AVIATION, OAG SCHEDULES ANALYSER 7 New York Newark Liberty 3.5%
95% 8 Chicago O'Hare 3.5%
All JV’s with ATI Turkish Russian/CIS LCCs Leisure Groups Fifth Freedoms
9 Los Angeles 3.0%
2%
2% 2% 10 Washington Dulles 2.7%
90% 2%
1% 2%
1%
11 Boston Logan 2.5%
2% 3%
12 Montreal Pierre Elliott Trudeau 2.5%
85% 4% 4%
4% 13 Atlanta Hartsfield-Jackson 2.3%
2%
1% 2% 2% 14 San Francisco 2.1%
3%
1% 1% 3%
80% 4% 15 Rome Fiumicino 2.0%
4%
5% 16 Miami 1.9%
5%
2% 17 Dublin 1.8%
75%
2% 80% 79% 78%
2% 18 London Gatwick 1.7%
75%
73% 72% 19 Munich 1.7%
70%
2011 2012 2013 2014 2015 2016
20 Madrid Barajas 1.7%

*Capacity share for the JVs within the alliances plus Virgin Atlantic from summer 2014; Aer Lingus capacity All others 78.2%
included from summer 2016 (although it is not expected to join the oneworld JV until 2017)

AIRLINE LEADER | JUL-AUG 2016 37

OUTLOOK
week of 2014, an increase of 18% over two
years. Compared with one year ago, there are
45 new routes in summer 2016.
Of these new routes, 22 are operated by
airlines with what might loosely be termed
‘alternative business models’. This in ludes
LCCs, airlines owned by leisure groups
and other new entrants. Legacy airlines are
operating on 25 of the new routes (there are
two new routes that have an airline from both
categories).
The f ct that LCCs and leisure groups
are responsible for almost half of the new
routes, but have an ASK share of only 5%
between them in summer 2016, highlights
the increasing importance of the alternative
business models in driving growth on the
North Atlantic. Their c mbined 5% share
compares with 3% in summer 2015.
The e are only two new entrant airlines on
North Atlantic routes in summer 2016, namely
Eurowings and Air Serbia. In summer 2015,
WOW air was a new entrant. The e has been
market exit this summer by the bankrupt
Transaero.
The 45 n w routes involve 26 European
airports and 27 North American airports. Only
15 of these involve an airport ranking in the
top 10 by ASKs between Europe and North
America, although a further 25 involve an
airport ranked between 11 and 20.
The e are fi e airports that are new to trans-
Atlantic services, two in North America and
three in Europe. This is not a lar e number,
but represents almost 4% of the 132 airports
that have flights be ween Europe and North
America, a noticeable percentage.
The n w North American airports are San
Jose Mineta (Lufthansa to Frankfurt and
British Airways to London Heathrow) and
Winnipeg (WestJet to London Gatwick).
The Eu opean airports that are new to
North Atlantic services in summer 2016 are
Belgrade (Air Serbia to New York), Cologne
Bonn (Eurowings to Boston and Miami)
and London Stansted (Th mson Airways
to Orlando Sanford and Th mas Cook to
Orlando – the latter not strictly new this
summer, but only previously operated in the
month of Jul-2015).
The UK eferendum vote in favour of leaving
38 AIRLINE LEADER | JUL-AUG 2016
the European Union at least raises questions about the JVs involving
UK airlines. A condition of antitrust immunity from the US authorities
is that the overseas partner airlines in a JV are from countries that have
signed an open skies agreement with the US.
The etherlands and Germany had opens skies agreements with the
US before the EU started to negotiate EU-wide agreements, but the
EU-US open skies agreement of 2008 paved the way for the JVs to
embrace multiple European members, including UK airlines. The U ’s
future relationship with the EU remains uncertain, but it will probably
need to negotiate to remain part of the EU-US open skies agreement in
order to preserve the integrity of the JV within oneworld (which includes
British Airways) and the JV between Virgin Atlantic and Delta.
The e is a precedent for non-EU countries to be parties to the EU-
US agreement, since Norway and Iceland are signatories, and it may be
assumed that the UK could negotiate to enjoy a similar status to them.
However, this may be conditional upon the UK’s acceptance of EU
principles over the freedom of movement of people, goods, services and
capital.
It is currently far from certain that UK politicians will want to commit
the UK to continued freedom of movement of people, since immigration
control was a key theme of the referendum campaign. It may be two
years or more before the UK establishes its post Brexit traffic ights
environment, both within Europe and on long haul routes.
Alternatively, the UK could seek to negotiate a new UK-US open
skies-style bilateral, but this would not in itself give UK airlines the
freedom to fly f om, say, Paris to New York. It may also, for example, call
into question Norwegian’s rights to fly f om the UK to destinations in
the US in competition with UK airlines.
A likely casualty of the Brexit decision, at least until the new UK-
EU relationship is clarified is the application by Norwegian’s British
subsidiary, Norwegian Air UK, for a US foreign carrier permit. Indeed,
on 30-Jun-2016, the DoT dismissed NAUK’s request for an exemption,
while continueing to review the permit application. Norwegian’s Irish
subsidiary, Norwegian Air International, has been given provisional
approval for a US permit, but this has not been made final and the B exit
uncertainty (although not directly relevant) could be used as an excuse
for the US Transportation Secretary to sit on his hands for longer.
If the UK wanted to re-create synthetically the traffic ights
environment of the EU-US agreement, after coming to a new UK-US
bilateral, the UK would also need to negotiate with the EU and US to
allow non-UK airlines to fly UK-US outes and to allow UK airlines
to fly EU-US outes (BA’s Paris-based OpenSkies subsidiary could be
threatened without such a negotiation).
British Airways and its parent IAG are currently fi m advocates of
competition and market liberalisation, but future scenarios could arise
whereby UK airlines may lobby for a more restrictive stance on UK-US
competition from non-UK airlines. Under such scenarios, the UK could
feasibly look to retreat from a liberal trans-Atlantic traffic ights regime
that continues to mimic the existing EU-US open skies agreement.
Again, although it may now seem that the most likely scenario is that
the UK will re-negotiate the same US traffic ights for UK (and EU)
airlines that apply currently, there is at least some degree of uncertainty
over the situation. The impli ations for the North Atlantic immunised
JVs involving UK airlines are unclear.
IAG will be keen to ensure that the future traffic ights regime will
still allow BA to collect US-bound traffic om EU countries via its UK
airports and allow Aer Lingus to carry UK passengers to the US via its
Irish bases. The UK is the lar est European O&D market on the North
Atlantic, but connecting traffic is imp tant. At least IAG has options
through its ownership of three trans-Atlantic airlines, one of which is
UK based and the other two of which are EU based.
The impli ations for the growth of trans-Atlantic low cost operators
such as Norwegian are also unclear. Norwegian has a long haul base
at London Gatwick in order to tap into the lucrative UK-US market.
Norwegian’s future operations from the UK to North America could be
threatened by a changed regulatory backdrop.
In addition to the uncertainties now surrounding UK-US operations,
the fragmentation of the existing EU-US open skies regime would
provide more opportunities for anti-competitive forces to enlist the
bilateral regime to raise protectionist barriers in the future. For example,
it is even possible that the more protectionist France and Germany could
seek to exclude the UK from the EU-US agreement as a competitive
barrier to the BA JV.
US airlines have achieved historically high profit margins th ough
a process of consolidation and by focusing on the domestic market. In
ASK terms, domestic routes are 55% of capacity for United, 61% for
Delta and 67% for American (based on reported traffic data or the first
fi e months of 2016).
The US ma ket is now very mature, offering little growth and nobody
has a strong incentive to disrupt pricing by pursuing aggressive domestic
expansion. Against this backdrop, Delta CEO Ed Bastian said at the
IATA AGM in Jun-2016 that his airline’s international operations
would grow to represent 50% of its activity. Assuming a 10 year growth
horizon, Delta would need to grow its international ASKs at an annual
rate around 5ppts faster than its domestic capacity in order to achieve a
50/50 balance. So far in 2016 ( Jan to May), its international ASMs have
fallen by 1.3%, so implementation has not yet begun. Clearly this sort of
growth will not be achieved on the North Atlantic.
Nevertheless, it seems inevitable that the US Big Th ee will increase
the proportion of their activities that come from international routes
over the longer term. Th y will undoubtedly need to make greater use
Nevertheless, it seems inevitable that the US Big Three
will increase the proportion of their activities that come
from international routes over the longer term. They will
undoubtedly need to make greater use of partnerships as
part of their strategies to achieve this.
of partnerships as part of their strategies to
achieve this.
The orth Atlantic seems unlikely to be
their preferred market for high growth rates.
Airbus forecasts an average RPK growth
rate between the US and Western Europe of
only 2.8% p/a for 2014-2034, compared with
4.7% p/a for all international long haul traffi
Boeing forecasts 3.0% p/a RPK growth for
North America-Europe, compared with 4.9%
p/a for all traffic ver the same time frame.
Capacity growth on the North Atlantic has
stepped up to 12% in summer 2016, compared
with 6% in summer 2015, according to data
from OAG. Even after allowing for the greater
length of this summer’s schedule versus last
year, this is a signifi ant increase and makes
the North Atlantic the second fastest growing
region from Europe after the Middle East.
Seat growth on the North Atlantic has
generally been accelerating since 2013, but
the 10 year average annual growth rate of 3%
p/a in this region is the lowest from Europe.
This l w growth reflects the elatively tight
capacity control resulting from the dominance
of immunised JVs in this market. However,
the accelerating capacity trend also reflects
increasing competition from newer and smaller
participants and, in some cases, a switch of
long haul capacity from other regions.
For all the big players on the North Atlantic
– the members of the immunised JVs – the
incentive would seem to be to preserve the
existing market structure that allows them a
dominant position. The e are higher growth
markets elsewhere and they do not want to
upset the stability of pricing.
In the first five months of 2016, Delta
cut ASKs by 1.1%, United cut by 1.0% and
American grew ASKs by only 1.0% on the
AIRLINE LEADER | JUL-AUG 2016 39
OUTLOOK
North Atlantic. Delta has specifi ally stated
its Atlantic capacity will fall by 3%-4% for the
winter season versus the summer.
Among the leading Europeans, the
Lufthansa Group’s hub airlines’ ASKs to the
Americas grew by 7.5% in the first five months
of 2016. This is not split be ween North and
South America, but is mainly focused on
the North Atlantic and partly offset by JV
partner United’s cuts. In spite of Lufthansa
Group’s strong ASK growth, its 1Q2016 yield
performance on North American routes was
better than average across its network.
IAG’s North Atlantic ASKs were up by 2.6%
(with Aer Lingus included in the base figu es)
and Air France-KLM’s by 4.2% in the first
fi e months of 2016. Air France is currently
shrinking its long haul network, while KLM is
growing, as part of its attempt to force its pilots
to agree to new productivity improvements.
New Air France-KLM CEO Jean Marc
Janaillac averted a planned strike by Air France
pilots in Jun-2016 by suspending productivity
measures that had been implemented, asking
for four months to provide a fuller response. At
this stage, the new CEO’s stance on long haul
growth is not known.
Turkish Airlines is growing faster in
North America than in any other region and
increased its ASKs there by 34.1% in the first
fi e months of 2016. Turkish does not compete
in the vital Western Europe-North America
O&D market, but it does provide competition
to that part of the major European airlines’
trans-Atlantic capacity that relies on feed
from/to points in the Middle East and Asia
Pacific In this respect, it is similar to the three
Gulf based super connectors Emirates, Qatar
Airways and Etihad, all of whom are targeting
North America for growth, albeit from a fairly
small base.
Turkish is the most signifi ant North
Atlantic operator not to be included in
a JV, although it is a member of the Star
Alliance. Moreover, tension between Turkish
and Lufthansa led to the end of codeshares
between the two in 2013.
Nevertheless, Star Alliance outgoing CEO
Mark Schwab said that a case could be made
that Turkish Airlines could add value if it
joined the Atlantic++ JV. “On a theoretical
40 AIRLINE LEADER | JUL-AUG 2016
basis, it would make sense,” he said at CAPA’s Airlines in Transition
2016 event. “ He added that it would “add bulk”, providing a bigger
network to offer corporate customers, but he did not expect it to happen
any time soon. If Lufthansa and Turkish can resolve their differences, the
case for embracing the Istanbul-based airline in Atlantic++ could become
stronger by 2025.
Technology is also changing the way the industry works, regardless of
competition rules. Although collusion is only legal within the JVs, the
revenue management systems of many of the leading operators adopt
similar algorithms and prices tend to look alike regardless of the JV or
alliance. This is not to s y that pricing is uniformly high. Far from it,
competition between the alliances is strong and all offer a proportion of
their inventory at discounted prices at any given time. However, much of
the pricing in the market looks similar.
Of course, LCCs such as Norwegian, WestJet and (in the indirect
market) Wow air are disrupting the market structure up to a point,
offering some very low fares, although they still have only a small share of
the market. Although the LCCs are growing rapidly, the North Atlantic
market leaders have not generally been tempted to follow suit in terms of
capacity expansion.
For the big players, premium cabins and routes with primary airports
at both ends are still a core focus and the LCCs are largely shut out of
these market segments. The majors nly really feel the growth of LCC
and leisure airlines at the bottom end of the market, where their response
is to engage in discounted pricing for a relatively small portion of their
inventory.
The ini ial impact of LCC entry into aviation markets is often that
it grows the total market and there is some evidence of this on the
North Atlantic. All this suggests that the LCC share will continue to
grow, generating incremental traffic in the m ket, but that the JVs will
continue to pursue more measured growth plans.
Nevertheless, most of the leading JV airlines on the North Atlantic
(with the notable exception of IAG) have been involved in campaigns to
limit new entrants in recent times.
Led by Delta, United and American and supported by Air France-
KLM and Lufthansa in addition to a number of labour organisations,
there has been highly visible opposition to Norwegian’s Irish-registered
For the big players, premium cabins and
routes with primary airports at both ends
are still a core focus and the LCCs are
largely shut out of these market segments.
Most of the leading
JV airlines on the
North Atlantic
have been involved
in campaigns to
limit new entrants
in recent times.
subsidiary Norwegian Air International and to the three Gulf super
connectors. The incumbents kn w that, while new entry may initially
help to grow the overall market, eventually a more efficient mpetitor
can take business away. Fearing this, and knowing that their own
operations are not yet efficient enoug they have attempted to enlist
regulators to limit competition.
The Lu thansa Group is attempting to have the best of both worlds
by launching new routes to the US and Caribbean operated by its LCC
brand Eurowings from Cologne/Bonn. Air Canada has also has an
LCC brand, rouge, which operates trans-Atlantic routes from Toronto,
Vancouver and Montreal to European airports including London
Gatwick, Edinburgh, Glasgow, Manchester, Dublin, Nice, Lisbon,
Prague, Barcelona, Venice, Warsaw and Athens deploying Boeing 767-
300 equipment.
IAG is unlikely to establish a long haul low cost operation, particularly
on the Atlantic, where it values BA’s premium positioning and sees
Aer Lingus as already providing a value proposition. Air France-KLM
management acknowledges that long haul low cost is not something to
disregard, but it is sceptical about the sustainability of year-round profits
of this activity.
US airlines have not had much success with LCC brands in the past
and do not currently look likely to attempt one on the Atlantic. However,
if a US LCC were to launch trans-Atlantic services, the US majors may
be tempted into a response.
Among the US LCC/hybrid operators, jetBlue is probably the most
likely to enter long haul markets to Europe. It would likely focus on
routes between the US east coast and Western Europe, initially sticking
to longer range narrowbody aircraft. It is due to receive A321neo aircraft
from 2018 and is known to have been considering the long range variant.
JetBlue also has existing partnerships with European airlines that could
facilitate feed (it has codeshares with Aer Lingus, Icelandair, TAP and
Turkish Airlines).
Among the larger European LCCs that are not currently involved
in long haul activity, Ryanair has most frequently been linked with a
possible trans-Atlantic operation. For many years, the Irish airline’s CEO
has often suggested that he has a plan to establish a separate long haul
entity (ie not Ryanair itself ), but this has never been implemented.
One of the key ingredients of Ryanair’s
success has been its ability to secure large
orders of narrowbody aircraft at very
competitive prices. The l ck of opportunity
to acquire widebodies at attractive prices any
time soon has been an important cause of
Mr O’Leary’s reluctance to enter long haul
markets.
In addition, Ryanair has historically probably
also lacked the primary airport network and
corporate customers that would be needed to
feed a trans-Atlantic operation. This is sl wly
changing as Ryanair’s product and service
moves in the direction of being more upmarket.
Nevertheless, Mr O’Leary’s focus seems likely
to remain on growing Ryanair in the European
short/medium haul markets. Anything is
possible by 2025, but he will only pursue his
long haul plans if the right aircraft deal arises.
The orth Atlantic is the largest and most
mature of the major intercontinental traffi
regions. It is also the most concentrated, if
the immunised JVs are considered as single
competitive entities. At both ends of this
market are the two regions that have made
the greatest contribution towards the global
liberalisation of aviation markets.
However, in different ways, both are now
showing troubling signs that liberalisation
could go into reverse. It is to be hoped that
this is a pessimistic view. The e is a chance
that, in spite of the necessary entry of new
and disruptive business models into the North
Atlantic, this market may not undergo a
signifi ant change in market structure by 2025.
Alternatively, there can be a path where the
combination of profitabili y and competition
can coexist.
The p ospect of new, efficient a craft able
to serve smaller city pairs, along with steady
economic growth generating new traffic ws
is a more likely scenario. This p ocess will be
accelerated where liberal market conditions
apply, allowing new entry and new routes to
materialise. To some extent this will inevitably
undermine the relative signifi ance of the
existing hubs – especially where they have
no ability to expand their capacity – and
the incumbent airlines. Understandably, the
affected airlines and airports will seek to resist
this evolution. AL
AIRLINE LEADER | JUL-AUG 2016 41
REGIONAL
LATIN
AMERICA:
Weak economies
offer opportunities
for foreign
investment that
will reshape
policies and joint
venture prospects
Despite the current economic slump sweeping
much of Latin America, the region remains one
of the most promising for air travel expansion
over the next decade. During the remainder of
the current decade, many of the region’s weakest
economies should start to improve, which means
demand for air travel will rebound.
Investors looking to capitalise on a down cycle
are circling Latin American airlines in order to
gain footholds in the market once the region fully
recovers. Brazil’s recession has necessitated a
move by the country’s beleaguered government
to give serious consideration to changing
foreign ownership restrictions of airlines, while
Avianca, the entity responsible for kickstarting
consolidation in the region, is courting investment
from foreign companies, including airlines.
42 AIRLINE LEADER | JUL-AUG 2016
O
NE OF THE LARGEST COMPETITIVE CHANGES IN LATIN
AMERICA OCCURRING IN THE SHORT TERM that will
affect the landscape over the next 10 years is the introduction
of cross border joint ventures ( JVs); these are led by oneworld,
already the most powerful alliance in the region. During the next fi e
years independent airlines and those participating in other alliances will
need to craft responses to the oneworld JV in order to remain viable
in two of Latin America’s most strategic long haul markets – North
America and Europe.
On a system wide basis, Gol, LATAM Airlines Group and Avianca
are forecast to represent 85% of Latin America’s seats in late Aug-2016
(according to data from CAPA and OAG). LATAM represents a 43%
share, and Avianca and Gol have shares of 19% and 22%, respectively.
Avianca, LATAM and Gol all posted losses in 2015 of USD139
million, USD110 million and USD1.1 billion respectively. Each of those
airlines is in the midst of deferring aircraft deliveries and working to
strengthen balance sheets in order to withstand the current economic

