Industry Trends and Negotiating Strategies

Neil Hammond

GoldSpring Consulting

Industry Economic TrendsIndustry ProjectionsGame ChangersCompetition BarriersAirline UpdateCorporate DealsBeyond the Discounts

Industry Economic Trends

Airline Industry

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100

200

300

400

500

600

700

800

900

2005200620072008200920102011201220132014201520162017

Revenue

Revenue

Industry revenue peaked in 2014 and has temporarily flattened out

The largest airline represents 5.3% of the global market.

Source : IATA

Profitability

-6

-4

-2

0

2

4

6

-30

-20

-10

0

10

20

30

40

EBIT Profit, $ billion EBIT margin

Profitability in 2015 and 2016 exceeded the combined profits for the previous 40 years

Profits have declined in 2016, 2017 but will stabilize at historically good levels

Source : IATA

Return on Capital

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2

4

6

8

10

12

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

ROC %

ROC %Source : IATA

Return on Capital has recently exceed the cost of money which will stimulate investment

Profits by Region

-5

0

5

10

15

20

25

2011 2012 2013 2014 2015 2016 2017

North America Europe Asia-Pacific

Middle East Latin America Africa

Since 2013 North American airlines have represented 50% of the global profits

Source : IATA

Airline Industry

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2

4

6

8

10

12

14

16

2011 2012 2013 2014 2015 2016 2017

North America Europe Asia-Pacific

Middle East Latin America Africa

Traffic (RPK) Year over Year Growth

RPK : Revenue Passenger Kilometers

Source : IATA

Airline Industry

-2

0

2

4

6

8

10

12

14

2011 2012 2013 2014 2015 2016 2017

North America Europe Asia-Pacific

Middle East Latin America Africa

Capacity (ASK) Growth

ASK : Available Seat Kilometers

Source : IATA

Airline Industry

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1

2

3

4

5

6

7

8

2011 2012 2013 2014 2015 2016 2017

RPK ASK

Traffic Versus Capacity

Capacity has lagged marginally. Higher yields?

Source : IATA

The effective cost of air travel has decreased by 65% over the last 40 years.

Industry Projections

Airline Industry 20 Year Forecast

Boeing Forecast

Air travel has proven to be a resilient market over the last several decades, growing at an annual average rate of more than 5 percent per year. Boeing forecasts robust demand to continue over the next 20 years. Economic growth, increasing consumer spending on services, growing middle classes in emerging markets, and evolving airline business models support this long-term outlook.

Boeing Forecast

Air travel has proven to be a resilient market over the last several decades, growing at an annual average rate of more than 5 percent per year. Boeing forecasts robust demand to continue over the next 20 years. Economic growth, increasing consumer spending on services, growing middle classes in emerging markets, and evolving airline business models support this long-term outlook.

Boeing Forecast

To serve an air travel market projected to be 2.5 times larger in 20 years, the global commercial jet fleet is projected to double in size by 2036. In addition to the need for new airplanes to meet growth demand, three quarters of today’s 23,500 commercial jets are forecast to need replacement over the next 20 years, contributing to overall demand for 41,030 new airplane deliveries by 2036.

Boeing Forecast

North America’s share of the global market place will drop significantly over the next 20 years.

China will increase its share, matching Europe and almost closing the gap with North America

Game Changers?

Boeing Forecast

The new Boeing 737- MAX 8 has a range of 3,900 miles

Boeing Forecast

The new Boeing 737- MAX 8 will be able to serve the shorter Trans Atlantic markets.

The economics of the single aisle plane will allow smaller cities to be connected

Low cost carriers will begin to service these markets.

Boeing Forecast

Low-cost carrier (LCC) Norwegian has performed its first commercial transatlantic flights using the Boeing 737 MAX

Air Canada has just announced that they will operate the 737 MAX on select Trans Atlantic flights.

United have indicated that they will likely use the 737 MAX for transatlantic routes but not immediately.

Driverless Cars

• Global $80 billion investment in autonomous vehicles in the last 3 years

• $2.7 billion in ADAS and autonomous driving components sold in 2016

• 40,000 people killed on US Roads annually

• 61% of people would prefer to be in a human controlled vehicle

• 55% would trust an autonomous vehicle if the stats prove a superior safety record

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Driverless Cars

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Driverless Cars

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Driverless Cars

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• My BOS->DC Trip– Planned– Leave for Airport – 5.30pm– Take Off 7.40pm– Land 9.40pm– Arrive Destination 11pm– Meeting 9am next day

Or

• Drive (7 hours)– Stay longer at previous event (Dinner,

Network)– Overnight Autonomous Drive leave 11pm– Arrive 6am

Hyperloop

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Hyperloop

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Hyperloop

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• Proposed projects and routes– LA / San Francisco– Chennai / Bangalaru (LOI Pending)– Amaravathi / Vijayawada (Signed)– Mumbai / Pune (MOU signed)– Helsinki / Stockholm (Business Case)– Jebel Ali / Dubai (Underway)– Moscow Passenger Routes– Hunchun / Vladivostok / NOKO border

