Finding Your Partner Outlook: Alliances, JV s M&A s Dr. Emre Serpen Executive Vice President InterVISTAS Consulting Group WORLD ROUTES 2012, ABU DHABI, UAE
Air transport growth is greater in emerging economies in Asia, Latin America, Middle East, Shifting market growth: The GDP growth of emerging economies is significantly higher than mature economies Small growth in GDP translates to significant market growth in Asian, Latin American markets Partnership and cooperation with airlines in emerging markets is critical for future growth Airbus August 2011 Forecast 1
Using geographic advantage Gulf Carriers and TK are growing connecting emerging markets in particular Asia, Middle East and Africa The emergence of Gulf/Middle East carriers causing shift in global traffic flows across major connecting hubs 2
With significant new aircraft orders, growth is set to increase in coming years Source: Diio Mi Sept 27 th, 2012. Both directions total. 3
Emirates supported its network thru code shares Profitable year-on-year growth Second brand worldwide Significant marketshare in India, many African states Changed dynamics of Kangaroo route Emirates Continuing growth More market penetration in US Canada FlyDubai expanding regional routes Positioned to take advantage of markets with significant potential Iraq. Iran etc Source: Diio Mi Sept 27 th, 2012 (For Sept 2012). 4
Emirates/QANTAS Partnership Signals Change in Traditional Alliance Relationships - Immediate impact on One world QANTAS Before Emirates Partnership: 5 One-Stop Destinations in Europe (via QF operations or code shares) No service to Middle East/North Africa Did BA had to use its aircraft in flights beyond Singapore? Reduction in feeder traffic with CX code shares? :JAL BA Start 1 st October Include Paris /FR 19 Flights LHR/NRT March 2013? Deal with CX, MH QANTAS After Emirates Partnership: Stop flying from Singapore and BKK to Europe Drop Frankfurt Service Drop code share plans with MH to 5 European Countries Discontinue BA code share (SIN/TPE), CX (HK/Rome) 32 One-Stop Destinations in Europe & 31 One-Stop Destinations in Middle East/North Africa via DXB Revised service to SIN/HKG/KUL for better connectivity to Asia Source: Sample Summer 2012 schedule 5
Etihad using code shares supporting its growth Source: Diio Mi Sept 27 th, 2012 6
Etihad adding partnerships to support its growth strategy 2011 profitable Interim 2012 revenues 30% increase 800,000 passengers from passenger airlines $ 281 Million from partner airlines Since 2008 growth fro 2 to 35 code share partners Mergers and Acquisitions key to 20 year plan 10 year strategic partnership with Virgin Australia 40 %Stake in Air Seychelles 29% Air Berlin Stake, access to high yield European Markets? Partnership with Air France & KLM one world indicated no issues with Air Berlin Economies of Scale in 787 fleet, 56 aircraft common activities Source: Diio Mi Sept 27 th, 2012 (For Sept 2012). 7
Strategic Partnerships Cross Alliance Boundaries and are Becoming More Complex Sample of selected strategic partnerships of Etihad and Emirates Cooperation under discussion Codeshare/ FFP benefits under Discussion 8
Alliance focus on emerging markets, Asia, Middle East, Latin America The three Global Airline Alliances continues see strong coverage in the Americas, Europe and Asia. Nevertheless, there is notable absence of membership in the Middle East and India. Passengers carried by Middle Eastern airlines that belong to a global alliance account for only 2.4% of total alliance passengers and 1.8% of daily departures. 9
Source: OAG Max There may be further impacts on Alliances due to JV and Merger activity Membership in Global Alliances is very fluid. LATAM, Emirates-Qatar Deal join SkyTeam exits SkyTeam & joins Star join SkyTeam joins Star Malaysian Sri Lankan join SkyTeam join oneworld 10
Ownership laws, national interests typically restricts industry consolidation Perceived national Interest Ownership rules Singapore/China Eastern Public opinion against foreign multinationals Some improvements (Malev, Air India) Competition Law The interpretation of the competition law often inhibit ed consolidation EU/US In 2001 DOJ blocked United/US merger on the grounds that the fares would increase Practicalities Fleets, cultures, work practices, IT, seniority lists
