forward thinking

The aviation industry is buoyant heading into 2018, with new routes, products and sales channels all taking off, reports Gillian Upton

On the face of it, the latest IATA BSP figures, of 8% growth and a rise in transactional volumes, point to a strong and growing aviation industry. Statistics highlight that the industry adds a cool £20billion to the UK economy, but its rude health has mixed implications for businesses with significant spend on air travel.

Look at most UK airports and extra capacity is being piled on in the regions. Emirates is launching flights from London Stansted to Dubai this summer, Qatar Airways is adding flights from Cardiff, Wizz Air is expanding at Luton and Virgin Atlantic at Manchester – British Airways, Norwegian and Eurowings are growing too. It’s all about connecting traffic from as many points as possible.

The strategy creates both new short-haul and long-haul operations. Easyjet has launched Southampton-geneva, EdinburghSofia and Gatwick-klagenfurt, plus a raft of others from Berlin Tegel prompted by its partial takeover of Air Berlin’s assets after its demise last year.

British Airways has also benefitted from an ailing airline, acquiring bankrupt Monarch Airlines slots at London Gatwick and subsequently announcing its largest summer schedule at the airport for almost a decade. As well as expanding its shorthaul network, the airline is adding services to Toronto and Las Vegas this summer.

Meanwhile, United Airlines is launching Edinburgh to Washington DC and will also re-instate flights from Heathrow to Denver this year – a non-stop service to one of the airline’s key hubs.

And one of the most notable launches of all comes in March when Qantas commences 17-hour-long flights between Heathrow and Perth – the first non-stop scheduled service between the UK and Australia.

In what looks like a bullish marketplace, new business models are emerging too. Monthly membership ticket type purchases are being offered on high frequency routes, initially London City to Zurich on Surf Air utilising small jets. Having moved from Luton in December, the ‘all you can fly’ model copies a similar model operating successfully in California.

And who can ignore Norwegian's growing low-cost long-haul network from London Gatwick? The carrier currently flies to nine US destinations, plus Singapore.

Boeing 787 Dreamliner have helped make such operations feasible, and money is being poured into new aircraft as more fuel efficient models are launched.

Virgin Atlantic, for example, is nearing completion of a £300million investment programme improving food and beverage, aircraft cabin and its Clubhouse lounges. Last summer it became the first European airline to have a fully wifi-connected fleet.

Arguably, the spectre of NDC – the new platform by which airlines can better display their wares – will bring further opportunities for airlines to carve out new income streams, principally around unbundling and selling ancillaries.

“From the consumer perspective it’s a positive picture,” says the GTMC'S Chief Executive, Adrian Parkes. “NDC will bring a change in how value is perceived.”

But look deeper and there are some dark clouds on the horizon. Consolidation across Europe has already begun, and the mix of extra capacity and stagnant consumer spending can only lead to one thing, and that’s pressure on airfares.

Europe is a more fragmented aviation market compared to say, the US, made up as it is of more smaller airline players who don’t have scale and size, and that doesn’t bode well in a market under pressure.

“To compete effectively airlines need a wide global network and we’re seeing more airline actively seeking out complementary partners in order to offer their customers a wide range of easy connections,” says Virgin Atlantic’s CEO, Craig Kreeger. “As a result, we’re seeing more and more consolidation within the airline industry.”

Virgin’s four-year partnership with Delta Air Lines will be augmented by an extended joint venture with Air France-klm due for completion in early 2019.

The Brexit effect is another unknown quantity which adds to the uncertain climate around the industry, although aviation is at the forefront of negotiations and the weaker pound has at least meant strong inbound travel to the UK.

The delayed decision over extra runway capacity in London is another factor as construction at Heathrow will not commence before 2021. As Adrian Parkes points out: “By 2034 we will reach full airport capacity in the South East so it’s important that regional airports continue to receive investment.”

That is certainly the hope of RABA (the Regional & Business Airports Group), which represents 40 airports in the UK. RABA'S recommendation is that the UK government will improve the UK'S connectivity strategy so that all parts of the UK will be connected to the UK'S global hub at Heathrow.

Some 14 new domestic routes are currently on the drawing board but RABA would like more, stretching from Cornwall Airport Newquay in the southwest to Scottish airports such as Glasgow Prestwick north of the border.

Market dynamics over the next 18 months will impact heavily on the aviation industry, as Brexit negotiations will be in their final stages and new bilateral agreements are hopefully sewn up.