strife, driven by a recession in Latin America’s largest air travel market,
Brazil. Presently, its economy is forecast to contract 1% in 2016.
Credit markets are closed off to B azilian companies, and as a result
Gol in mid-2015 undertook a restructuring that culminated in 2016 with
its attempts to restructure USD780 million of unsecured bonds issued
in international markets. Other crucial aspects of Gol’s restructuring
programme are contingent on the company successfully renegotiating the
conditions of those bonds.
During 2016 some Brazilian legislators pushed for the easing of
foreign ownership of the country’s airlines, which would have given
Gol a lifeline. In late Jun-2016, Brazil’s Lower House pushed through
legislation to allow foreign companies to own up to 100% of the
country’s airlines. The enate approved the bill in order to avoid its
expiration; however, the country’s interim government has stated it will
veto the foreign ownership provision, which would leave the current 20%
cap intact. The e is a possibility of continuing discussion among Brazil’s
legislators about changing foreign ownership levels and there seems to be
Avianca, LATAM and Gol
all posted losses in 2015 of
USD139 million, USD110
million and USD1.1 billion.
an appetite for raising the restrictions, but for
now the status quo remains.
If some change in foreign ownership laws
materialises, foreign investors could line up
to purchase stakes in two of Brazil’s largest
airlines, Gol and Azul. Data from Brazil’s
ANAC covering Jan-2016 to May-2016 show
Gol held a 36% share of Brazil’s domestic
market followed by TAM’s (part of LATAM
Airlines Group) 35% share. Azul’s share during
that time period was 17%, and Avianca Brazil
held an 11% share.
Although investing in Gol may carry
signifi ant levels of risk, it remains one of
Brazil’s largest airlines. Delta already holds a
9.5% stake in Gol, and seems the most feasible
candidate to seize on an opportunity to invest
in the struggling airline. Delta, more than any
other large global airline, has made investments
in foreign airlines to shore up its presence in
strategic markets. It has upped its stake in
Aeromexico, and aims to forge a JV with the
airline now that a more liberalised bilateral
between the US and Mexico has won approval
from all the requisite authorities.
Gol is an important partner for Delta,
allowing the US major airline to offer broad
network utility in a market where it has lagged
rivals American and United. An increased stake
by Delta could provide Gol crucial stability, and
ensures Delta’s position in Brazil over the long
term.
Azul has already secured investments from
United Airlines and HNA Group, which owns
Hainan Airlines. HNA invested USD450
million in Azul to take a 24% stake in Brazil’s
third largest airline, reflecting the impo tance
Brazil will warrant in the global aviation
industry during the next decade.
United took a stake in Azul and forged a
codeshare agreement with the Brazilian airline
in order to regain lost ground in Brazil after
TAM exited the Star Alliance. Similarly to
Delta, United needs to look beyond Brazil’s
AIRLINE LEADER | JUL-AUG 2016 43
REGIONAL

The Star and SkyTeam
alliances have no choice but
to respond to the dominance
oneworld will achieve.
short term woes to determine how best to position itself over the long
term.
United and Delta have also emerged as potential investors in Avianca
after the airline group, Colombia’s largest domestic operator representing
a 61% market share in early 2016, sought a capital injection. Obtaining
a stake in Avianca would give either airline important access to two of
the fastest growing domestic markets in Latin America – Colombia and
Peru. Colombia posted nearly 11% domestic passenger growth in 2015
and Peru’s domestic passenger market expanded by 12% year-on-year.
Avianca Peru is the country’s third largest airline with a 12.3% market
share.
The outcome of l osening ownership restrictions in Brazil and
the opportunity for foreign airlines to invest in Avianca could result
in North American airlines strengthening their already signifi ant
influence in the lar est market from Latin America. During late Jun-
2016 approximately one million seats were deployed between Latin
America and North America, and North American Airlines controlled
roughly 69% of the seats on offer.

TOP 15 US AIRLINES CAPACITY SHARE (% OF SEATS) BETWEEN

LATIN AMERICA-NORTH AMERICA: LATE JUN-2016
SOURCE: CAPA - CENTRE FOR AVIATION

2%
2% 2% 1%
2%
2% 24% American Avianca
3%
3% United Air Canada
3% Delta Interjet
jetBlue Spirit
4%
Aeromexico Sunwing
5% Southwest Alaska Airlines
Copa WestJet
14%
9% Volaris

11%

American and LATAM, which are seeking to create a wide-ranging

South American JV, controlled 28% of the seats between Latin America
and North America during late Jun-2016. By 2020 that JV should be
fully functional (likely with some concessions), which means the two
entities can coordinate on capacity, pricing and scheduling on routes

The Latin America-Europe market is

another region with significant growth
potential, especially for Latin airlines
aiming to grow their market share.

44 AIRLINE LEADER | JUL-AUG 2016

between North America and Brazil, Colombia, Chile, Peru, Paraguay 2016.
and Uruguay. A LATAM group airline holds either the leading position, The atin America-Europe market is
or second leading position, in all those countries (measured by system another region with signifi ant growth
seat deployment). potential, especially for Latin airlines aiming to
grow their market share. Presently, European
airlines dominate the seats on offer between
LATAM AIRLINES GROUP PROPOSED JV MARKETS WITH the two markets, but Latin airlines have
AMERICAN AIRLINES (% SEAT SHARE): JUN-2016 been expanding their presence during the
SOURCE: CAPA - CENTRE FOR AVIATION last year. TAM has added flights f om Sao
Paulo to Barcelona and LAN has introduced
17% 30% a Santiago-Sao Paulo-Milan route and added
frequencies between Santiago and Madrid.
30% TAM also plans to introduce flights f om Sao
16% Paulo to Johannesburg in late 2016, becoming
the first atin airline to serve Africa in more
than a decade. If Latin airlines are entrenched
Brazil Peru
in immunised JVs, it allows for growth that
Colombia Paraguay is tied to a much larger revenue sharing
Chile Urguay opportunity, and more scale to weather future
down cycles.
50% The e are also obvious long haul
61% opportunities for Latin airlines outside
traditional global alliances. Azul in 2016 has
launched its first t ans-Atlantic flights be ween
Campinas and Lisbon in conjunction with
The tar and SkyTeam alliances have no choice but to respond to the TAP Portugal, which is a member of Star. The
dominance oneworld will achieve between North America and Latin two airlines established ties after Azul founder
America with its planned JV. Accordingly, during the next fi e years David Neeleman participated in a consortium
United will deepen ties with Star partner Avianca, likely through both an
equity stake and a JV as well as possibly increasing its stake in Azul.
Although Avianca Brazil is a member of Star, Azul could be a better TOP 15 EUROPEAN AIRLINES (% SEAT
Brazilian partner for United, which showcases the conclusion that SHARE) BETWEEN LATIN AMERICA AND
alliances in many instances cannot create total blanket network coverage WESTERN EUROPE: JUN-2016
for their members. SOURCE: CAPA - CENTRE FOR AVIATION
Delta is already touting its planned JV with Gol, which by 2020 could
become a SkyTeam member if Delta increases its stake and gains an 2% 2% 2%
2%
opportunity to exert more influence ver the airline. Gol has consistently 3% 17%
maintained its desire to remain independent, but a new foreign investor 3%
taking a majority stake may steer the airline in a different direction. 3%
Star and SkyTeam may also follow suit with European trans-Atlantic 4%
JVs as LATAM and IAG have declared their plans to establish a JV.
4%
Similar to the North American market, competitors cannot ignore the 13%
business arrangement the oneworld partners are creating any more than 5%
they could have avoided not responding to the JVs created over the
6%
North Atlantic nearly a decade ago. Combined, LATAM and IAG held 7%
8%
a 27% seat share from Latin America to Western Europe in late Jun-
IAG Lufthansa Alitalia
Air France Thomson Airways Aeromexico