Hence level of airline consolidation is still relatively low compared with other industries, United 16% Airlines Share of Industry 12 months ending March 2007 Delta 12% Continental 12% Northwest 10% US Airways 4% Top-3 Distribution Company Share of Industry 12 months ending March 2007 Sabre 34% 95% of Industry Revenues Amadeus 31% Galileo / Worldspan 30% Other 5% American 20% Top-3 48% of Industry Revenues Other 26% Network carriers reduced From 20 Carriers to 8 (90-06) Regional Carriers Reduced From 150-70 (90-06) Top-3 Rental Car Company Share of Industry 12 months ending March 2007 Hertz 29% 80% of Industry Revenues Enterprise 31% Avis / Budget 20% National / Alamo 9% Thrifty / Dollar 6% Other 5% Note: Other based on estimates from industry reports
Some consolidation has started within EU, also some flag carriers ceased to exist Lufthansa The synergies from integration with Swiss, exceeded 200 million Euros expanded route network with more destinations and better connections interlinked frequent flyer programmes and mutual lounge access Total synergies from integration of Austrian are estimated at around EUR 80 million Euros (both revenue and cost) improved access to international passenger flows and joint international marketing, cost advantages and economies of scale Nonstop Total Weekly seats Operated by Lufthansa Group Aug. 2003 Aug. 2008, Dec. 2008 The scope of integration Swiss /Austrian were similar Autonomous carrier own business management, own crew and fleet Zurich integral part of Lufthansa s multi hub strategy Air France / KLM The airline related savings of 525 million over three years by combining purchasing, sales and information technology. Depending on further progress of discussions between FAA EU in future we could see similar deals between US/EU
Joint ventures increasing in across the board Joint Venture / Anti-trust Immunity relationships allow for better coordination in scheduling and pricing to offer passengers more convenient travel options. 14
Short haul routes : LCCs have quadrupled their intra- European market share in the last ten years 2001 2008 2012 RAPID LCC EXPANSION ACROSS EUROPE LEADING TO INCREASED MARKET SHARE FSC LCC 2001 2004 2008 2012E Source: OAG, 2011; Lit search;
Similar patterns in Asia, Middle East, also closer business models may lead to further cooperation between network and LCC Focus on short haul profitability, reduction in CASK, Eg Malindo, Air Asia, Cooperation between Network and LCC carriers -Eg LH/Jetblue. Etihad/VA et Network carriers to leverage LCC relationships much better Do we have more opportunity for further partnerships between Network And LCC?? Air Arabia Flydubai Source: Diio Mi Sept 27 th, 2012 (For Sept 2012). 16
Increasing Joint Ventures and Innovative Partnerships Alliances and Joint Ventures Central Africa / India / Middle East / CIS carriers likely next to consider Global alliances membership Potential new JVs to form in light of recently announced Emirates / Qantas Joint Venture and codeshare partnership Global Alliances attracting LCCs to join via hybrid partnership platform (SkyTeam) Mergers Cross-Border Within the EU: Lufthansa with Austrian, Swiss, Brussels Airlines; IAG: British Airways and Iberia Latin America AviancaTACA; LATAM Airlines Group Potential US-EU airline mergers? (Pending regulatory approvals) Innovative Partnerships China Eastern & Qantas (carriers in different competing Global Alliances) to form Hong Kong based LCC Etihad /Australia Porter (small, regional Canadian airline) signs interline partnership with South African Airways via Washington IAD
Finding Partner: Analysis, Strategy, Execution
Analysis Overview Identify changes in region and market level in both demand, supply, considering circuitry and yield Region- Region Circuitry Yield Onboard O&D Industry O&D Growth A1 Share Aug-09 Aug-10 Aug-09 Aug-10 Aug-10 Aug-10 A1 Industry of Industry 1. Relative growth of region to region flows considering yield and circuitry 2. Benchmark connectivity with key competitors considering yield 3. Historical growth O/D growth 4. Relative growth of airline market share share compared to O/D market flow considering yield and circuitry EU-NO 108% 8.8 9.0 869,909 1,019,118 8,330,229 8,479,367 17.2% 1.8% 12% NO-EU 109% 8.7 9.1 835,797 986,496 8,330,229 8,479,367 18.0% 1.8% 12% AP-AF 107% 9.4 9.3 657,943 703,314 5,776,835 5,630,906 6.9% -2.5% 12% AF-AP 106% 9.4 9.3 655,028 701,660 5,776,835 5,630,906 7.1% -2.5% 12% Region A1 A2 A3 Yield EU-EU 6.2 6.6 8.5 9.6 LA-EU 9.4 9.2 11.0 9.1 EU-NO 9.1 9.1 10.6 9.0 AP-EU 9.5 9.1 8.8 9.3 Connect Markets 2005 2006 2007 2008 2009 2010 CDG-MED 87 391 853 793 1,717 2,566 DAM-MXP 35 29 56 2,347 2,561 PEK-ODS 1,452 2,050 1,195 1,539 2,539 2,528 BKK-TLV 847 1,294 2,308 3,745 3,679 2,499 Service Share O&D Share % Change CCt Connect Markets Jan-09 Jan-10 2009 2010 Service O&D O&D Yield BKK-ARN 0.8% 0.9% 2.0% 3.3% 8% 61% 101% 6,786 3.0 PEK-TIP 0.6% 0.7% 1.6% 2.9% 4% 79% 101% 5,968 3.0 IKA-YYZ 1.4% 1.3% 7.3% 8.9% -9% 23% 110% 5,674 2.8 ALG-MED 50.2% 100.0% 86.0% 86.3% 99% 0% 117% 5,196 7.7 Focus on city pairs we want to develop/improve 19