Supersonic Flight

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Supersonic Flight

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•Aerion Supersonic AS2 business jet - will carry up to 12 passengers at a top cruise speed of Mach 1.4. Power: three modified GE Aviation turbofans. The company promises "boomless" cruise at Mach 1.2. First commercial flights planned for 2026.•Boom Supersonic airliner - will carry 55 passengers at Mach 2.2. Power: three non-afterburning, medium-bypass turbofans with variable geometry intake and exhaust. Sonic boom will be "30 times quieter than Concorde". First commercial flights planned for 2025.•Spike Aerospace S-512 supersonic jet - will carry 12-18 passengers at Mach 1.6. Power: two turbofans. First commercial flights planned for 2025.•Aerospatiale/BAC Concorde - carried 92-128 passengers at Mach 2.04. In service 1976-2003.•Tupolev Tu-144 - carried up to 140 passengers at Mach 1.8. In service 1977-78.

Which will you try first?

• Single Aisle Transatlantic

• Driverless Car

• Hyperloop

• Supersonic Flight

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Competition Barriers

FREEDOM?

The international aviation is regulated by a complex web of over 3000 interlocking bilateral air services agreements. In recent years, groups of countries have come together to negotiate air services agreements. These are known as plurilateral agreements, however the majority of international air services are still traded bilaterally.

As a result, much the global airline industry is a fragmented series of duopolies

Foreign Ownership restrictions

• US, Canada – 25%

• EU – 49%

• Japan – 33%

• Australia – No restriction for domestic

Restrictions easing

• 2007 EU Open Skies• India 0% to 49%• Latin America has relaxed rules to allow the formation

of LATAM• ASEAN (Association of South East Asian Nations) has

relaxed regulations to allow formation of low cost alliances

Restrictions circumvented

• Holding Companies : IAG, Air France KLM Group, Lufthansa Group

• Joint Ventures/ATI : Delta/Virgin Atlantic

• ‘Minority’ Ownership : Etihad (Air Serbia, Darwin, AirBerlin, Alitalia)

Hub and Spoke ModelEven if freedom rights, foreign ownership, unions, geopolitical and domestic government subsidy issues were all resolved, the EU open skies agreement still shows that national loyalty combined with the hub and spoke model are natural inhibitors to a fully competitive market place

Understand Airline Relationships• Airline Holding Companies• Airline• Ownership• Sub contractors• Joint Venture• Alliance• Code Share• Interline

JVs• JV deals are mandatory where international routes are involved and Anti-trust

immunity has been granted.• Pricing and contract terms are controlled by home market carrier• No requirement for JV to provide pricing for home markets of JV partners.• Business model mechanics are specific to carriers and vary.• Advantages

• Expanded network to secondary cities

• Disadvantages• Reduced Competition

Alliances

– Generally moving away from Alliance deals• Strict minimum standards on spend and footprint

• Voluntary participation from carriers

– Minimal advantage for corporation

– Alliance partners still compete against each other

– Cannot share information with lead carrier

Airline Update

Alignment

• Delta (AF, KL, AZ, AM, VA, VS)• Korean JV

• WestJet

• Gol

• American (BA, IB, AY, JL)• Qantas

• China Southern

• Southwest?• United (AC, LH, OS,

SN, LX, NH)• Latin America

• LATAM• Avianca• Copa

China

• China Southern – Sky Team

• Air China – Star Alliance

• China Eastern – Sky Team

• China Airlines – Sky Team

• Cathay Pacific / Dragon Air – One World

Corporate Deals

Small Business Accounts– US carriers are still interested in maintaining a relationship when not selected

as a preferred carrier– Offering discounts with light or no targets

• Value 2% -> 6%– Maintain the relationship– Track Data– This has set / raised the bar on minimum savings that should be achieved in

most programs– If you are getting 3 or 4% for no commitment then your expectations should

be much higher when targets are included

Where there’s mystery, there’s money

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• Complexity in pricing will increase

• This benefits the consumer and the industry

• The effective cost of air travel has decreased 65% in 40 years

• Who wants to be a commodity?

Basic Economy Fares• US carriers have created a basic economy package with the lowest

service possible• Baggage, carry on baggage• Seating• Boarding• Miles• Upgrades

• The majority of managed travel programs have responded by eliminating basic economy from the Lowest Logical Fare (LLF) definition and updating their policies accordingly

Fare Basis Code Qualification

• Instead of making fares available on all Fare codes, some contract terms are restricting discounts to specific fare basis codes. (starting with, containing, position)

• Also different discounts between different fare basis codes in the same fare class.• Estimating savings is more complex as usage by fare basis needs to be considered.• For a new carrier to a program, some of the fare basis codes would not have been

used historically• Carriers control inventory

Booking Class Fare Class Fare Basis Code

B B BFFUS4RT

D J JFFGB7OW

Book Downs• Also known as Multi tiered Pricing or Down Bucketing

• Fare Class JRT / D Discount 50%• Market : YYZ – LHR • Published Fare $10,000• Discounted Fare $5,000• DRT / D Published Fare $6,000• Effective Discount 17% ($6,000 - $5,000) / $6,000 * 100%

• J Fare rules apply – (Value ~3%)

Fixed Fares– A fixed fare (or guaranteed fare) is a flat rate for a specific inventory class– A fixed fare may carry more flexible rules– Since there is a range of fares in each fare class, it may not always be the

lowest– It is capacity controlled so it may not always be available– They may be subject to revision each year– Evaluate the usage in your program– Managing a dynamic environment with a static solution. Hotel programs are

slowly moving to more discount oriented savings as dynamic pricing, restrictions and penalties increase.