Azul is the first long haul, LCC operating KLM

LATAM
Air Caraibes
Virgin Atlantic
Condor Flugdienst
Corsair
service from Latin America to Europe. Air Europa Avianca Thomas Cook Airlines

AIRLINE LEADER | JUL-AUG 2016 45

REGIONAL
that became the successful bidder for TAP in
2015. Azul is the first l ng haul LCC operating
service from Latin America to Europe, and its
flight to Lisb n, propelled in part by TAP, is a
test case for the model being adopted in North
Atlantic markets.
The hances of upstart long haul LCCs
emerging in Latin America during the next
decade are slim given the barriers to entry
erected by some governments in the region, and
the pent up demand for low cost service within
certain countries in Latin America, and on
routes within South and Central America.
According to Mexican ULCC Volaris, trips
per capita during 2014 in Mexico were 0.25,
0.45 in Brazil, 0.42 in Colombia and 0.27 in
Peru. That c mpares with 2.05 trips per capita
in the mature US market.
Some positive signs for liberalisation are
emerging in historically closed off markets A
newly elected government in Argentina that
assumed control in late 2015 has adopted more
liberalised policies, allowing other airlines
aside from government owned Aerolineas
Argentinas to expand domestically, and
creating opportunities for the establishment of
new airlines.
Avianca’s parent, Synergy, is working to
create a domestic airline from Argentina’s
second largest city Cordoba and the Viva
Group, parent to Mexico’s VivaAerobus and
VivaColombia, is also reportedly examining
low cost opportunities in Argentina stemming
from the country’s more liberalised attitude.
If liberalisation spreads throughout Central
and South America, as seems likely, there
should be more LCCs established in the region
by 2025. Mexican LCC Volaris has previously
outlined plans to develop a subsidiary in
Costa Rica, which was on Viva’s radar until
the company concluded tax and airport fee
constraints would prohibit it from achieving
price points necessary for market stimulation.
Another low cost opportunity could emerge
in Chile, which has a more liberalised stance
toward the aviation sector. The count y’s
second largest airline, Sky, is transitioning to
a low cost model, perhaps as a defensive move
to discourage another would be LCC from
establishing a foothold in the country.
By 2025 the Latin American aviation
46 AIRLINE LEADER | JUL-AUG 2016
On long haul routes to North America and Europe, where the foreign airlines dominate, the
prospects is for further cross border investment and establishment of JVs.
landscape could feature two pan American LCC groups, and one to two
independent LCCs. The e is also a reasonable chance that some of the
region’s largest airline groups could be influenced y foreign owners who
materialise in the short term.
The e are signifi ant and necessary changes for Latin American
governments to undertake during the next decade in liberalisation,
taxation and fees in order for the region to realise its full potential for
untapped demand in both domestic and international markets. Countries
including Colombia, Mexico and Panama will benefit f om their more
liberalised perspectives, and previously protectionist countries such as
Argentina are signalling an encouraging new era of more liberalised
perspectives.
Brazil’s economic situation may force the government to rethink
its ownership and taxation policies. Recently, IATA cited the World
Economic Forum’s competitiveness ranking of ticket prices and airport
charges in which Brazil ranks 118 out 140 countries, just behind Sierra
Leone. Clearly, changes are necessary if the airline industry in Latin
America’s largest country is to rebound and thrive.
In many ways, Latin America’s current economic challenges could
create opportunities for a paradigm shift in foreign ownership, taxes
and liberalisation in a region that is still drawing attention from leading
global airlines either through the creation of JVs or potential expanded
or new equity stakes in Latin America’s largest airlines.
Much of the onus for future success lies with the region’s governments;
they hold the power to foster a robust aviation sector, or inhibit efforts
of Latin American airlines to reach their full potential in a region where
residents will demand more affordable air travel both domestically and
internationally in the coming decade.
Meanwhile, on long haul routes to North America and Europe, where
the foreign airlines dominate, the prospect is for further cross border
investment and establishment of JVs. AL
 CAPA Fleets delivers the very latest
insight into the global commercial fleets
market, providing your business with a
world-class, cost-effective data service.

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REGIONAL

The
Middle East
long haul
Looking back in 2025, the Middle East might
appear little changed from 2016: the world will
be aghast, and some displeased, that three Gulf
airlines and a fourth (not strictly from the Arabian

markets:
peninsula but with favourable geography and
a domestic market) have defied the odds to
become global airlines with high growth, and
more to come.
Yet these airlines may not be Emirates, Etihad,

The future will involve

Qatar and Turkish but instead Kuwait Airways,
Oman Air, Saudia and Iran Air. Each shares the
favourable geography of the Gulf carriers, but

partnerships, and some

as is often the case in Middle East aviation,
everybody under-estimated the other. One
other uncontrollable ingredient they will need

new large hub carriers

though to achieve that position is a liberal market
environment, apparently something that can no
longer be taken for granted.

48 AIRLINE LEADER | JUL-AUG 2016


T
HE SUCCESS EVIDENT IN 2016 OF GULF NETWORK
AIRLINES IS INSPIRING OTHERS TO IMITATE THE
STRATEGY, and claim back some of the traffic their peers h e
funnelled to support their hubs. At play in 2016 are ambitions
from smaller airlines to grow exponentially and take a role in transfer
traffi This in ludes Kuwait Airways, Oman Air and Saudia. Extending
the geographic borders of this populous and well positioned region, Iran
Air and Pakistan International Airlines are also eyeing not just a revival
but surpassing previous achievements.
Egypt Air, Middle East Airlines (MEA), Jazeera and Gulf Air are not
so motivated. Egypt Air’s future is tied to local stability and final emoval
of government interference. MEA and Gulf Air have smaller local
markets while Syrian Air, Yemenia and airlines in Afghanistan and Iraq
remain small players.
Physical positioning is not a guarantor of success. Geography is only
one ingredient and mastering all the components is a hurdle even for
established airlines like Lufthansa and Singapore Airlines. For the
Iran Air has the greatest
potential given the size of its
local market.
ABU DHABI, DOHA AND DUBAI
INTERNATIONAL ANNUAL PASSENGER
NUMBERS: 2003-2015
SOURCE: CAPA - CENTRE FOR AVIATION AND AIRPORT REPORTS
250
200
150
100
50
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Etihad Emirates Qatar Emirates & flydubai
up-and-coming Middle East airlines, the
challenges are immense.
The e is no prospect this new crop of airlines
will surpass Emirates, Etihad, Qatar and
Turkish. Within the Gulf three, Emirates will
surely remain the largest followed by Qatar,
but Qatar is rapidly growing to narrow the
gap with Emirates. As for other contenders,
Iran Air has the greatest potential given the
size of its local market, geography and national
willingness to return to the days when Tehran
was a hub. It gives the Gulf three cause for
concern.
Oman Air recently reportedly spent a record
USD75 million for a single Heathrow slot pair,
apparently a record although only a minority
of transactions are public and Oman Air’s slot
is at prized, and most valuable, hours: it will
have the earliest arrival into Heathrow of the
Gulf airlines. The slot is Oman Ai ’s second
Heathrow service, and Manchester will also be
launched as Oman Air builds up hub traffi Yet
all of this is from a country with a population
under 4 million; the UAE is under 10 million.
Despite these startling growth spurts, Oman
Air cautions it will never reach the size of an
AIRLINE LEADER | JUL-AUG 2016 49
REGIONAL

Etihad. Etihad, in turn, says it will not ever be An EU mandate has been established
the size of Emirates. Yet change in the Middle
East happens quickly; Emirates is twice the
to negotiate open skies with some GCC
size it was in 2010, when it was already large. countries.
It might be asked if Oman Air will not match
the size of Etihad at the same time or might
in 2025 be the size Etihad was in 2010. Oman as it seeks to win back local traffic Saudia is working to overcome this.
Air in 2016 has 14 widebodies; Etihad had Now that oil revenue is under pressure, the government is reviewing the
approximately 30 in 2010. hub strategy and looking to boost tourism. Yet aside from religious trips,
Since late 2016 Iran has received attention local attractions are few and a tourism embrace will necessitate a whole
for its potential hub capability; Tehran’s of country change. Dubai may also have been built in the desert, but it
geography and the country’s large population took more than a generation.
and diaspora give it a head start. Another Iran is more of a ready-made market and, unlike Saudi, has an efficien
lurking sleeper may be Saudia. Saudi Arabia local workforce. Iran also has a sizeable and experienced, educated
has disadvantages for the flag arrier: split hubs workforce abroad that could return. Existing capacity is small, so that
across two or even three cities and government signifi ant change could happen quickly.
interference (similar on both accounts to PIA Market access is perhaps a greater unknown. Here Dubai was
advantaged from early in its life, signing favourable or liberalised air
service agreements. Many were signed when the benefit at the time was
EMIRATES, ETIHAD AND QATAR ANNUAL to foreign airlines. Over the years, the benefit (if lo king only at national
CAPACITY (ASKS): 2006-2016F airline interest and not holistically) has fi mly shifted to Dubai. But that
SOURCE: CAPA – CENTRE FOR AVIATION AND OAG outcome was only possible because, from the start, Dubai (and Emirates’
400 owners) insisted on totally open skies.
TheDubai-Singapore bilateral allowed Singapore Airlines to hub from
Dubai to other Middle East destinations. These se vices have now been
300
2010-2016 withdrawn but Emirates, besides its multiple daily flights to ingapore,
+ 99%
offers continuing service from Singapore to Australia. In hindsight,
200
would Singapore – and other countries – have granted so much access
BILLIONS

Qatar 2016 = Emirates 2010

if they had known it would hurt their national airline? (Importantly, the
100 Etihad 2016 = Emirates mid-2007 answer might even be yes; Singapore measures its aviation success not
so much through the fortunes of its flag arrier, but for its airport and
0
tourist arrivals.)
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Turkish Airlines may already be an example. In 2015, it carried
Emirates Qatar Etihad more transfer passengers than Etihad carried total passengers. Its ASK
production in 2016 is forecast to be approximately the same as Emirates
EMIRATES, ETIHAD AND QATAR ANNUAL was in 2011. Turkish faces restrictive bilaterals to the east; Hong Kong
CAPACITY (ASK) INCREASE: 2006- for example will not grant a seventh weekly service, leaving Turkish with
2016F an unusual six times weekly operation.
SOURCE: CAPA – CENTRE FOR AVIATION AND OAG Future growth will hinge on liberalisation. Some markets are open
40
skies or heavily liberalised. But to exploit transfer markets effectively,
each of the spokes must offer open access, something that not all
countries are prepared to offer, being more intent on protecting their
30
own airlines. Improvements are being made with China while there is
cautious optimism that the new Canadian government in the long term
20 will bring a more consumer-friendly approach to capacity allocation.
Korea, with its global airlines, is a holdout but there should be improved
access by 2020. Africa has been surprisingly, but not thoroughly, liberal
10
with Gulf airlines and by 2025 their impact on linking Africa with the
new world will have been felt for many years – probably generating
0 regional economic growth that no home grown policy would hope to
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
achieve.
Emirates Etihad Qatar

50 AIRLINE LEADER | JUL-AUG 2016

 An EU mandate has been established to negotiate open skies with ABU DHABI, DOHA AND DUBAI
some GCC countries including Qatar and the UAE. This m y not INTERNATIONAL ANNUAL PASSENGER
produce liberalisation but over the long term economic sense should NUMBERS: 2003-2015
prevail with more access granted to the airlines. SOURCE: CAPA - CENTRE FOR AVIATION AND AIRPORT REPORTS
Airport and airways capacity is also a constraint. For a region known
for being a world leader, the lag in infrastructure construction has 80,000k

been surprising. The g owth of today’s smaller airlines, assuming they

have government backing for expansion, will be driven by aeropolitical 60,000k
access and hub capacity. Despite being late on the scene, constrained
infrastructure elsewhere could be to their advantage.
It is against this background of change, global pressure and a possible 40,000k

structural decline in premium traffic that market l der Emirates is

looking to re-invigorate itself. This is orrisome news to airlines already
deathly worried and unable ever to match Emirates’ efficie y. Emirates 20,000k

is already a highly efficient a line by most metrics – to the extent its

model can be compared with others. The e is room for improvement in 0k
the usual areas but also the opportunity to make advances in new areas 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

that will be difficult or others to replicate. In the long term these areas Abu Dhabi Doha Dubai
probably hold greater potential than cost efficie y improvements.
An important and unique issue for Emirates is the future of the A380.
ADDITIONAL PASSENGERS FROM
No other airline comes close to depending on the A380 as Emirates
does. Peers Etihad and Qatar have token A380 fleets and ran Air’s PREVIOUS YEAR AT ABU DHABI, DOHA
A380 order may not eventuate at all. Emirates CEO Sir Tim Clark in AND DUBAI (GROWTH PERCENTAGES
Jun-2016 displayed an uncharacteristic pessimism about the future of FOR WHEN ABU DHABI AND DOHA
the A380. The e are still a few years for this aircraft programme to play JOINTLY OUTPACED DUBAI): 2004-
out, but uncertainty could lead Emirates and Boeing to develop an even
2015
larger version of the 777X.
SOURCE: CAPA - CENTRE FOR AVIATION AND AIRPORT REPORTS
Where the Middle East leads in aircraft orders, partnerships are a
small part of their profil . This va ies in the region. Etihad has seen 10,000k

partners generate a fi th to quarter of revenue (profit not stated) but 2015

106%
this will slow as Etihad looks to accelerate its growth faster than that of 7,500k 2014
partner airlines. Qatar Airways is the only one of the three Gulf network 159%

airlines to have joined an alliance, but an early foray for oneworld peer 2008
158%
Cathay Pacific saw the JV disso ved. 5,000k 2011
102%
An IAG JV with Qatar is supposedly forthcoming and could indicate
future potential for JVs with Gulf airlines. IAG and Qatar Airways 2,500k

would bring multiple hubs and routes together. In comparison, Qantas-

Emirates was relatively straightforward as Qantas has only two daily 0k
flights to ubai (both continuing to London) and this market for 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Qantas is more strategic systemwide than it is profitabl . For IAG and Dubai Doha Abu Dhabi

others who need to follow, there is much at stake.

