Boeing versus Airbus: Who has the Correct View of Future Aviation Markets?

Transcription

1 Boeing versus Airbus: Who has the Correct View of Future Aviation Markets? David Gillen YVR Professor & Director, Sauder School of Business-UBC Seminar Chartered Institute of Logistics and December 5, 2005

2 The question? How will the aviation industry evolve: which business model will dominate, point to point or hub and spoke?

3 Outline The protagonists? Features, orders and complements -Airbus 1256 Boeing 360 Competing theories What the data tell us - does size matter? Key factors - what do we know Demand preferences Costs and infrastructure Regulation and liberalization The challenges and problem areas The bottom line looking forward 3

4 In this corner Airbus 380, in the other the 787 Dreamliner + 4

5 A Comparison but with whom? AIRCRAFT DIMENSIONS A380 B LR B ER B ER B787-9 metric metric metric metric metric Overall length 73 m m 73.9 m 70.6 m 62 m Height 24.1 m m 18.5 m 19.4 m 17 m Wingspan (geometric) 79.8 m m 60.9 m 64.4 m 60.1 m BASIC OPERATING DATA Typical passenger seating Range (w/max. passengers) 15,400 km. 9,649 km 11,029 km 9,200 km 15,400km DESIGN WEIGHTS Maximum takeoff weight 590 tonnes tonnes tonnes tonnes tonnes Typical operating weight empty tonnes tonnes tonnes tonnes tonnes Typical city paires Asia/Pacific routes London-NY Denver-Honolulu Tokyo-San Francisco Tokyo-Singapore Honolulu-Seoul San Franciso- Tokyo NY to Frankfurt London to Seoul Tokoy to Los Angeles 5

6 What do we know the world is changing! Over the last 30 years evolution in business models; FSC, new entrant, FSNC, H&S, P2P, LCC, ubiquity,? Will there be stability? No airlines are not unique in business world At no time have airlines had access to factor input on equal terms (Labour, fleets, infrastructure, technology..) Over the next 20 years there will be a need for 20,000 new aircraft, $2 trillion in orders 6

7 Southwest Airlines Route Network Source: American Airlines

8 Southwest Airlines Route Network Source: American Airlines

9 Who s Buying? Airbus Boeing 787 Buyers # of orders Emirates 43 Lufthansa 15 Qantas Airways 12 Air Force 10 Federal Express 10 Internation Lease Finance Corporatio 10 Singapore Airlines 10 UPS 10 Malaysia Airlines 6 Thai Airways International 6 Virgin Atlantic Airways 6 China Southern Airlines 5 Kingfisher Airlines 5 Korean Air Lines 5 Etihad Airways 4 Qatar Airways 2 Total # of orders 159 Buyers # of orders All Nippon Airways 50 Japan Airlines 30 ILFC 20 Northwest Airlines 18 Air China 15 Airlines 15 Air Canada 14 Ethiopian Airlines 10 Korean Air 10 Shanghai Airlines 9 LOT Polish Airlines 7 First Choice Airways 6 Lcal 6 Continental Airlines 5 Blue Panorama 4 Air New Zealand 4 Vietnam Airlines 4 Icelandair 2 Total # of orders 229 9

10 Consolidation Theory-Airbus Alliances have and will concentrate traffic at major hubs Large markets will need larger airplanes Hubs are congested, this will get worse Industry consolidation increases this trend Alliances increase this trend Airports have physical & environmental capacity This trend is happening, therefore size trumps frequency 10

11 Fragmentation Theory-Boeing Large markets peak early and grow slowly Overflying bleeds traffic off early markets Some connecting travelers choose nonstops Others choose competitive connections Secondary airports divert local traffic New airlines attack large traffic flows Frequency competition continues New markets open we missed this! Point to point is the future 11

12 Why such Divergent Views? Boeing Time savings matter Growth of markets and not market growth matter >50 % of current passengers are connecting History continues! Airbus EU view ATC & airports are congested and slot coordinated Airport capacity is fixed and demand for the busiest airports will continue unabated The reality Pax want to get where they are going quickly, on-time, with good service, some personal space and respect! Business pax lost, capacity rises, fares fall 12