“We need the extra runway capacity earlier,” says aviation consultant Chris Tarry of CTAIRA. “Any reasonable individual should conclude that it’s not expansion at either Heathrow or Gatwick that’s needed, but expansion at both.” This is also the Institute of Directors’ recommendation.

In the short term, however, Tarry predicts that fares will continue to fall. “The economic outlook for the UK is dire, consumer confidence is declining, alongside spending power, but it’ll be great for travellers.”

He adds that the spot price for fuel is 35% higher than it was a year ago, putting airline’s margins under increasing pressure. Fuel is one of the top two expenses for airlines, alongside salaries. And adding fuel

Market dynamics over the next 18 months will impact heavily on the aviation industry, as Brexit negotiations will be in their final stages”

to the fire, the latest IATA forecast  flagged up that labour costs in 2017 would increase by some 3%, a trend likely to continue this year.

“The inescapable conclusion is that airline margins in 2018 and 2019 will fall,” says Tarry. “I’ve got a list of 40 airlines who are either looking for investment, who are struggling or are looking to exit the market. Only a very small number of airlines – the 30 largest – distort the industry picture as they are the only ones still bringing in profits,” he explains.

Tarry believes the small group of outperformers will widen the gap between the rest of the industry and that 2018 and beyond will see a repeat of what we witnessed in 2017 – ie, more financially challenged airlines as the going gets tough.

“There’s more competition than ever before,” says Virgin’s Kreeger. “Gone are the days where there was just one national carrier per country. It’s up to airlines to focus on their strategy, how they differentiate themselves and what makes them stand out from the crowd.”

Time will tell if the extra capacity being poured into regional airports will be sustained. One thing is for sure and that is that while capacity remains high there will be pressure on fares to fall.

American Airlines is one of the industry’s outperformers, delivering profits. The airline is currently taking delivery of a new aircraft every four days, and retiring an old one at the same time.

“In the US we’re in a really healthy spot, making healthy margins so we have the ability to invest,” says Tom Lattig, MD EMEA Sales. But he does not believe the picture is rosy globally. “In Europe, quite a bit of capacity has been added and that gives us some concern. There are a lot of low-cost carriers so we have to think how we can compete with that.

“If there is not enough demand then prices will come down in the short term,” he says. “We need to be a big global company with lots of scale so we can service the big global customers who travel premium, but not forgetting the backpackers too.”

American’s focus for 2018 is premium economy, one of the booming areas industry wide. AA'S partner airline British Airways has had a premium economy cabin for a long time. It will be available on the vast majority of its flights this year, having rolled it out in early 2017. It claims to have been the first US carrier to do so.

More legroom, noise-cancelling headsets and upgraded meal service form American’s premium economy product, which is fairly typical of the extras industry wide. The number of seats in this cabin varies by aircraft type. On American’s A330 for example, the cabin offers 21 seats.

Lattig says that the big uptake has been from leisure travellers but corporates are looking at it too, downtrading from business class on one or both legs of a journey.

Lattig cites one particular corporate who has incorporated premium economy in policy, specifically on any outbound flight from the UK on a daylight flight. The overnight inbound flight remains in business class.

Delta launched its version of Premium Economy – called Comfort+ – first in March 2015 as an upgrade from the main cabin and formally as a separate fare class last autumn. Available on most transatlantic routes and between North America and Africa and Israel, it offers extra legroom and recline, priority boarding, dedicated overhead bin space and amenity bags.

“The popularity of Delta Comfort+ has surged and we’re delighted to bring it to more international markets around our network,” remarked Corneel Koster, Delta’s Senior Vice President EMEA.

Qantas unveiled a revolutionary new Premium Economy seat last year which debuted on its Dreamliners in October. The airline claims a unique recline motion provides “a class-leading” level of comfort. It is also 10% wider than the previous seat, with TV screens that are 25% larger.

If premium economy is the class faring well for airlines, then the region showing the most promise is Asia. The most recent World Economic outlook from the IMF highlights the highest rate of GDP growth over the 2018-2022 period will be from Asia at 6.4%, compared to 1.7% for the Euro area, for example.

So it’s no surprise that everyone is looking eastwards. American Airlines is busy filling the gap in its network with a codeshare with China Southern. “We have a vested interest in working together,” says Lattig. Other airlines are busy launching new routes and upping frequencies into Asia.

The air travel market is very much a picture of two halves, with the big boys soaring ahead and the smaller airlines struggling to keep up.

It’s up to airlines to focus on their strategies, differentiate themselves and show what makes them stand out from the crowd”