Smarter Planet: Airlines

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    12-Sep-2014
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Success on the new horizon depends on deeper, more holistic and informed planning, collaboration and execution: (1) Predict demand and optimize capacity and assets, (2) Improve operational efficiency while reducing environmental impact, (3) Improve end-to-end customer experience, (4) Assure safety and security.

Transcript of Smarter Planet: Airlines

  • 2010 IBM Corporation

    Lets Build a Smarter Planet: Airlines

    George Mattathil -

  • 2010 IBM Corporation

    Lets build a smarter planet: Airlines

    Headwinds, horizons and hopecompeting on a smarter planet.

    HEADWINDS

    There are significant business environment factors and trends

    that will likely change the airline industry forever.

    HORIZONS

    There are now, and will continue to be, growing opportunities to capture and

    transform data and to use the resulting information in new and powerful ways.

    HOPE

    For airlines, those horizons can be leveraged to create new strategies,

    capabilities and insights to drive competitiveness and long-term viability.

  • 2010 IBM Corporation

    Lets build a smarter planet: Airlines

    Strong headwinds are setting global airline industry profitability back.

    AT THE TOP LINE

    Current predictions are for 2009 passenger revenues to be off by nearly 16%, with cargo

    revenues off nearly 18%. By midyear, average international ticket prices had fallen 19% YTY,

    while 21% fewer premium passengers were flying.

    AT THE COST LINE

    While some have benefited positively from hedging positions, fuel price increases of 56% from

    their YTD low, airline service costs growth to over US$54B worldwide, imbalances in capacity

    and pending environmental regulation all promise even more cost line concerns.

    AT THE BOTTOM LINE

    Average yields have cratered by over -12% for passengers and -15% for freight; and despite a

    reduction in capacity, ever-growing break-even load factors are not being met. The industry

    has already lost US$6B (1st half estimate) and is positioned to nearly double that by year-end.

  • 2010 IBM Corporation

    Lets build a smarter planet: Airlines

    Asia-Pacific are enjoying robust demand growth.

    10%

    5%

    0%

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    RPK GROWTH FTK GROWTH

    RP

    K A

    ND

    FT

    K %

    CH

    AN

    GE

    ASIA-PACIFIC INTERNATIONAL PASSENGER

    AND CARGO GROWTH

    AU

    G 0

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    SE

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    20%

    15%

    25%

    35%

    30%

  • 2010 IBM Corporation

    Lets build a smarter planet: Airlines

    Top-line performance is also being bolstered by the gradual return of business and premium travel categories.

    Globally, companies that cut back on business travel are spending once again:

    In 2009, 93% reported a reduction in their companies travel spending (ACTE Survey, March 2009) 1 in 3 managers expect spending to increase in the next 12 months (AirPlus Business Travel Index, August, 2010)

    69% reported reductions in overall travel budget (HBR Survey, July 2009)

    6.2% increase in global business travel spending expected in 2010 (NBTA Foundation , August 2010)

    And companies are also spending more on premium class air travel:

    65% of travel managers stated that they had made changes to their existing travel policy to reflect specific

    spending limitations (ACTE Survey, March 2009)

    10% of business travelers fly Business Class, compared to 8% in 2009 (AirPlus Business Travel Index , August 2010)

    47% reported use of less expensive class of travel (HBR Survey, July 2009)

    33% of travel managers expect an increase in spending in 2010 (AirPlus Business Travel Index , August 2010)

    But not all markets are expected to enjoy uniformly robust corporate travel recovery:

    Japanese manufacturing sector continued to slow in 2H10, putting downward pressure on corporate travel Industrial growth in India slowed to in June to just 7.1% which may dampen business travel demand Despite output growth from several countries in Western Europe, uncertainty about the speed and shape

    of the economic recovery in the rest of Europe will depress demand, including demand for business travel

  • 2010 IBM Corporation

    Lets build a smarter planet: Airlines

    One important threat to business travel is the emergence of virtual alternatives to physical travel, such as telepresence.