13 Big Markets Do Not Mean Big Airplanes Seats Per Departure Average Seats Per Day All Airport Pairs under 5000km and over 1000 seats/day 13

14 Forecasters in 1990 Were Still Confused FORECAST 210 Seats Per Airplane data 2000 data

15 Air Travel Growth Has Been Met By Increased Frequencies and Non-Stops Index 1985= Air Travel Frequencies Non-Stop Markets Average Stage Length Average Airplane Size 15

16 Largest Markets are Not Growing: Overflights are diverting traffic 100% 80% 60% 40% World, Top 100 Markets > 5000 Km 20% 0% -20% ASK growth Frequency growth Airplane size growth 747 Departures 16

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18 How is Demand Changing? Leisure traffic: shorter haul, more frequent, shorter vacations Long haul: less focus on hubs, new destinations Airlines: buying new aircraft to open markets (e.g. Cathay, NA-EU 200 new markets with Open Skies) Development drives income which increases time value non stops and frequency are important High Speed Trains, FedEx, Digital Cameras, , the Pentium V, DSL, the autobahn are valuable why? 18

19 What is happening to Costs LCCs have costs 40% less than FSNC but they are adding value through higher costs FSNC have reduced their costs >20% Fuel costs rising Economies of size decline for large aircraft Time penalties with congestion lowers productivity Secondary airports become important 19

20 First A380 Routes 20

21 Airport Investment Cost: A380 responsible Only Investment Cost Monthly Amortized Annual Amortized US$ (A380) Estimated Cost Estimated Cost Airport (2) (US$) (3) (US$) (4)** New York John F. Kennedy $ 144,000,000 $ 950,336 $ 11,404,035 Los Angeles International $ 149,250,000 $ 984,984 $ 11,819,807 London Heathrow Airport $ 819,000,000 $ 5,405,038 $ 64,860,450 Singapore International $ 888,099,467 $ 5,861,063 $ 70,332,761 New Tokyo Narita International $ 708,935,259 $ 4,678,660 $ 56,143,924 Frankfurt Airport $ 193,700,000 $ 1,278,334 $ 15,340,011 Melbourne Airport $ 164,736,010 $ 1,087,185 $ 13,046,217 San Francisco International Airport $ 200,000,000 $ 1,319,911 $ 15,838,938 Note: Some of the Estimated Investment Cost have been averaged **Over a twenty year period at five percent 21

22 Is it a Good Investment? For Whom? FAA estimate of 20 US airports, total cost of $7.5 Billion Requires an average of $30 million more in revenue per airport per year Airside and terminal investments Pricing: who should pay? Dynamic inconsistency Airports optimize, do not act strategically, airlines act strategically Fair versus efficient prices Impact on travellers (disproportionate on LCCs) 22

23 Regulation and Liberalization As markets liberalize more markets are opened E.g Canada-US Open Skies 2005 Open Skies will open more markets US-EU Open Skies (if completed) will significantly expand number of markets - works for and against A380 More point to point markets A380 needs beyond gateway access Developing economies, are liberalizing, and generate as well as receive many passengers Consolidation across all business models 23

24 New Repaired Network Model Step 1: reduce domestic and short haul network RJs important here Step 2: focus on long haul markets Step 3: alliances; demand came first, cost came next and now needed are joint-ventures (does STAR need 6 hubs in Europe?) Step 4; dominate your market niche Step 5: choose your fleet carefully 24

25 YVR A380 Compliant 2 gates 2007, 2 more 2010 Runways 200 (not 150 ) Airside changes also needed for A and B First arrival: Qantas, China Southern, Korean my bet UPS 25

26 The Bottom Line Looking Forward France, UK, Germany and Spain have invested $13 Billion, Airbus states, it has covered its costs There is room for both platforms but thank the taxpayers of EU for your A380 ride-deep discounts The network model will change and hubs are relatively less important Airlines never keep the rents even if there are some! Real problem areas: wake turbulence, high altitude pollution, deep vein thrombosis (DVT), demographics, weight! And the final real question 26

27 The real question going forward How many different business models are sustainable when factor markets are truly competitive? and the corollary How many firms of each sustainable business model will customers support in each relevant market sans government support, interference,? Airbus and Boeing may both win but for their narrow body product! 27

28 Thank you