Watershed partnerships remain a possibility. TheGerman government
is pressing Lufthansa for a solution to its woes. “Walling off the
market won’t help, and the Gulf carriers have a geo-strategic advantage
All three Gulf airlines would
due to their location,” Brigitte Zypries, the Economy Ministry State like a deep partnership with
secretary who coordinates Germany’s aviation and aerospace policy, told
Bloomberg in Jun-2016. “One should think about other possibilities…
a US airline, and surely
The English ha e demonstrated how such cooperation could shape up, by 2025 at least one such
and it makes sense to consider that.”
Yet for a potential Gulf partner, the clock and scale may have ticked
partnership will have to
over. Whereas a few years ago a Gulf airline may have signed up for a emerge.

AIRLINE LEADER | JUL-AUG 2016 51

REGIONAL

Lufthansa partnership, the Gulf airlines have SELECT GULF AIRPORT DEPARTURE TAXES: JUL-2016
had to stand on their own, becoming so large SOURCE: CAPA – CENTRE FOR AVIATION AND AIRPORT AUTHORITIES
and strong that Lufthansa may no longer be DEPARTING PASSENGER TRANSFER PASSENGER
seen as a useful partner – other than perhaps to AIRPORT CHARGES CHARGES
neutralise its opposition. Doha Total: QAR50 (USD13.73) 0
The Air rance-KLM Group has for a few Passenger service charge:
years been exploring a deeper partnership with QAR10
Etihad but nothing has eventuated; Air France Airport fee: QAR40
has enough difficu y with its unions even Abu Dhabi, Dubai Total: AED80 (USD21.78) 0
making small adjustments. Singapore Airlines International/Dubai World Passenger service charge:
is unlikely to dance with the devil but Thai and Sharjah – travel until AED75
Airways, becoming more commercial, agile 30-Jun-2016 Security fee: AED5
and free of government influenc , could form a Abu Dhabi & Dubai Total: AED115 (USD31.31) Total: AED35
Gulf partnership. International/Dubai World Passenger service charge: (USD9.53)
All three Gulf airlines would like a deep and Sharajh – on/after AED75 Service fee: AED35
partnership with a US airline, and surely by 1-Jul-2016 Security fee: AED5
2025 at least one such partnership will have to Service fee: AED35
emerge. American Airlines is the most obvious
candidate, having partnerships with both case elsewhere, LCCs can be a catalyst for change at full service airlines
Etihad and (oneworld’s) Qatar, and actually even if there are valid structural differences between regions. One of
growing them while complaining against the the biggest challenges for LCCs is full service overcapacity in regional
Gulf three to the US government in 2015. markets, where too often access restrictions remain. Market share battles
Aside from their (very signifi ant) North should have ended by 2025 as airlines become smarter with capacity,
Atlantic JV partners, there is particular synergy perhaps by shifting production to lower cost platforms.
in working with the Gulf airlines, with little The mo e immediate future requires a solution to air traffic co rol
route overlap. congestion. Reported changes to be implemented in Dubai in late 2016
Qatar Airways is looking at partnerships, are encouraging steps for the needed sweeping changes that cannot wait
from Royal Air Maroc to Meridiana in Italy, until 2025 – or even 2020. Increased airport fees and introduction of
often due to sovereign interests. Emirates is transfer charges is not welcome but perhaps pragmatic from the point of
selectively expanding partnerships – TAAG view of governments in need of revenue and without unlimited airport
and Malaysia Airlines – and could continue capacity. The g eater concern is that other airports, with less guaranteed
to do so. It has shown particular interest in sources of traffi replicate what they see as a role model in Dubai.
African LCCs, which are increasingly linking Overall the internal challenges in the largest Gulf markets are
the continent and do not have any long haul comparatively few, but require action. The e are greater challenges in
traffic that could be jeop dised by partnerships other Gulf markets and the wider Middle East, and it is mostly from
from airlines outside of Africa. here there could be the largest changes in competitive landscape by 2025.
By 2025, Emirates will be at its new Dubai For all of them, a liberal access regime will delineate their success or
World Central hub and re-united with otherwise. A rollback of liberalisation may be possible, but there are also
fl dubai. Like Emirates, fl dubai is owned signs of acceptance of new hubs. AL
by the Dubai government but Emirates and
fl dubai are managed separately and have little
to do with each other. Timing will be good for 2025 will bring a
the two. Th y will be back at the same airport,
able to have the flexibili y needed to make a
larger population of
partnership that benefits ubai. Oman Air and foreigners, already
Saudia will need to work with their countries’
new national LCCs, Salam Air and fly deal.
inclined to use
2025 will bring a larger population of LCCs, and a greater
foreigners, already inclined to use LCCs, and
a greater willingness by locals to use LCCs.
willingness by locals
This bodes ell for Air Arabia, fl nas and to use LCCs.
any future additional LCCs. As has been the

52 AIRLINE LEADER | JUL-AUG 2016

IRAN AVIATION
Finance & Travel Summit 2016
Tehran, 17-18 September

The largest aviation event in the world’s newest market

Following the success of the historic CAPA Iran Aviation Summit shortly after sanctions were lifted in Jan-2016, Iran’s aviation
authorities have invited CAPA back to hold a unique follow-up event on 17-18 Sep-2016, combining an Aviation Finance and Travel
Summit. This a seminal event, opening Iran’s marketplace to the world for the first time in four decades and intended to move the
industry forward.

The CAPA Iran Aviation Finance and Travel Summit brings together airlines, aircraft manufacturers, lessors, banks, export credit agencies, regulators and law
firms, along with airport operators and investors, and infrastructure developers for panel discussions and networking sessions to identify financing solutions
for transactions related to aircraft acquisition, leasing and infrastructure development; a parallel stream also addresses the key travel industry issues such
as distribution, travel technology and corporate travel.

With the opening up of Iran this region now represents one of the most exciting aviation markets in global aviation.

CAPA Iran Aviation Finance & Travel Summit

Dates 17-18 September 2016

Venue Novotel Imam Khomeini International Airport

Description Speakers and panel discussions to identify solutions to facilitate transactions for the acquisition and leasing of aircraft and for
the expansion and modernisation of Iran’s airport and airspace infrastructure.

Expected 250 foreign delegates

Delegates 250 Iranian delegates

Participants • Aircraft Lessors • Law firms

• Aircraft Manufacturers • MROs
• Airport operators and investors • Trade Finance
• Banks and Financial Institutions • Architects and Engineers
• Engine manufacturers • Consulting Services
• Export credit agencies • Foreign Airline Route Development
• Infrastructure developers • IT companies and e-commerce
• Insurance companies • Travel Distribution and GDS

Delegate registrations are now open: To exhibit or sponsor please email CAPA on
www.capaevents.com/iranSEP16 events@centreforaviation.com
REGIONAL

AFRICA’S
INTERNATIONAL
MARKET:
VISION 2025

Route evolution in African international markets has always been defined
by intra-African protectionist policies that cause long haul route networks to
focus on Europe and, more recently, the Gulf. With typically weak national
flag carriers, foreign airlines are likely increasingly to dominate Africa’s
intercontinental market, particularly Emirates, Qatar Airways and Turkish
Airlines. With the exception of Ethiopian Airlines, African carriers will continue
to struggle and lose market share.
F
RAGMENTED AND USUALLY
HIGHLY INEFFICIENT AFRICAN
AIRLINES have a relatively small
presence in the international market
and struggle to compete against larger players
from outside their region. Traffic to and om
Africa will grow signifi antly in percentage
terms over the next 10 years off the existing
low base, particularly between Africa and Asia.
However, African airlines appear destined to
continue to lose market share to competitors.
Europe is the largest intercontinental market
from Africa with approximately 1.2 million

54 AIRLINE LEADER | JUL-AUG 2016

 Turkish Airlines now
serves 43 destinations in
Africa and plans to expand
further in Africa with new
destinations.

AFRICA-EUROPE NONSTOP CAPACITY

SHARE (% OF SEATS) BY AIRLINE GROUP:
JUL-2016
SOURCE: CAPA – CENTRE FOR AVIATION & OAG

4%
9% 15%

4%
7%
6%

6%
8%
5%

5%
12%
5%
10% 4%
Air France - KLM Other European groups
Turkish Royal Air Maroc
IAG Air Algerie
Lufthansa Group Tunisair
TUI EgyptAir
Ryanair Other African groups
Aigle Azur Other groups

Note: Air Arabia Maroc and Alitalia capacity counted under others
as their parent is not based in Europe or Africa

weekly nonstop return seats. African airlines account for less than 40% of
this capacity, according to CAPA and OAG data for Jul-2016.
Air France-KLM is the largest airline group in the Africa-Europe
market while Turkish Airlines is the second largest and the fastest
growing. Turkish has expanded its share of capacity in the Africa-Europe
market from less than 5% to approximately 7% over the last three years as
it has rapidly grown its African network.
Turkish Airlines now serves 43 destinations in Africa and plans to
expand further in Africa with new destinations and, more signifi antly,
additional capacity to existing destinations through extra frequencies,
decoupling destinations and up-gauging. Turkish’s share of nonstop
capacity in the Africa-Europe market could reach 15% in 2025, enabling
it to overtake Air France-KLM as the market leader.
Europe’s three main airline groups – Air
France-KLM, IAG and Lufthansa – all have a
strong presence in Africa which they are keen
to grow, although the rate of growth will be
much slower than Turkish. Th y particularly
have an advantage over African competitors in
the long haul markets connecting Europe with
central, eastern, southern and western Africa.
In the larger north Africa-Europe market,
the African airlines are relatively stronger.
North African airlines allocate nearly all of
their capacity to nearby Europe. However they
have the disadvantage of having to compete