Strategic Evaluation - is critical to establish competitive strengths and determine scenarios for growth opportunities Market analysis -the demand and supply, competitor activities and strategic change Market Growth compared with Client Growth, where client growth may be slower than market growth, also vis-a-vis fare changes. Strategic evaluation is used in the of the development scenarios 20
Strategic Evaluation Market Analysis and SWOT Market share growth compared with total market growth lose marketshare whilst reducing its average fares. marketshare growth and fare protection in growing markets 21
For example growth of competitor activities at airline s hub. This analysis shows though this particular client is growing y-o-y 25% on its hub serving top 500 markets, 22
Other deeper analysis include analysis of an airline s hub which may be poorly designed with the lack of a clear arrival/departure bank structure. This for instance equates to lost opportunities in connecting O/D markets 23
Market forecasting to determine priorities Top-down elements include GDP-driven passenger growth. There is an established correlation between year-over-year GDP growth and corresponding growth in passenger volumes. For increased accuracy, the GDP of respective countries on a route network and point-of-sale data are considered in the analysis This smoothes temporary fluctuations of bottom up analysis The bottom-up elements include regression analysis utilizing IATA Paxis and MIDT flown passenger data. The market forecasting results are then used as an input to network optimisation tools. 24
Development of Route Strategy Selected scenarios evaluated to establish route strategy and route structure Test different scenarios and business models and evaluate respective differences in variable contribution towards selection of the best model Use of optimisation models. New destinations with better market growth, and yield advantages. The route structure that maximises marketshare, and variable contribution improving competitiveness is selected Identify key changes to Long Haul, Medium Haul, Regional and Domestic Identify key changes for better use of alliance and code share partnerships 25
Revenue Deciding on code share, alliance, Joint Venture Strategies Network Planning Long & Medium Term Strategic Plan Market Forecasting Capacity growth (incl competitors) Average Fares Costs Service Objectives Scenario Development Hub Optimisation Changes to Fleet Plan Network Design MIDT/BIDT Shorth Term Network Planning Long & Medium Term Strategic Plan MIDT/BIDT Scenario Development Network Design Identify value of current codeshares Identify new codeshare opportunities to improve sustainable variable conytribution Monitor Performance of current codeshare agreements Identify alliance to opportunitie improve sustainable variable contribution Monitor execute changes to improve gains from the current alliance Identify Joint Venture Partners to improve sustainable variable contribution Monitor Benefits from JV partnership Alliances Shorth Term Pricing Alliances Contact candidate airlines and initiate new codeshare agreements Develop code share agreement Execute codeshare agreements Contact alliances to initiate membership execute Alliance Participation Contact JV Partners towards agreement Execute Joint Venture Agreement 26
Determination of code share benefits Following the network optimisation analysis, bilateral and codeshare development opportunities can be identified and examined or long-haul flights with codeshares to other alliance hubs including beyond points, medium/short-haul flights in a feeder role. As some alliances selectively restrict code shares with rival alliances, the value of current code shares must be evaluated. beneficial for the airline. Example: Value of Current Codeshares 27
Evaluation of Alliance Benefits Network Benefits Additional pax due to meaningful and advantageous connections. Develop the best strategic fit with the alliance for own strategy Different Objectives feeder to alliance hubs protect stratetic interests Bilateral agreements excluding other airlines. 28