    Surveys show the current economic environment is driving higher use: 60% of respondents had cut travel through remote conferencing use (BTN Survey, July 2009) 79% reported greater use of conference calls, WebEx, and telepresence (ACTE Survey, June 2009) 44% surveyed believed that video conferencing would increase in use, and 71% felt that telepresence

    was more time-efficient than face-to-face meetings (HBR Survey, July 2009)

    And some analysts are spelling out the direct impact to airlines: Gartner: telepresence will replace 2.1 million airline seats per year by 2012 (Gartner, Feb 2009) Haddock Research: 35% 40% of airline seats for American business travel are threatened

    by telepresence (Haddock Research & Branding, May 2009)

    And business travel suppliers are getting on board!

    American Express Corporate Travels Virtual Meetings eXpert

    Based upon criteria such as price, duration of trip, purpose, environmental impact and more, the solution will alert travelers at the time of booking on available telepresence

    and high-end virtual meeting options, and guides them through scenarios that

    determine if it makes sense to take the trip virtually.

  • 2010 IBM Corporation

    Lets build a smarter planet: Airlines

    Air travel is also under threat from high-speed rail which is perceived as more convenient, greener and competitively priced.

    70%

    80%

    50%

    Share of Madrid-Seville market AVE

    Estimated share of UK 3-hour domestic market SNCF

    46%

    63%

    60% Decline in inter-city

    flights THSR

    Share of Tokyo-Akita

    market JR East

    Share of Madrid-Barcelona

    market AVE

    Share of Korea market KTX

    An airplane on wheels Air France-KLM Chairman, Jean-Cyril Spinetta on the TGV.

  • 2010 IBM Corporation

    Lets build a smarter planet: Airlines

    From a cost-line perspective, the new unknown will be environmental costs for greenhouse gas emissions, which will have a further impact on premium demand as costs are passed on to passengers.

    15% Anticipated shortfall (77M tons of CO2)

    in allowances for airlines from EU Carbon

    Trading Scheme in 2012 (estimated to

    cost US$1.4 $1.6B to the industry and adding an average cost per ticket of

    US$13+ to a short-haul flight and US$60

    for a long-haul flight).

    US$7B Expected annual cost to airlines to

    meet global IATA commitment for

    carbon neutral growth in 2020.

    DELTA

    UNITED

    BRITISH

    RYANAIR

    QANTAS

    CONTINENTAL

    EASYJET

    THAI

    AMERICAN

    AIR FRANCE/KLM

    $0 $10 $20 $30 $40 $50 $60 $70 $80

    US$ MILLIONS

    ADDITIONAL COSTS FROM ETS ALONE 2012 COST FOR CARBON CREDIT PURCHASES

  • 2010 IBM Corporation

    Lets build a smarter planet: Airlines

    160

    GLOBAL LANDING FEES QUARTERLY CHARGES TO AIRLINES

    150

    140

    130

    120

    110

    100

    4Q

    06

    1Q

    07

    2Q

    07

    3Q

    07

    4Q

    07

    1Q

    08

    2Q

    08

    3Q

    08

    4Q

    08

    1Q

    09

    2000 = 100

    Airport service charges

    collectively accounted

    for nearly 8% of AP

    airlines operating costs.

    Meanwhile, higher fuel and airport services costs may compound the issue and increase average costs or cost volatility.

    JET FUEL PRICE TREND

    Singapore Kerosene-Type Jet Fuel

    Spot Price (Cents per Gallon)

    0

    50

    100

    150

    200

    250

    300

    350

    2005 2006 2007 2008 2009 2010

    On a global basis, Jet Fuel is

    down almost 30% from 2008

    and up 25% from 2009 to 2010

  • 2010 IBM Corporation

    Lets build a smarter planet: Airlines

    These headwinds make it difficult to predict future performance.

    GLOBAL INDUSTRY PROFITABILITY TOTAL INDUSTRY PROFIT/LOSS PAST 20 YEARS

    $15

    1989

    $10

    $5

    $0

    -$5

    -$15

    -$20

    1990

    1991

    1992

    1993

    1994

    1995

    1996

    1997

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010F

    US

    $ B

    ILL

    ION

    S

    -$10

    2010 forecasts

    are positive

  • 2010 IBM Corporation

    Lets build a smarter planet: Airlines

    Bigger is NOT always better. Smarter is better

    INVERSE RELAT