AIRLINE LEADER | JUL-AUG 2016 55

REGIONAL
against European LCCs in addition to
Europe’s main full service airline groups.
European LCCs now account for 22% of
capacity in the north Africa-Europe market,
led by a 7% share from Ryanair. North Africa-
Europe accounts for approximately two thirds
of total Africa-Europe capacity. Europe’s
LCCs will continue to expand in north Africa
over the next decade and use new generation
narrowbody aircraft to push further into Africa.
Given the challenges they face, African
airlines will likely experience over the next
decade a steady decline in their share of
capacity in the Africa-Europe market. Africa’s
airlines generally lack the scale to compete
effectively and have not been able to follow
the European airline sector in pursuing
acquisitions or mergers.
Ethiopian Airlines has made some
moves towards consolidation, although
its acquisitions have been relatively minor
in terms of the airlines acquired and the
size of the stakes. The politi al – essentially
protectionist – environment in Africa
makes it very difficult to pursue meani ful
consolidation. As a result most of Africa’s
airlines will likely continue to struggle from
both a profitabili y and growth perspective. In
the Africa-Europe market this means ceding
market share to stronger competitors from
Europe and the Middle East.
According to OAG Traffic nalyser data,
European airlines accounted for 60% of all
Africa-Europe bookings in the year ending
Mar-2016. African airlines accounted for
only 35% and Middle Eastern airlines the
remaining 5%.
Gulf airlines have become signifi ant players
in the eastern Africa-Europe and southern
Africa-Europe markets. Emirates and Qatar
Airways are particularly strong in Africa
with 22 African passenger destinations each.
Emirates accounted for more than a 3% share
European airlines
accounted for 60% of all
Africa-Europe bookings in
the year ending Mar-2016.
56 AIRLINE LEADER | JUL-AUG 2016
of total Africa-Europe bookings in the year ending Mar-2016, making
it one of the top 10 airlines in the Africa-Europe market and the only
airline in the top 10 that does not compete in the sizeable north Africa-
Europe sector.
The e are approximately 800,000 weekly nonstop seats between Africa
and the Middle East. The Mid le East is a large local market from
Africa, particularly for northern and eastern Africa. However a large
portion of Africa-Middle East traffic avels beyond the Middle East as
the Gulf is geographically well placed for Africa intercontinental traffi
Emirates is the largest airline in the Africa-Middle East market
and is also the largest foreign airline in Africa overall. Middle Eastern
airlines combined account for approximately a 60% share of seat capacity
between Africa and the Middle East, led by an 18% share for Emirates –
or 20% when including its sister airline fl dubai.
AFRICA-MIDDLE EAST NONSTOP CAPACITY SHARE (% OF SEATS)
BY AIRLINE: JUL-2016
SOURCE: CAPA – CENTRE FOR AVIATION & OAG
8%
3% 18%
4%
Emirates Other Middle Eastern airlines
4%
Saudia EgyptAir
4% Qatar Ethiopian Airlines
11%
Etihad Nile Air
flydubai Nesma Airlines
17% flynas Air Cairo
9%
Air Arabia Other African airlines
4%
9%
3% 3% 3%
Note: Air Arabia Egypt and Air Arabia Maroc capacity counted under other African airlines
African airlines account for the remaining 40% of total Africa-Middle
East capacity. When excluding Egyptian airlines, their share is less than
10%. Egypt-Africa accounts for approximately 60% of total Africa-
Middle East capacity. The e are more than 10 Egyptian airlines serving
the Middle East with a combined 63% share of Egypt-Africa seat
capacity.
On non-Egypt routes, the Middle Eastern airlines dominate with an
80% share of total seat capacity. African airlines will likely see their share
of this market continue to decline as they are not well positioned to
compete against much larger Gulf airlines.
The ulf hubs are particularly well suited for Africa-Asia traffic an
also attract a signifi ant share of Africa-North America traffic and ven
some regional intra-Africa traffi According to OAG Traffic nalyser
data, Middle Eastern airlines accounted for 45% of total Africa-Asia
bookings and 11% of total Africa-North America bookings in the
year ending Mar-2016. African airlines accounted for a 40% share of
bookings in the Africa-Asia market and 30% share in the Africa-North
American market.
There are more than 10 Egyptian airlines
serving the Middle East with a combined
63% share of Egypt-Africa seat capacity.
The e are currently only approximately 50,000 weekly nonstop return
seats in the Africa-North American market and approximately 12,000
seats between Africa and Latin America. European airlines have
traditionally dominated these markets, making it difficult or African
airlines to pursue growth in the Americas. European carriers currently
account for approximately a 38% share of passenger traffic in the A ica-
North America market.
AFRICA-NORTH AMERICA MARKET SHARE (% OF BOOKINGS) BY
AIRLINE REGION: YEAR ENDING MAR-2016
SOURCE: OAG TRAFFIC ANALYSER
11%
38%
21%
European airlines
African airlines
North American airlines
Middle Eastern airlines
30%
Ethiopian has been the only African airline in recent years to launch
new destinations in the Americas. Ethiopian added Los Angeles in
Jun-2015 and New York in Jul-2016, giving it four destinations in North
America and fi e in the Americas. Ethiopian will add at least two more
destinations in the Americas in the coming years – most likely Chicago
and Houston – but is more focused on growing in Asia.
Asia is the fastest growing international market from Africa but has
a relatively limited amount of nonstop capacity. The e are currently
approximately 90,000 weekly return seats between Africa and Asia
Pacific making it a larger market than Africa-Americas but signifi antly
smaller than Africa-Europe or Africa-Middle East.
Unlike the Europe or Middle East markets, African airlines have a
larger share of nonstop capacity to and from Asia than their overseas
competitors. Currently African airlines have an 81% share of Africa-
North America nonstop seat capacity, led by a 33% share for Ethiopian.
African airlines have an advantage over Asian competitors as they can
offer connections throughout Africa – and in some cases even to South
America.
AFRICA-ASIA PACIFIC NONSTOP
CAPACITY SHARE (% OF SEATS) BY
AIRLINE: JUL-2016
SOURCE: CAPA – CENTRE FOR AVIATION & OAG
4% 5%
4%
6%
33%
7%
8%
9% 12%
12%
Ethiopian Airlines Other African airlines
Air Mauritius Qantas
EgyptAir Cathay Pacific
Kenya Airways Singapore Airlines
South African Other Asian airlines
Ethiopian has rapidly expanded in Asia,
growing its network from only six destinations
in 2011 to 11 currently. Africa-Asia traffi
has been the main driver of Ethiopian’s
rapid ascent over the past fi e years as it has
more than doubled its total passenger traffi
and emerged as Africa’s largest (and most
profitable) ai line group. Ethiopian also has
pursued rapid growth regionally in Africa
which has complemented the expansion of its
Asia operation, which requires signifi ant feed
as the local Ethiopia-Asia market is very small.
Ethiopian is planning more expansion in
Asia in the coming years and will likely at least
double its Asia seat capacity by 2025. However
the total Asia-Africa market will also double or
even triple in size, with other African airlines
targeting a piece of the fast expanding pie.
East African airlines are particularly well
placed for Africa-Asia given their geographic
location. Air Mauritius is in the process
of establishing a new Africa-Asia hub and
Rwandair is pursuing the same pool of sixth
freedom traffic as it epares to launch services
AIRLINE LEADER | JUL-AUG 2016 57
REGIONAL
to China and India using a newly acquired
widebody fleet
EgyptAir and Kenya Airways, which have
been restructuring following instability in their
home markets, are also keen to resume Asia
expansion over the next several years. Kenya
Airways has suffered some setbacks after a
fruitful partnership with KLM was established
and is currently undergoing a management
overhaul, but looks unlikely to become a major
force in the next decade.
Asia represents a ray of hope for African
airlines as they try to improve their overall
position in a very challenging market.
However competition in the Africa-Asia
market is intensifying. Gulf airlines are very
well positioned to capture a large share of
the anticipated Africa-Asia growth as they
continue to expand their networks in both
regions.
Middle Eastern airlines already fly mo e
passengers between Africa and Asia Pacific
than African airlines. While there are
opportunities for more nonstop services from
African (and Asian) airlines, the majority of
passengers in this market will travel via the
Middle East. As previously mentioned Middle
Eastern airlines currently account for 45% of
total Africa-Asia Pacific bo kings compared
to a 40% share for African Airlines, a 9% share
for Asia Pacific ai lines and a 6% share for
European airlines.
Emirates is already the leader in the Africa-
Asia market with a 22% share of bookings
and should be able to expand its share to 30%
by 2025 as it continues to pursue expansion
in Africa and Asia. Given the expected rapid
growth in the Africa-Asia market, total traffi
for Emirates in this market could triple or even
quadruple.
Qatar is currently the third largest player in
the Africa-Asia market, behind only Emirates
and Ethiopian. Qatar’s 11% share could reach
20% by 2025.
Competing against Emirates and Qatar is
not an easy proposition for any airline from
any region. For African airlines the challenge is
even more intense as they are generally small,
inefficient and un ofitabl .
Ethiopian has been the only exception in
58 AIRLINE LEADER | JUL-AUG 2016
AFRICA-ASIA PACIFIC MARKET SHARE (% OF BOOKINGS) BY
AIRLINE: 12 MONTHS ENDING MAR-2016
SOURCE: OAG TRAFFIC ANALYSER
22%
17%
Emirates Etihad Airways
Ethiopian Airlines Air Mauritius
5% Qatar Airways EgyptAir
16%
Kenya Airways Others
6%
6%
11%
7%
recent years and should be able to continue growing its market share.
Ethiopian has the largest order book in Africa and plans to again double
in size by 2025.
Ethiopian should be able to grow its share of Africa-Asia traffi
from 16% currently to over 20% by 2025 and its Africa-North America
share from 6% to at least 10%. Ethiopian is not as well positioned
geographically for the more mature Africa-Europe market, but should be
able to modestly grow its current 2% share.
Most other African airline groups do not have the scale, profitabili y
and backing to increase their market share over the next decade. Several
are likely to contract – or even exit – unless they quickly are able to
reform. Th y do not have the cost structures to compete internationally
and the current protectionist policies and interventionist ways of several
African governments are detrimental to their long term health.
TheYamoussoukro Decision, which was adopted as long ago as 1988,
and designed to improve intra-African market access, has still not been
implemented. Given the current environment it seems unlikely the long
overdue open skies regime, or even signifi ant liberalisation, will take
place by 2025. LCC group fastjet is attempting to negotiate its way
through international markets within Africa, but again runs afoul of the
persistent protectionist policies that characterise so many markets.
It is hard to be optimistic about the prospects for Africa’s airline
sector. The ma ket must grow, as the continent is resource rich and
currently greatly underserved by global standards. But continuing
political instability, government interference and poor management
make for a difficult outl k. African airlines are less profitable than their
counterparts in all other regions. Without major structural changes the
African airline sector is unlikely to be profitable y 2025. Africa in a
decade will be even more dominated by foreign airlines, particularly the
big Gulf groups.
The e is the potential for one or two more local success stories to
join Ethiopian, particularly if partnerships are embraced and some
consolidation is pursued. However by and large the current situation
unfortunately is not about to change. AL
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REGIONAL
South Pacific F
markets will
be defined
by China’s
expansion
The nature of the region’s geography makes finding the
right partners for South Pacific airlines essential for survival in
international long haul markets – as most are.
The region is characterised by relatively liberal access
regimes and by partnerships of varying levels – in New
Zealand especially, where Air New Zealand’s international
network is dominated by JVs. Virgin Australia has built a
‘virtual alliance’ alongside HNA, Singapore Airlines, Etihad and
Delta, with very little of its own metal flying outside Australia.
At Qantas Group, international performance has improved
markedly following its Emirates partnership, as its operating
focus has shifted from Europe toward Asia, with local JVs, and
close partnerships with American Airlines and China Eastern
continuing to grow and mature.
For all airlines in the region, the China market will define
much of the growth over the coming decade.
60 AIRLINE LEADER | JUL-AUG 2016
OR BOTH AUSTRALIAN AIRLINES AND AIR
NEW ZEALAND, the China market and Asia
more generally offer enormous potential and
securing access across the region will help define
their futures. Virgin’s virtual airline strategy will support a
move into Beijing and Hong Kong during 2017 as part of
its Singapore Airlines and HNA Group partnerships, while
Qantas seeks positions via its Jetstar JVs and a partnership
with China Eastern, as well as with Japan Airlines and
Vietnam Airlines.
Over the next decade, Qantas Group will steadily expand
its international footprint further with the arrival of its
Boeing 787-9 fleet while the Virgin Group reviews its
international moves. Contrasted with Qantas, international
has always been a challenge for the carrier, which lacks
economies of scale and reach with a handful of services to
the US, South Pacific and outheast Asia.
Asia will be the key for these airlines’ growth, as it is for
many others. The outh Pacifi ’s geographic proximity to
these emerging markets make it an attractive first opti n
for airlines testing the international waters, while existing
operators in the South Pacific a e likely to continue focus
on a hub-to-hub strategy with partners before adding more
dots to the map.
Air New Zealand and Fiji Airways are both quiet
achievers – the former in bedding down its Pacific Rim
strategy and becoming a key connecting point for the
region. Some 30% of traffic n its recently-launched
Auckland-Buenos Aires service originates in Australia,
for example. Fiji Airways has typically focused heavily
on Australia and New Zealand, but has recently pivoted
toward North Asia – especially China, which is likely to be
a key growth market for Fiji.
South Pacific arriers have embraced virtual long
haul networks more than any other region, mostly a
consequence of geography. While Qantas and Emirates
have paved the way for a seismic shift in how alliances
are formed, Virgin Australia has steadily added to its
airline partnership stable, which now includes Etihad,
Delta, Singapore Airlines, Air New Zealand and Hainan
Airlines; another Chinese, non-airline, investor Nanshan,
has recently joined the share registry. Air New Zealand
has added JVs with Singapore Airlines into Asia and
United Airlines to the US, alongside an NEW ZEALAND VISITOR ARRIVALS BY MARKET IN 2015
existing codeshare agreement with oneworld’s EXCLUDING AUSTRALIA
Cathay Pacific (with wh m Qantas does not SOURCE: CAPA - CENTRE FOR AVIATION AND STATISTICS NEW ZEALAND
cooperate). 19.7%
Air New Zealand has been able to grow
such a large JV network due to its historically 31.0%
friendly approach and smaller, under the radar China Germany India
size. In contrast, an outcome of Qantas’ size US South Korea Hong Kong
13.5%
was that airlines worked together against it. Air UK Canada Thailand
1.2% Japan Singapore Others
New Zealand has also benefited f om a relaxed 2.0%
regulatory environment for approving JVs. Fiji 2.5%
2.7% 11.3%
Airways has yet to find a st ategic partner of 2.9%
its own but has built upon its boutique carrier 3.6% 4.7% 4.8%
image with codeshare partners in Alaska
Airlines, Air New Zealand, Cathay Pacific and balance. Capacity between New Zealand and the mainland US is now at
Qantas Airways. This is the best path or its an unprecedented high. Open skies agreements govern relations between
operation for now. all three countries, making for several layers of potential competition.
As end of line carriers, all suffer from But the US is relatively a fading star for New Zealand and indeed
intermediate competition – though this has much of the South Pacific as Asia bec mes the growth story; in New
been converted to an opportunity rather than Zealand, arrivals from China have increased considerably each year
a structural disadvantage. Air New Zealand’s since 2009 with China accounting now for around 11.4% of total visitor
Pacific Rim st ategy – connecting Asia, arrivals. Excluding Australia – by far the largest inbound market for New
Australia, New Zealand and the Americas – Zealand – that number increases to 19.7%, almost one in fi e tourists.
has proved successful at tapping new markets American visitation to New Zealand and Australia continues its
such as Buenos Aires, Houston and Singapore. upward trajectory, but is coming to represent a smaller piece of the
Notably, all but two international routes pie – the decline broadly corresponded to the global financial c isis and
operated by Air New Zealand are either the strengthening NZD and AUD against the USD, making inbound
monopoly routes or operated as part of a tourism more expensive though encouraging additional global air
metal-neutral JV with the only other operator. capacity into those markets.
Until recently, the New Zealand-US route For now, foreign airlines reliant mainly on outbound have cooled their
was also a monopoly market which Air New capacity growth in response to the falling currency. Hawaiian Airlines
Zealand described as “one of the highest CEO Mark Dunkerley, in Jun-2016 said that while Australia remains an
yielding long-haul markets in the world” – important part of its network, demand is slowing: “TheAustralian market
although both United Airlines and American is probably the one market in our entire network where we have seen
Airlines have since entered the fray, tilting that some slowdown in demand,” adding: “It’s not as strong as it was a couple
of years ago and travel trade is seeing that in terms of outbound demand.”
In the short term, plans for a Melbourne service have been put off.
NEW ZEALAND TO MAINLAND US, SEATS
PER WEEK, WEEK STARTING 4-JUL-2016 SHORT TERM VISITOR ARRIVALS TO AUSTRALIA VS AUD/USD
SOURCE: CAPA – CENTRE FOR AVIATION AND OAG EXCHANGE RATE
20k SOURCE: CAPA – CENTRE FOR AVIATION, AUSTRALIAN BUREAU OF STATISTICS AND XE
1,000k 0.84
15k 900k Short term Visitors AUD/USD Exchange Rate 0.82
Seats per week

