VIS­IT­ING THE LAND OF THE MORN­ING CALM

Avi­a­tion Busi­ness trav­elled to Seoul to at­tend last month’s IATA An­nual Gen­eral Meet­ing, dis­cov­er­ing the lat­est de­vel­op­ments with the global air trans­port mar­ket, as well as the chal­lenges the in­dus­try is fac­ing in 2019

Aviation Business - - CONTENTS -

AVB TRAV­ELLED TO SEOUL TO AT­TEND LAST MONTH’S IATA AN­NUAL GEN­ERAL MEET­ING, DIS­COV­ER­ING THE LAT­EST DE­VEL­OP­MENTS WITH THE GLOBAL AIR TRANS­PORT MAR­KET, AS WELL AS THE CHAL­LENGES THE IN­DUS­TRY IS FAC­ING IN 2019

Last month, the In­ter­na­tional Air Trans­port As­so­ci­a­tion (IATA) hosted its 75th IATA An­nual Gen­eral Meet­ing (AGM) and World Air Trans­port Sum­mit (WATS) in Seoul. Run­ning from the 1 – 3 June, this marked the first time that Korean Air

played host to the AGM and the first time the event has been held in the Re­pub­lic of Korea. Over 300 hun­dred of the world’s press at­tended, along with rep­re­sen­ta­tives from among IATA’s 290 mem­ber air­lines.

Un­der the theme of The Vi­sion for the Fu­ture, the 75th IATA AGM touched on a num­ber of top­ics, which in­cluded in­creas­ing de­mand for con­nec­tiv­ity, air­line dig­i­tal trans­for­ma­tion, in­fra­struc­ture ca­pac­ity, sus­tain­abil­ity, as well as the fu­ture work­force.

The event con­cluded with both the an­nounce­ment of Lufthansa Group CEO Carsten Spohr’s ap­point­ment

as Chair­man of the IATA Board of Gov­er­nors (BoG) and that the 76th IATA AGM will be hosted by KLM Royal Dutch Air­lines in Am­s­ter­dam, The Nether­lands.

Down­grade in the works

Dur­ing the open­ing of the an­nual gen­eral meet­ing, Alexan­dre de Ju­niac, IATA’s di­rec­tor gen­eral and CEO, painted a cau­tious state of the global air trans­port mar­ket, shar­ing that the or­gan­i­sa­tion had down­graded its 2019 out­look.

The as­so­ci­a­tion has pro­jected $28bn profit for the global air trans­port in­dus­try for 2019, down from $35.5bn fore­casted back in De­cem­ber 2018. Ad­di­tion­ally, IATA noted that is a de­cline on 2018 net post-tax prof­its, which the as­so­ci­a­tion es­ti­mates at $30bn.

Fac­tors that are neg­a­tively af­fect­ing the busi­ness en­vi­ron­ment in­cludes the in­crease in fuel prices, as well as a de­crease in global trade. In the case of the for­mer, the high price of fuel from 2018, which was recorded as $71.6/bar­rel Brent, is ex­pected to con­tinue well into 2019 with an av­er­age cost of $70.00/bar­rel Brent ex­pected. This is 27.5% higher than the $54.9/bar­rel Brent recorded back in 2017.

The air­line as­so­ci­a­tion ex­pected that fuel costs will ac­count for 25% of to­tal op­er­at­ing costs, a one and half per­cent­age point in­crease over the 2018 fig­ure.

Over the course of 2019, over­all costs are pro­jected to in­crease by

7.4%, sur­pass­ing a 6.5% in­crease in rev­enues. This, in turn, will likely squeeze net mar­gins down from the 3.7% recorded to 2018, to 3.2% for the cur­rent year. Ad­di­tion­ally, IATA ex­pects a profit per pas­sen­ger will de­cline from $6.85 recorded in 2018 to $6.12 for 2019.

“This year will be the tenth con­sec­u­tive year in the black for the air­line in­dus­try. But mar­gins are be­ing squeezed by ris­ing costs right across the board—in­clud­ing labour, fuel, and in­fra­struc­ture. Stiff com­pe­ti­tion among air­lines keeps yields from ris­ing,” said de Ju­niac.