Evaluation of ATI Benefits ATI Benefits: Commercial and operational alliance-wide cooperation, reciprocal participation in each other s FFP, proration of passenger fares, co-operation on facilities and passenger handling, lounge exchange program, common promotion and advertising common procurement Category Low High Revenue Com es From CRM 1.5 1.5 CRM improvements FFP 5 15 Opportunity cost of not having ATI/Open Skies 0 0 Increase costs per KM to suppliers using Alliance FFP. Could lose many benefits currently offered from Alliance Low er COUNTRY distribution costs 6 9 Reduce commissions/overrides Net Fares in COUNTRY mkts 0 0 Better coordination of net fares Target corporate accounts 0 0 Internet sales increase 0 0 Increase in COUNTRY sales 30 30 Competitive effect in COUNTRY marketplace 0 0 Offer corporations deals for their entire travel needs Joint coordination of sales campaigns & promotions Combination of pricing, RM, sales & marketing Competitive response (pricing, RM, sales & marketing) Low er Country distribution costs 39 39 Reduce distribution costs Negative competitive effect in domestic marketplace 0 0 Franchise Country CTO's 0 0 Competitors erode Client market share Spin-off Country CTO's through franchise concept 29
Joint venture success requires careful planning, stakeholder engagement and change management Realistic assumptions, especially on yield increases Governance of network, pricing, revenue management, distribution Cultural fit Tone of the Joint Venture Discussions Clear execution and communication plan towards JV, M&A activities Focus on revenue growth not just cost reduction Equity, ownership issues/value part of the business plan, as well as network and other benefits Emphasis of the alternative scenario during discussions 30
Critical success factors for successful JV s and MA s Benefits Pre-merger Agreements Delta/Northwest Sufficient time Both Planning and Execution AF/KLM Business Case + Communications Plan + Funds US Airways / United was blocked. Economies of Scale Purchasing Synergies IT Synergies Maint. Synergies Corp. Planning Synergies Marketing Synergies Financial Synergies Economies of Scope Network Optimization New Market Growth Economies of Destiny Hubbing Alliances & Mergers Mergers Alliances 0% 20% 40% 60% 80% 100% Source: Dr Iatrou, Global symposium on Air Transport Liberalisation ICAO Dubai, results of global survey of 32 airlines Realistic expectations + Benefits Cultural fit + Change management IT Don t Touch Brands Governance and organisation for JV M&A management
InterVISTAS Client Experiences Selected Current Clients Qantas Malaysian Airlines Garuda Turkish Airlines, MAZ Holding, DAS Holding, Oman Airways, Sri Lanka Airlines, RAK airlines, Royal Jordanian Porter Airlines Etihad British Airways Amadeus Belleair Sectors Team Members Client Experiences: 60 + Airlines Regions Europe, Middle East, South Asia, Eastern Europe 32 32
Our Airline Practice Service Lines are Focused on Airline Strategy and Airline Performance Improvement Strategy and Finance Performance Improvement Strategy Develop strategy, feasibility studies and business planning Market Forecasting (Airline, Airport, MRO, Cargo) Start up Airline and MRO feasibility and business plan Mergers and acquistions planning Network and Fleet Planning Develop and optimise network and route plans for airlines Route Planning and Schedule Development, Alliances Hub design and optimisation, slot remarketing Fleet planning, Aircraft leasing and remarketing Financial Services Evaluate airline investment opportunities Due diligence (Airline, Airport, MRO, Cargo, GH) Privatization and spin-off and financing of Airline, MRO, Pilot School, GH, Cargo Commercial Improvement Airline Revenue Improvement Pricing and Revenue Management Marketing, Sales and Distribution Technology solutions supporting revenue growth Operations Improvement Airline Productivity Improvement and Cost Reduction Diagnostic and Cost reduction MRO Crew Resource Management Integrated Operations Control Restructuring & Change Management Airline Transformation and Turnaround Restructuring (Airline, MRO, Cargo, Aerospace) Start up Implementation Performance management Organisation improvement and change management. IT Strategy IT Implementation 33
Thank You! Emre.Serpen@Intervistas.com +447944163891 www.intervistas.com