800k 0.8
700k 0.78
10k
600k 0.76
500k 0.74
5k 400k 0.72
300k 0.7
0k
200k 0.68
Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 100k 0.66
Air New Zealand American Airlines United Airlines
0k 0.64
Jan-2015 Apr-2015 Jul-2015 Oct-2015 Jan-2016

AIRLINE LEADER | JUL-AUG 2016 61

REGIONAL

Jetstar Group CEO Jayne Hrdlicka mirrors TOP 10 CITY PAIRS WITHIN THE SOUTH PACIFIC, RANKED BY
the sentiment, and the carrier plans to suspend SEATS, WEEK STARTING 270JUN-2016
twice weekly Brisbane-Honolulu service in SOURCE: CAPA – CENTRE FOR AVIATION AND OAG
Oct-2016. The ai craft will instead be deployed
Y-O-Y
to Indonesia and Thailand more profitable RANK ORIGIN DESTINATION SEATS
CHANGE
markets for the group: “It’s fair to say we’ve
seen a moderate dip in demand out of Brisbane 1 Auckland International Sydney Kingsford Smith 43,239 13.50%
and we believe it is the right time to move this 2 Singapore Changi Sydney Kingsford Smith 38,843 1.60%
capacity to Asia where more Australians want
3 Singapore Changi Melbourne Tullamarine 36,917 18.30%
to travel.”
High inbound growth rates to Australia 4 Auckland International Melbourne Tullamarine 29,728 12.80%
from most Asian countries have continued, 5 Singapore Changi Perth 28,024 6.40%
but more liberal bilateral agreements remain 6 Auckland International Brisbane 25,117 26.60%
necessary with several key markets including
China, Hong Kong and Malaysia – especially 7 Kuala Lumpur Melbourne Tullamarine 23,688 -6.60%
International
in advance of capacity requirements.
8 Hong Kong International Sydney Kingsford Smith 23,446 17.20%

LARGEST INTERNATIONAL GROWTH 9 Los Angeles International Sydney Kingsford Smith 23,051 8.90%
MARKETS BY CAPACITY FOR AUSTRALIA 10 Bali Denpasar Ngurah Rai Perth 22,850 6.30%
IN 2016 VS 2015*
SOURCE: CAPA - CENTRE FOR AVIATION AND STATISTICS NEW
ZEALAND
Many non-Asian countries could look at
*Data for week starting 23-May-2016 vs p-c-p in 2015 today’s Australia as an indicator for their
+35.6% +28.0% +20.7% +13.2% future.
Japan China Indonesia Hong Kong
AUSTRALIA INTERNATIONAL MARKET SHARE BY SEATS
SOURCE: CAPA – CENTRE FOR AVIATION AND OAG
Other markets, such as Qatar and the
Philippines, have recently entered in to new 20.4%
agreements, though others remain problematic
– indeed Hong Kong is unlikely to be 32.6%
expanded, and even so airport capacity in Hong New Zealand United States of America
Kong remains challenging. For now, China Singapore Malaysia
13.8% United Arab Emirates Others
remains the biggest growth story for Australia Indonesia
– reaching 1 million visitors during 2015. The
7.1%
average Chinese tourist also takes between two 9.8%
and three domestic legs while in the country. 7.8%
8.5%
While Australia considers its future with
Chinese tourism and air services, many
NEW ZEALAND INTERNATIONAL MARKET SHARE BY SEATS
non-Asian countries could look at today’s SOURCE: CAPA – CENTRE FOR AVIATION AND OAG
Australia as an indicator for their future. In
2016, the largest outbound aviation markets 16.5%
from Australia are predictable: New Zealand,
Singapore, United Arab Emirates, Indonesia 2.5%
3.6%
and the US. China’s absence is notable; there
Australia Singapore
the fl w is predominantly inbound to Australia. 5.1% United States of America Hong Kong
From New Zealand, Australia, US, China, Fiji China Others
5.2% 59.4% Fiji
and Singapore top the list – though Australia
dominates with 60% of seat capacity. 7.8%
Australia’s future growth will align heavily

62 AIRLINE LEADER | JUL-AUG 2016

around North Asia as most other markets continue to moderate; AUSTRALIA TO CHINA (SEATS PER WEEK,
Southeast Asia has experienced an overall capacity decline while North ONE WAY): 01-JUL-2013 TO 12-DEC-2016
America has flattened (though at a cur ent peak, largely from growth SOURCE: CAPA – CENTRE FOR AVIATION AND OAG
into New Zealand). The China- ustralia market is dominated in non-
stop seat capacity by China Southern, which holds over 40% of the 50k

market in Jul-2016. China Eastern holds about 20% and Air China 40k
around 15%. The ecent entry of smaller airlines, as well as secondary

Seats per week

30k
routes from other carriers, has meant rapid growth in links, even if
capacity expansion is more moderate and capacity is concentrated on 20k
core routes.
10k
The big est growth prospects are from mainland China. Until 2010
only three Chinese cities (Beijing, Guangzhou and Shanghai) had 0k
Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16
service to Australia. This number s elled to six in 2014, and is so far
China Southern Airlines China Eastern Airlines Air China
planned to double to 12 in 2016. Most of the growth has occurred since Qantas Airways Sichuan Airlines Xiamen Airlines
Jetstar Airways Hainan Airlines Beijing Capital Airlines
late 2015, when Xiamen Airlines opened Sydney services from Fuzhou Thomson Airways
and Xiamen, and Hainan Airlines from Xi’an. China Southern plans to
open service from Shenzhen to Melbourne in Sep-2016 after launching
Shenzhen-Sydney service in Jan-2016. Australia-China city pairs could developing its market in China through a series
grow to at least 21 in 2016. of ad hoc charters on behalf of local agents,
Another country, Indonesia’s enormous potential may well be but is poised to take advantage of further
recognised over the next decade , with its population of 250 million. A opportunities.
thriving domestic market, growing economy and a fast expanding Lion Perhaps most importantly, each of
Group (it has a fleet of 252 ai craft, with 490 on order), establishing Australasia’s major international airlines
cross border JVs in southeast Asia, along with a revitalised Garuda has developed a relatively cohesive Asian
Group, means change is in the wind. Indonesia has been a laggard in strategy. Qantas has rebuilt its Singapore hub
liberalisation, although more open recently, but a big problem remains around regional connections, and focused on
congestion at the main hub, Jakarta, with limited expansion likely, so that greater partnerships in each hub destination.
growth must come from other gateways too. Previously, most of its Asia capacity was
The p eviously high AUD resulted in an imbalance in favour of dedicated to through Europe-Australia service.
outbound travel, supported by the long-running strength of the Virgin Australia, with its Singapore Airlines
Australian economy. Among the most peripatetic nationalities, Australia partner (and part owner) has not yet been
and New Zealand outbound traffic w l always be influenced y the able to establish an attractive Asian pricing
level of their currencies. But, situated on the lip of Asia, they are well structure or north Asian partnership, but a new
positioned to attract new inbound traffic ws. In this respect the two arrangement with shareholder Hainan gives
countries are frequently treated as a single destination. Aided by an Virgin a much needed partner in North Asia.
Australia-New Zealand open skies agreement – which also permits Air New Zealand meanwhile has anchored
fi th freedom operations – many visitors arrive in New Zealand and with Star partners Singapore Airlines and Air
depart Australia in one trip. Primarily a tourism destination, Fiji is still China. AL

Indonesia’s enormous potential may well be

recognised over the next decade.

AIRLINE LEADER | JUL-AUG 2016 63

FEATURE
The world’s top
20 international
airports in 2025
will mostly reflect
hub connectivity
expansion
There is a variety of factors that will influence the evolution of
international airport leaders over the next decade. Inevitably, given the
nexus between economic growth and airline activity, the global economy
will play a major part in defining the overall outcome.
But to project which specific airports will grow over that period
requires an overlay of other elements, partly derived from local
influences, partly from regional and global developments.
Thus, for example the rise of the Gulf hubs over the past two decades
has resulted from a combination of factors: aircraft technology, allowing
long haul connectivity; supportive government strategies, generating
a climate in which traffic growth can thrive; and a more liberal global
access regime.
There are many other factors in the mix, but it is reasonable to assume
that the future airport leaders in international market growth will be
those that accentuate transfer traffic.
64 AIRLINE LEADER | JUL-AUG 2016
The main determinants of airport hub
growth
Global and local economic development
Overall air travel growth correlates with
economic expansion; but local/national GDP
fluctuations generally have a larger impact on
traffic at individual airports. In countries where
there is significant end-to-end traffic, this helps
underwrite connecting frequencies, in turn
influencing international throughput.
Economic regulation, global and bilateral
Liberalisation of market access has done much
to change the shape and availability of air travel.
It has also allowed a shift away from the older
hubs, allowing new airports to grow faster. It may
be however that we have passed the zenith of
liberal times.
Geography
Geographic positioning has always been
an important determinant of a hub airport’s
effectiveness. As aircraft technology has
changed, so the profile of geography has
evolved.
A national airline
Having a strong national airline based at the
hub has typically been a vital characteristic. That
this was due to the protective nature of bilateral
aviation regulation means that this may be
changing – for example in the EU, where foreign
airlines are able to establish across borders, or
in Asia, where cross border JVs achieve a similar
change.
Global alliance presence
The established hubs tend to have a major
member of a global alliance present, so that
other members converge on it. This is more a
case of chicken and egg though, as it was often
the largest, established airlines which formed
the core of the alliances. Clearly the Gulf carriers
have changed the nature of global networks, so
that the alliances have only minimal presence at
their hubs (even though their open skies regimes
allow foreign operations freely.

Aircraft range and characteristics
Ultra long haul aircraft have reshaped how
hub systems work in some markets. And,
against this trend, a new breed of smaller
(“hub bypass”) long haul aircraft (eg Boeing
787s, A350s, A330s) is also helping new
airlines and city pairs become prominent.
For the time being there are not sufficient
of the aircraft types in operation to make
major inroads, but a combination of hub
congestion and business travel convenience
is supporting establishment of new routes.
Environmental impact
Environmental concerns are limiting airport
development, notably in Europe. Indecision
and consumer objections increasingly
prevent new airports and airport expansion.
On short haul international routes in
Europe, the role of high speed rail is
increasing. The impact of China’s HSR
is mostly domestic, but can help feed
international hubs.
T
HERE HAS BEEN LITTLE MOVEMENT IN THE RANKINGS
of the world’s busiest international passenger airports in recent
years. While there has been a discernible shift towards the east
in the overall airport rankings, the biggest percentage gainer
in terms of airports ranked by international passengers has been Qatar’s
Doha Airport, part of the Gulf carrier expansion phenomenon.
However, compared with 20 years previously, airports in the Middle
East and Asia Pacific ha e now established themselves in the rankings.
Dubai has occupied the #1 spot for a second year in 2015 and a group of
Asia Pacific ai ports represented through to 17th place.
Naturally there is a contrast between domestic and international
airport size, even where there has been substantial local expansion. For
example, Beijing, world’s second busiest airport overall, does not appear
in the table and the only representative from the US is New York’s JFK
International Airport, despite the fact that Atlanta is the world’s busiest
airport overall; 87% of Atlanta’s seat capacity is domestic.
TABLE OF THE WORLD’S 20 BUSIEST AIRPORTS BY
INTERNATIONAL PASSENGERS IN 2015
SOURCE: ACI
Note: there are some small variances between these and exact levels published individually by airports,
but CAPA uses the ACI data as a benchmark.