“Weak­en­ing of global trade is likely to con­tinue as the US-China trade war in­ten­si­fies. This pri­mar­ily im­pacts the cargo busi­ness, but pas­sen­ger traffic could also be im­pacted as ten­sions rise. Air­lines will still turn a profit this year, but there is no easy money to be made.”

Other pro­jec­tions from IATA point to a de­cline in re­turn on in­vested cap­i­tal earned. Ac­cord­ing to the as­so­ci­a­tion, the re­turn on in­vested cap­i­tal earned will drop by 0.5 per­cent­age points from last year’s fig­ure of 7.9%. While ex­ceed­ing the av­er­age cost of cap­i­tal that is es­ti­mated at 7.3%, IATA notes that the buf­fer is quite nar­row.

De­spite ef­forts to in­stil “fi­nan­cial re­silience” through­out the global in­dus­try, there re­mains a sub­stan­tial gap be­tween the per­for­mance of car­ri­ers in North Amer­ica, Europe and Asia-Pa­cific and those that are based in Africa,

Latin Amer­ica and the Mid­dle East.

“The good news is that air­lines have bro­ken the boom-and-bust cy­cle. A down­turn in the trad­ing en­vi­ron­ment no longer plunges the in­dus­try into a deep cri­sis. But un­der cur­rent cir­cum­stances, the great achieve­ment of the in­dus­try—cre­at­ing value for in­vestors with nor­mal lev­els of profitabil­ity is at risk. Air­lines will still cre­ate value for in­vestors in 2019 with above costof-cap­i­tal re­turns, but only just,” said de Ju­niac.

Chal­lenges for the Mid­dle East

Over in the Mid­dle East, IATA noted that Mid­dle East-based car­ri­ers are

This year will be the tenth con­sec­u­tive year in the black for the air­line in­dus­try. But mar­gins are be­ing squeezed by ris­ing costs right across the board.” Alexan­dre de Ju­niac

ex­pected to de­liver a com­bined net loss of $1.1bn, which is fur­ther down from the $1.0bn loss recorded in 2018. Equat­ing to a $.01 loss per pas­sen­gers and a neg­a­tive net mar­gin of -1.9%, the Mid­dle East has faced chal­lenges in both the busi­ness en­vi­ron­ment and to busi­ness mod­els. The for­mer is ex­pected to pro­long losses for air­lines in the re­gion over 2019.

In a me­dia brief­ing that in­cluded jour­nal­ists from both Africa and the Mid­dle East, Muham­mad Ali Al­bakri, re­gional VP, Africa and the Mid­dle East, shared an up­date on the progress of the re­gion that sup­ports 8.2 mil­lion jobs and gen­er­ates $185.8bn in GDP. Of those fig­ures, the Mid­dle East sup­ports 2.4 mil­lion jobs in the re­gion and gen­er­ates $130bn in GDP.

Re­cent find­ings from IATA also point out that the Mid­dle East’s com­pound an­nual growth rate for 2018 – 2037 will be 4.4% and will record an ex­tra 278 mil­lion pas­sen­gers to reach a to­tal of 501 mil­lion by 2037.

“We have three dif­fer­ent sce­nar­ios; we have an op­ti­mistic sce­nario, an asis sce­nario, and a pes­simistic sce­nario. If you looked at all three sce­nar­ios, you see that the de­mand for travel by peo­ple in the re­gion is in­creas­ing in terms of travel,” said Al­bakri.

“Africa and the Mid­dle East is one of the most promis­ing re­gions of all the re­gions world­wide.”

De­spite the for­ward progress, how­ever, the re­gional VP is quick to point that there are still chal­lenges that need to be over­come. One such is­sue shared be­tween Africa and the Mid­dle East is the con­stric­tion of profit mar­gins.

Where the global av­er­age profit per pas­sen­gers was recorded reach­ing $6.12 in 2019, air­lines in the Mid­dle East saw a de­cline to -$4.46 per pas­sen­ger, while car­ri­ers in Africa lost $1.09 per pas­sen­gers.