RFP Best Practices

• GBTA RFP Package• Give yourself time, extensions• Don’t disclose full schedule

– # of rounds, ability to adjust– Split Rounds– Select primary carriers first– 3 year contracts

Uncovered Spend (White Space)• Point of Sale Country

• It is not a given that your lead carriers and their JV partners will offer discounts in lower spend markets.

• Ask for Point of Origin pricing (SOTO)

• Geography• Ensure that all the routes in a particular point of sale are covered• Good for major markets / pay attention to JV partners

• Inventory• Generally major carriers offer good coverage for domestic travel• International, up to 50% Economy spend is in undiscounted fare

buckets

Uncovered Spend (White Space)Analyze coverage of your airline partners for total coverage.

US CA GB AU IT DE IN CN HK SG BR

$10,075,905 $16,213 $97,262 $4,701

$15,460,836 $56,363 $135,964 $5,647

$11,858,151 $88,657 $53,969

$12,725,535 $93,491 $74,043

$5,470,830 $68,740

$6,443,345 $89,678

$868,774 $59,628 $504,214 $29,561 $1,938

$1,246,760 $223,304 $972,983 $44,837 $2,677

$249,243 $1,323,081

$313,909 $1,639,842

UU $1,703,412 $800 $185

$914,801

$1,157,857

$465,737 $83,927

$717,219 $137,609

$271,366 $98,933

$478,035 $123,613

$184,781 $148,050 $5,348

$331,019 $193,138 $17,859

$134,048

$567,385

RR $11,799 $39,901 $5,561

SS $15,849 $22,894 $69,467 $8,652 $1,309

$524 TT $9,196 $23,478 $708,655

VV $69,959 $2,892 $469 $240

WW $5,762 $3,159

XX $31,702 $145 $1,449 $5,820 $437 $217 $3,360 $3,268

$587 $3,212 YY $2,043 $3,237

ZZ $9,571 $2,402 $1,147 $1,368 $4,763

PP $760 $742 $530 $359

QQ $28,457 $14,405 $13,152

Performance Targets

• Negotiate as much on performance targets as discounts. It is an equal component in the resulting value.

• Acquire your own Fair Market Share data (FMS/QSI)• Share Gap instead of share target

• Ex. Dom Hub +5% share gap versus QSI/FMS• Is adjusted if carrier changes service• Carrier calculates QSI/FMS

Performance Targets

• Revenue share instead of segment share

– Revenue is easier to move than segments

– Carrier might set revenue targets higher

– Revenue is based on coupon price

– Revenue is net of discount

Beyond the discounts - Value• Priority Boarding• Denied boarding protection• Preferred Seating• Priority Rebooking• Service Funds / Points• Status Awards• Status Matching• Upgrades

• Bag Fee Savings/Paid• Club Membership• Club Passes• Traveler Satisfaction Rating• Completion Statistics• Lost Luggage• Loyalty Status Profile• Check in platform

How to use the information• Determine Savings (what you would have paid)

• Determine value

• Review Travel Policy

• Negotiate

• Decision support

• Change Management

However• Most carriers don’t have the mechanism in place to allow

negotiations on ancillaries

• Many value add components offered are not contractual

• They are interested in developing Corporate Recognition programs

Domestic Loyalty program comparisonAirline Program Level 1 Level 2pri Level 3 Level 4

American AAdvantage Gold30/25/$3k

Platinum60/50/$6k

Platinum Pro90/75/$9k

E Platinum120/100/$12k

Delta SkyMiles Silver30/25/$3k

Gold60/50/$6k

Platinum100/75/$9k

Diamond140/125/$15k

United Mileage Plus Silver30 Segs

Gold60 Segs

Platinum90 Segs

1K120 Segs

Southwest Rapid Rewards A-List25/35/--

A-List Pref50/70/--

Alaska Mileage Plan MVP30/20/--

MVP Gold60/40/--

MVP Gold 75k90/75

Jet Blue True Blue Mosaic30/15

However• We need ability to negotiation on segment /

mileage / spend credits towards status– Example : Ability to negotiate a 30 segment annual

credit for company B– Will benefit ALL corporate loyalty program members– Better than individual allocation or status nominations

or matches– Can provide measurable savings / value on benefits

What did we learn?• The Airline industry is healthier than it has ever been• Asia will become a dominant force• The industry is fragmented and market forces will lead very slow

progress toward consolidation and competition. The JV model is currently the workhorse model for growth and servicing corporate clients

• Airline pricing and deals will be ever more complex• Value components are becoming a larger part of negotiations

Thank you

• Questions?