Airport ownership and investment TOTAL INT RANK/ %

RANK AIRPORT COUNTRY
In many countries, funding of infrastructure PAX CHANGE CHANGE
is problematic. The US in particular, where 1 Dubai UAE 77,453,466 - +10.7
private funding is limited to airlines owning
2 London Heathrow UK 69,816,491 - +2.5
their own terminal, is lagging dramatically in
airport development. 3 Hong Kong Hong Kong 68,139,897 - +8.3
(China SAR)
Local demographics
4 Paris Charles de Gaulle France 60,369,798 - +3.0
Substantial origin and/or destination traffic
provides a sound foundation for transfer 5 Amsterdam Schiphol Netherlands 58,245,545 - +6.0
traffic operations over a hub, given a sound 6 Singapore Changi Singapore 54,835,000 - +2.9
geographic position. 7 Frankfurt Germany 53,994,154 - +2.4
Political stability, local and regional 8 Seoul Incheon South Korea 48,720,319 - +8.5
Predictable government and a secure 9 Bangkok Suvarnabhumi Thailand 43,251,807 +1 +16.3
airport environment are a more recent
predictor of successful hub operation, but 10 Istanbul Atatürk Turkey 42,302,859 (-1) +11.1
sadly appear likely to become more relevant 11 Taipei Taoyuan Taiwan 38,103,889 - +7.6
in future. 12 London Gatwick UK 36,667,769 - +6.4
13 Kuala Lumpur Malaysia 34,434,015 - +0.1
14 Madrid Barajas Spain 33,787,171 +2 +14.1
15 Munich Germany 31,313,329 (-1) +3.5
16 Doha Hamad Qatar 30,906,303 +4 +17.3
17 Tokyo Narita Japan 30,547,564 (-2) +3.2
18 New York JFK USA 30,017,244 (-1) +6.2
19 Barcelona Spain 29,077,820 (-1) +6.7
20 Rome Fiumicino Italy 28,280,267 (-1) +5.4

AIRLINE LEADER | JUL-AUG 2016 65

FEATURE
The int iguing question though is not what
sort of short term changes to the table can be
expected but rather what the longer term ones
might be, and why. What will the picture be
like in 2025?
20 years is often the maximum period for
which an airport will even attempt to forecast
because so many of these variables are so
unpredictable. Even a 10 year period allows
for the unanticipated introduction of variables.
Thus in addition to the relatively exhaustive
listing of influential eatures, matters such
natural events and pandemics impact airport
planning.
The e are short and long term influencers
For example the US economic recovery gave
a boost to airports such as New York JFK in
2015, even if it did not improve its ranking. On
the other hand the US is beset by problems of
congestion and under-investment, constraining
infrastructure growth.
In a small number of countries, airports
are being built which will replace the existing
leaders. For example the new Istanbul Grand
Airport is likely to have superseded the
main Istanbul Atatürk long before 2025. It
is intended to host 200 million passengers
p/a eventually. Istanbul Grand will slow or
displace the expansion of the city’s other
airport, Sabiha Gokcen Airport, accelerating its
own role as a super-connector.
A new airport for Mexico City is under
construction, with ultimate capacity of 125
million ppa, 24 million more than Atlanta
handled in 2015. Both of these airports have a
large focus on transfer traffic and e replacing
airports that are currently at capacity – the
implication being that they are likely to expand
faster than others, all other things being equal.
New, supplementary, airports are being
constructed elsewhere in cities that will
probably feature in the table before long,
such as Beijing (Daxing) and Chengdu, as
international business and leisure travel to/
from China starts to grow again. Supported
by farsighted construction, the sheer size of
China’s various domestic markets prompts
synergistic growth of international operations.
In Dubai more use of being made of Al
Maktoum Airport but when and whether or
not it will take over from Dubai International
66 AIRLINE LEADER | JUL-AUG 2016
is not clear. Depending on its timing, on current growth trajectories, it
should become established as global front runner.
No European hub airport is increasing in global importance. It is
evident that while the European airports are growing, apart from Istanbul
(which is on the Europe-Asia boundary) airports in the Middle East
and Asia Pacific a e growing more substantially; only Madrid is actually
moving up the earlier table (+2 places). The Eu opean continent has its
own economic problems, it is no longer the world’s natural aviation hub
and politically it faces the prospect of breaking up, led by Britain’s exit
from the EU following the referendum on 23-Jun-2016.
While there will always be international travel to/from Europe for both
business and leisure reasons it appears as if that hub role will continue
to diminish over time. Moreover, there are political issues preventing the
addition of runways, the prime examples being at London and Munich.
And it is not only within Europe that runway infrastructure has a
controlling say in future growth patterns. Hong Kong for example, where
the international passenger increase was 8.3% in 2015, like Heathrow,
needs a new runway; there is strong opposition in both places, although
Hong Kong has at least gone through a process which might end in
going ahead.
The e is a crossover between the ideal size for an airport. But it
depends on the ingredients of a particular airport. The e is no template
for determining how big an airport can get before its operations become
impractical. This has not eally been tested yet. Atlanta’s 100 million
passengers p/a travel mainly on Delta, concentrating the control more
narrowly. An airport handling 125 or 200 million ppa on a range of
airlines, many of them international is a different proposition; and
operating more than six runways can pose organisational problems of its
own.
Another question, as the industry evolves, is whether or not the
existing hub and spoke system and the three branded global alliances
(BGAs) will continue to prevail or whether the more recent practice of
ad hoc, often promiscuous alliances, often involving smaller airlines that
were previously ‘unaligned,’ will influence passen ers towards hub by-
passing (which will adversely affect the established hubs in Europe more
than their counterparts elsewhere). The g owing importance of selective
partnerships is a theme of this series of reports, but in many cases they
continue to operate in parallel with the BGAs. The unde lying causes of
limited and artificial c oss border relationships are in the archaic bilateral
system and its essentially mercantilistic restrictions; as these evolve, the
need for and shape of international partnerships changes.
Interacting with this is the performance of the new aircraft types that
enable these hub by-passing operations such as the now established
Boeing 787, the newer A350 and the Boeing 777x.
Even the Airports Commission in the UK, which spent GBP25
million over three years trying to establish whether an additional runway
should be built at London Heathrow or Gatwick airports, or somewhere
else, or not at all, stopped short of predicting future major alliance
trends. It admitted in its final eport that it could not be certain that its
assumptions about the survival and continuation of the formal airline
alliances and their hub and spoke systems were accurate.
 ACI Europe however reported in Jun-2016 that most of the growth
in air connectivity in Europe in 2016 is happening at smaller hubs
and other mid-sized airports. The c ntinued rise of LCCs and point
to point services and the relative retrenchment of legacy carriers and
hub and spoke services has led to an unusually strong increase in direct
connectivity.
Meanwhile, very large airports – and especially the major hubs –
are experiencing a decrease in both their total air connectivity levels
(direct and indirect connectivity) and hub connectivity levels. These
developments are pointing to a rebalancing in connectivity between
the different segments of the airport industry, which is indicative of
increasing airport competition, as evidenced for example by the increase
not only of savvy ‘self-connection’ passengers (who purchase two separate
tickets that are cheaper than a through ticket and make their own
transfer at an airport) but also of airport provision for that activity.
If that trend were to be repeated worldwide it would have at the least
a limited impact on the primary and hub airports within the decade
timescale of this report.
The fu ure for long haul low cost is becoming easier to assess. With
the rise of this form of new entry comes questions of the scale of its
growth and whether its likely historic propensity in some (not all)
regions to avoid primary airports will continue. If the short haul industry
segment leader globally is Ryanair then others might follow its decision
to open more bases at primary airports and grow route networks there.
Or they might not.
In the long haul arena there is more clarity. After a very slow start,
long haul LCCs have established a working model, are becoming more
numerous and are staying in business longer. Importantly they can fina ly
access the new, more economic aircraft that they need. Th y are certainly
using primary airports. Norwegian Air UK for example has almost 7%
LCC CAPACITY SHARE (%) OF TOTAL SEATS: 2007 TO 2016 JAN-
MAY*
SOURCE: CAPA - CENTRE FOR AVIATION WITH DATA PROVIDED BY OAG
* Year to Month indicated
40%
30%
25.9% 25.4%
25.0%
22.8% 23.4%
21.4%
20% 19.2%
20.3%
17.5%
10%
0%
07
of all seat capacity at London Gatwick Airport
(#12 in the table), where it operates seven
trans-Atlantic services.
While most long haul LCCs will seek out
non-hub airports first the f ct that some of
them are talking to short haul LCCs about
agreements on connecting passengers suggests
that another major change in commercial and
operating procedures may again be on the way;
one that sees a bigger presence of both these
carrier types at primary hub airports where the
capacity is adequate and where the economics
can be justified
As for the now 20 year old LCC ‘movement’
overall – short and long haul – it shows no sign
of abating despite the propensity for LCCs to
morph into hybrid carriers, although the ratio
of global LCC capacity did fall by 0.5ppts in
2015, possibly the first time ver that it has
done so. But that may have more to do with the
changing shape of the LCC model itself.
Emerging economies will progressively
translate into rapid airport growth. Provision
also has to be made for countries that might
have been considered low on the potential
growth scale until recently. For example, the
outlook for Iran, a country that, it was assumed,
would continue to descend the global GDP
table, has greatly changed with the ending of
many economic sanctions in Jan-2016. Since
then a raft of business representatives from
across the world has been flooding into the
country, including those from the aviation
sector, and large aircraft orders are being placed
along with the negotiation of PPP deals to
expand airports.
It is unlikely that either of the Tehran
airports will enter the top 20 busiest
international airports by 2025, but the airline
25.5%
world can change in a decade. On a smaller
scale the same applies to airports in Cuba and
Myanmar – countries that have also re-entered
the global economic mainstream – as unlikely
as that may also sound.
Another factor is what the global population
is likely to be in 2025. Most surveys, including
those of the United Nations, estimate it will
be slightly over eight billion, an additional
one billion of them added since 2013. Males

08

09

10

11

12

13

14

15

n*
-Ju
20

20

20

20

20

20

20

20

20

will slightly outnumber females in most age

an
J
16

World-wide ranges. The highest ertility rates are in Africa,

20

AIRLINE LEADER | JUL-AUG 2016 67

FEATURE

followed by Oceania, then South America GLOBAL MEGA-CITIES IN 2014 AND 2034
(none of which have an airport in the top 20), SOURCE: MCKINSEY, UNPD, AIRBUS GMF2015
followed by a tie between North America and 47 Aviation Mega-Cities in 2014
Asia, with Europe coming in last. 2014 Aviation Mega-Cities
No fi m conclusion can be drawn from this
other than that most of the population growth 47 0.9M 90%+
Daily Passengers: of long-haul traffic
long-haul traffic to/ on routes
Aviation
in the future, whatever the rate, will come Mega-cities
from/via Mega-
Cities
to/from/via
47 cities

from developing and emerging countries. Asia

will remain the most populous region, and
population increase is likely to be at its lowest 22%
of World
in Europe. GDP
in 2014
Arising out of population growth the shift
towards urbanisation is another important • >50 000 daily long-haul passengers
•
factor; the rise of aviation mega-cities. Airbus
>20 000 daily long-haul passengers

Source: McKinsey, UNPD, Airbus GMF2015

• >10 000 daily long-haul passengers

predicted that the existing 47 ‘Aviation Mega- … and 91 Mega-Cities by 2034

Cities’ in 2014 will increase to 91 by 2034, with
© AIRBUS all rights reserved. Confidential and proprietary document.

2034 Aviation Mega-Cities

95% of long haul traffic avelling between
airports in these mega-cities, which collectively 91 2.3M 95%+
Daily Passengers: of long-haul traffic

will represent 35% of world GDP. A mega-city

Long-Haul traffic on routes
Aviation to/ from/via Mega- to/from/via
Mega-cities Cities 91 cities

airport is defined y the number of daily long

haul passengers, in three categories, as in the
chart on the right. 35%
of World
2034 is nine years after the relevant date here, GDP
in 2034
so an assumption is made that there will be 69
of these cities by 2025, with a similar degree of • >50 000 daily long-haul passengers

influence n long haul travel and global GDP
Source: McKinsey, UNPD, Airbus GMF2015
•
•
>20 000 daily long-haul passengers
>10 000 daily long-haul passengers

to that of 2034.
The c ntrast between the two maps is stark: ALPHA, BETA AND GAMMA CITIES (UPDATED 2015)
© AIRBUS all rights reserved. Confidential and proprietary document.

the focus is on Europe in the 2014 map (and SOURCE: GLOBALISATION AND WORLD CITIES RESEARCH NETWORK
growth continues there to 2034) but most of
the growth of the mega-cities takes place in the
Asia Pacific egion though the Americas gain
several of them, Istanbul and Moscow appear
for the first time and Af ica gets its first ne.
One interesting point about the Airbus
(2034) chart is how it correlates with that of
the rankings issued by the Globalisation and
World Rankings Research Institute.
Both organisations agree with where the
economic focus is, and will be – the northern
part of Asia Pacific North America (mainly
east coast) and Europe.
The e is an argument that the economic
power of cities and city-regions should be Assuming that the calculations are accurate and allowing for the
viewed in a wider context. difference in the year of measurement, it is particularly interesting that,
The Global Ec nomic Power Index (shown while four of the top 10 economic cities figu e in the top 10 airports list
on the next page) reflects th ee key three (London, Paris, Hong Kong and Seoul) the majority do not.
dimensions of economic power – economic, Boston Logan was merely the 48th busiest airport overall in 2015 and
financial and innovative (expressed as the does not figu e at all in international passenger rankings. Beijing Capital
number of patents issued) and lists the top 25 comes in at #13 in the cities league, was the world’s second busiest airport
cities by that measure. overall last year but is nowhere in the international passenger league.

68 AIRLINE LEADER | JUL-AUG 2016

THE GLOBAL ECONOMIC POWER INDEX Ireland to the US; there are also numerous
CITY (OR CITY- CITY (OR CITY- CITY (OR CITY- forces in the US pushing back against free
RANK REGION) RANK REGION) RANK REGION) trade. And, since the British vote to leave
1 Tokyo (tie 10) Seoul 19 Montreal the EU, the UK’s future participation in that
multilateral agreement is being questioned.
2 New York 11 Sydney 20 Vancouver
The e are many ‘unknown unknowns’ here.
3 London 12 Toronto (tie) 22 Vienna Frontier requirements inevitably have a
4 Chicago 13 Beijing (tie) 22 Shanghai limiting impact on origin and destination
traffic – an for countries like the US, even
5 Paris 14 Madrid 23 Buenos Aires for international transfer traffi But otherwise,
6 Boston 15 Sao Paulo (tie) 25 Stockholm apart from the impact of wars and territorial
disputes, the trend appears to be greater
7 Hong Kong 16 Mexico City (tie) 25 Dublin
co-operation between nation states in visitor
8 Osaka (tie) 18 Melbourne regulation as evidenced for example by many
SOURCE:
(tie 10) Washington DC (tie) 18 Singapore MARTIN PROSPERITY INSTITUTE countries relaxing visa requirements for
Chinese visitors to enable them to tap into
both business and leisure tourism.
The e is a greater correlation with second tier cities such as Stockholm, The sha e of regulation plays a large part in
Vienna and Dublin with Dublin at #23 and Vienna at #28 in the determining airline network planning. Where
international passengers table but Montreal’s main airport only hosted deregulation occurs, legacy airlines have tended
15.5 million passengers in 2015 and local politicians consistently to move towards a hub and spoke system. But
complain about its lack of global importance. that is mainly historical. If not for the advent
One conclusion would be that transfer traffic has be me the of low cost carriers and the design of new
predominant element at so many airports now. That ould certainly be aircraft that can support thin long haul routes
the case with Dubai for example (#1 international airport) and to a lesser economically it would remain the case with
degree with Istanbul (#10), neither of which figu e in the economic city any further instance of deregulation. But today
table. both the LCCs and their more efficient a craft
So there are many, many variables involved in attempting to estimate are entrenched and influence the t avel plans of
which will be the busiest international airports in 2025, these are merely leisure and business travellers alike.
a handful of them and many are quite contradictory. This has the impli ation that if, say, the EU
For all the many variables listed, two of the most signifi ant are and the ASEAN blocs made a bloc to bloc
regulation of the industry and – an adjunct to population rates and the aviation agreement (tentative discussions
emergence of global aviation mega-cities – development of global traffi began in 2015) there is no guarantee that
fl ws. traffic ising from it would route mainly
In this context, no airport can achieve signifi ant growth in the between the four biggest European airports
absence of a liberal access regime. In an ideal world a globally multilateral of Frankfurt, London, Amsterdam, Paris and
open skies regime would apply, with aircraft from economic unions such their equivalents in ASEAN, Jakarta, Bangkok,
as the EU able to fly t , from and possibly within the US, ASEAN, Singapore, Kuala Lumpur and Manila.
Mercosur and any of the other active or proposed economic unions and Indeed it is more likely that the increase in
vice versa. While there are senior figu es in the industry who believe that traffic that almost i vitably follows these
such an accord is achievable none will commit to a date when it might deals would see the advent of more direct
become reality. flights y budget carriers connecting smaller
On the other hand bilateral open skies agreements between blocs can airports at one end at least, such as Singapore-
fall apart. The e is currently tension in the US-Europe agreement, over Birmingham, Bangkok-Berlin and Kuala
US reluctance to permit operations by Norwegian Air International from Lumpur-Copenhagen. Perhaps even Chiang
Mai-Dusseldorf or Manchester. At the same
time it would inevitably also help bulk up the
Transfer traffic has become the major hubs, at least where capacity constraints
predominant element at so many airports do not apply.
In determining future global traffic ws it
now. is necessary first to understand h w different

AIRLINE LEADER | JUL-AUG 2016 69

FEATURE

authorities anticipate air traffic owth by ASIA-PACIFIC TO LEAD IN WORLD TRAFFIC BY 2034
continent in the following 10 years or longer. Asia-Pacific
SOURCE: to lead in world traffic by 2034
AIRBUS GMF2015
The e is a degree of commonality amongst RPK traffic by airline domicile (billions)
% of 2014 20-year % of 2034
them. Airbus and Boeing project average 4.75% 0 1,000 2,000 3,000 4,000 5,000 6,000 world RPK growth world RPK

passenger growth from 2014 to 2034, mainly in Asia-Pacific 2014 traffic 2015-2034 traffic
29% 5.7% 36%

emerging countries. Europe 25% 3.6% 21%

Both airframe manufacturers produce North America 25% 2.5% 17%

regular long term forecasts for global, market Middle East 9% 6.7% 13%
and airframe growth. Th y understandably 20-year
Latin America 5% 5.2% 6%
tend to be broadly similar. The Ai bus Global world annual
traffic growth
Market Forecast of 2015, covering the period
CIS 4% 4.9% 4%
4.6%
2014-2034 correlates with IATA forecasts and Africa 3% 5.3% 3%

anticipates average passenger growth of 4.6% in Source: Airbus GMF2015

that period, indicating a doubling of RPKs in © AIRBUS all rights reserved. Confidential and proprietary document.

that period. Boeing, in its forecast for a similar average passenger growth running at 4.1%, slightly less than the more
period, envisages 4.9% passenger traffic owth. recent Airbus and Boeing RPK forecasts which were also for a slightly
In both cases and signifi antly for regional different time period. Again, the largest growth was envisaged in Asia
market development, growth is expected to Pacific but on this occasion the Middle East ranked just behind Latin
come more from economically expanding America (the ACI forecast was made before economic difficulties bese
regions rather than advanced nations and Asia Brazil and other countries in Latin America – a warning of how quickly
Pacific wi l be the leader. winds can change). Overall there are broad similarities between these
Airports Council International (ACI), in its forecasts and it is clear that much of the growth is going to come from
2012-2031 Global Traffic orecast Report has Asia Pacific and the Mid le East.
made a bold statement for passenger traffi Moreover the Middle Class – from which the bulk of new travellers
growth in the period 2011-2031, which had come – will continue to grow much faster in emerging countries, more
than doubling there from 1.1 billion to 3.9 billion to 2034, while
remaining close to static in North America and Europe. (The total
AIR TRANSPORT GROWTH IS HIGHEST IN percentage of the Middle Class will reach 55% of the global population
EXPANDING REGIONS by 2034 from 37% in 2014 according to Oxford Economics.)
SOURCE: AIRBUS GLOBAL MARKET FORECAST 2015
Another interesting statistic is that while propensity to travel remains
YEARLY RPK at its highest in Europe and North America, 25% of the population
COUNTRIES POPULATION 2014 GROWTH 2015 of the emerging countries took a trip a year in 2014. By 2034 it is
- 2034 anticipated that in China the number of trips taken per head of
China, India, 6.8 billion +5.8% population will have risen close to current (2016) European levels.
Middle East, This alls into question not only global growth but the traffic ws that
Asia, Africa, growth will stimulate.
CIS, Latin Perhaps this is why Delta Air Lines is focussing so strongly on the
America, China market, despite lacking a nonstop flight to the count y from its
Eastern Europe home city of Atlanta (which as previously reported does not figu e in the
Western 1 billion +3.8% top 20 international passenger airports).
Europe, North Capacity growth in the US-China aviation market has been explosive
America, Japan in the last few years and 2016 should be the largest on record for US-
China air traffic ws. Delta’s new CEO, Ed Bastian, recently said the
airline foresees shifting its focus from Tokyo to Shanghai, its likely future
Airbus and Boeing project Asia hub, as the city grows as a regional financial cent e and the country’s
average 4.75% passenger massive internal population grows ever more internationally mobile.
Shanghai Pudong airport’s international passenger traffic in eased
growth from 2014 to by 18.3% in 2015 as it gained four places in the busiest international
2034, mainly in emerging airports league to #25.
These individual oute examples are interesting in their own right but
countries. are part of a much bigger picture of course. These a l form part of how

70 AIRLINE LEADER | JUL-AUG 2016

ANTICIPATED NUMBER OF TRIPS PER CAPITA BY COUNTRY IN While the chart below, from IATA, does
2034 not deal with fl ws between specific egions,
SOURCE: SABRE, IHS ECONOMICS, AIRBUS GMF2015 rather fl ws from and to individual ones, it tells
2.5 a fairly similar story (this time from 2014 to
2034) with Asia Pacific gaining while Eu ope
2.0 and North America retrench (and the Middle
East remaining constant on this occasion).
1.5
GLOBAL AIR PASSENGERS BY REGION (%
1.0 2.24 2.16 OF TOTAL FLOWS)
SOURCE: IATA
0.5 1.09 Outer circle: 2034

0.3
0
India China Europe North America 20

27
international traffic ws in general will change over the next decade. 35
The hart below is from ACI’s Global Passenger Traffic orecast 2012, Inner circle: 40
in association with DKMA. Again, a new forecast is in production but 2014
not yet available. The eport claimed: “In line with global economic 20
development, international traffic w l post healthy growth over the next 23 3
8 5
twenty years, especially in Asia Pacific Latin America, and Africa, while
the Middle East, taking advantage of its geographical position, will 8 4
continue to expand. The t ansatlantic route area is currently the largest 5
in terms of volume but, by 2031, it will be surpassed by the Europe-Asia Asia Pacific Africa Middle East
Pacific oute.”
South America North America Europe
Actually, while Europe–Asia Pacific and Eu ope–Middle East have
suggested average growth rates of 5.7% to 2031, the largest growth
posited is Middle East–Asia Pacific at 6.5% The Asia acific– orth IATA O&D forecasts reinforce positive
America fl w would only grow by 4.8%, running contrary to the projections for China, US, India and
suggestion arising out of Delta’s expansion to China, which goes to show Indonesia. The final hart is an IATA forecast
how quickly things can change in a matter of a few short years. that looks at passenger growth between 2014
and 2034 from the perspective of origin and
departure passenger journeys to, from and
ACI/DKMA PASSENGER TRAFFIC GROWTH BETWEEN REGIONS within countries, which includes domestic
TO 2031 (AVERAGE ANNUAL GROWTH RATES) traffic and wh h therefore shows how the
SOURCE: DKMA top 10 passenger markets will expand in that
period. It is a traffic w projection by country
rather than by region.

IATA TOP 10 1,200

1,000
China
US
220 Indonesia

PASSENGER 800 Japan

200 Brazil
600 Spain

MARKETS 400

350
India 180
Germany
France

2014-2034 300 UK
160

140
Italy

SOURCE: IATA 250

Indonesia
200
Japan
Brazil
120
Spain
Germany
France
150 Italy 100

100 80
2014 2034
50
2014 2034

AIRLINE LEADER | JUL-AUG 2016 71

FEATURE
This hart confi ms much of what has been
indicated previously with both Chinese and
US passenger journeys increasing strongly and
Chinese ones marginally overtaking US ones
by 2034. While growth is expected this is a
powerful statement for one very mature market
and another that is heading towards maturity.
India also climbs dramatically from 100
million journeys p/a to 380 million while
Indonesia climbs from 85 million to 220
million. Another climber is Brazil, doubling
from 100 million to 200 million ppa. The
current turmoil in Brazil has mainly taken
place since this forecast was produced and may
or may not have a longer tern effect.
The losers so to speak a e again the
European countries such as France, Germany
and Spain, which continue to grow but in most
cases not as quickly as the emerging countries
mentioned previously. The UK sh ws a slightly
higher growth rate to 290 million ppa but
one wonders how that will be impacted by
the UK referendum result which has already
forced a further delay to the construction of an
additional London runway.
These p edictions have much in common,
with growth in and between Asia Pacific and
the Middle East the focus of attention in
coming years. Interestingly Airbus believes
that 70% of traffic owth until 2034 will be
coming from existing networks rather than
from new routes. As many new routes presently
are in the point to point LCC domain, that
lends support to the theory that says that
the hub and spoke principle will continue to
prevail and this backs up Airbus’ prediction
that 95% of long haul traffi will travel between
airports in mega-cities.
This o ten contradictory data makes
conclusive findings on fu ure directions a
hazardous task. But some conclusions can be
drawn:
72 AIRLINE LEADER | JUL-AUG 2016
• Long haul LCCs and ad hoc alliance hub by-passing will redirect traffic from
global hubs but not sufficiently to have a material traffic effect on the larger
primary airports within this timescale;
• New airports may be built to replace or part-replace those in the 2015 busiest
airports table;
• The physical size of airports may be restricted – the industry is entering new
territory beyond 100 million ppa;
• Runway infrastructure may be enhanced at some leading airports but not
others. Existing hubs where infrastructure growth is constrained for one
reason or another will lag competitors;
• Political decisions will affect traffic flows both within and between regions;
• The global population will increase by up to one billion by 2025, with Africa
increasing at the fastest rate but with Asia Pacific easily remaining the most
populous area, while the European population will stabilise;
• Analysts suggest the trend towards the congregation of air services within an
ever-increasing number of aviation mega-cities, which will number around 70
by 2025. While they are located across the globe many of the new ones will
be in Asia Pacific;
• The economic power of a city or city region does not however necessarily
correlate with the size of its airport(s), indicating the importance of transit
traffic;
• The regulatory trend is generally still mainly towards deregulation, notably
in Asia; and there has been an easing of travel restrictions for international
travel, from China in particular. But the ever-changing political landscape
does encourage contrary measures in some influential countries. Bloc to bloc
travel need not feed through hubs at each end but the influence of point to
point budget travel that bypasses regional hubs is, again, unlikely adversely to
influence those hubs;
• The main airframe manufacturers envisage growth of around 5% p/a
throughout the period and beyond and that it will be centred on emerging
countries, specifically in Asia Pacific. ACI, in its last forecast, concurred but
added the Middle East as a high growth area;
• The Middle Class is expected to continue to grow at a faster rate in these
countries, notably India and China, and the number of trips per capita,
especially international trips, will increase with it;
• Traffic flow projections by Canadian analysts (DKMA) suggest that the Europe-
Asia Pacific and Middle East-Asia Pacific zones will be the fastest growing
flows by the end of the next decade. This prediction is largely supported
by IATA, which additionally focuses on individual country flows and which
anticipates strong growth involving China, India and Indonesia, and, outside
Asia Pacific, in Brazil. AL
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 AIRLINE
ISSUE 35 | JUL-AUG 2016

AIRLINE LEADER
LEADER

ISSUE 34 JUL-AUG 2016

THE STRATEGY JOURNAL FOR AIRLINE CEOS

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