Delv­ing more specif­i­cally into the is­sues faced in the Mid­dle East, Al­bakri noted that de­spite a re­duc­tion in oil prices that should have ben­e­fit­ted air­lines, oil pro­duc­ing na­tions moved to re­coup lost rev­enue through ad­di­tional taxes and charges. This, in turn, im­pacted the Mid­dle East’s avi­a­tion mar­ket.

The on­go­ing po­lit­i­cal in­sta­bil­ity of the re­gion has also af­fected the Mid­dle East’s per­for­mance, par­tic­u­larly when it comes to the man­age­ment of the airspace. The fact that most of the airspace is man­aged by the mil­i­tary has led to se­verely con­stricted zones of op­er­a­tion within a small ge­o­graphic area. This has re­sulted in an in­crease in the num­ber of ATC is­sues across, as well as a sig­nif­i­cant in­crease in the av­er­age de­lay of flights.

Point­ing a pre­vi­ous study done on the re­gion, Al­barki ex­plained that the av­er­age de­lay per flight at­trib­uted

We are work­ing very hard with the reg­u­la­tory and gov­ern­ments to re­ally ad­dress the is­sue of taxes and charges, to bring them down. Im­prov­ing air traffic man­age­ment that’s a huge pri­or­ity for us in the Mid­dle East. Skies are over con­gested” Ali Al­bakri

to ATC is­sues reached as high as 29 min­utes. Un­less ad­dressed soon, this fig­ure could dou­ble by 2025, re­sult­ing in over $7bn in lost pro­duc­tiv­ity time to pas­sen­gers, while also adding $9bn to air­line op­er­at­ing costs.

The fi­nal chal­lenge is around ca­pac­ity-build­ing, se­cur­ing the nec­es­sary tal­ent within the re­gion to cope with fu­ture air de­mand.

“We are work­ing very hard with the reg­u­la­tory and gov­ern­ments to re­ally ad­dress the is­sue of taxes and charges, to bring them down. Im­prov­ing air traffic man­age­ment that’s a huge pri­or­ity for us in the Mid­dle East. Skies are over con­gested,” shared Al­bakri.

“And ca­pac­ity build­ing in terms of knowl­edge and skilled re­sources that will be able to pro­vide the sup­port needed for the ex­pected growth in the re­gion,” he con­cluded.

Five key ar­eas of fo­cus

As part of its an­nual gen­eral meet­ing, IATA dis­cussed and passed five res­o­lu­tions that the as­so­ci­a­tion will now fo­cus its ef­forts to­wards.

The first res­o­lu­tion to be passed with a unan­i­mous vote called on gov­ern­ments to im­ple­ment the

Car­bon Off­set­ting and Re­duc­tion Scheme for In­ter­na­tional Avi­a­tion (COR­SIA), as es­tab­lished through the UN’s In­ter­na­tional Civil Avi­a­tion Or­ga­ni­za­tion (ICAO).

As the first global car­bon pric­ing scheme for any in­dus­try sec­tor, COR­SIA is set to cap net CO2 emis­sions of the global avi­a­tion sec­tor at 2020 lev­els. Build­ing upon the foun­da­tion formed by the ini­tia­tive, this year’s IATA AGM looked to the fu­ture and es­tab­lished the goal to re­duce net emis­sions to half 2005 lev­els by 2050. To achieve this, air­lines are en­cour­aged to in­tro­duce all avi­a­tion in­dus­try stan­dard fuel ef­fi­ciency prac­tices, as well as par­tic­i­pate in a long-term switchover to sus­tain­able fu­els.

The sec­ond area ex­plored was the con­cept of a global air­port slot sys­tem, to­wards which AGM called upon gov­ern­ments to ad­dress ca­pac­ity short­ages. As part of the res­o­lu­tion, the or­gan­i­sa­tion reaf­firmed that the World­wide Slot Guide­lines (WSG) is the global stan­dard for the poli­cies and pro­ce­dures of air­port slot al­lo­ca­tion and man­age­ment.

IATA mem­bers voted for the res­o­lu­tion aimed at de­vel­op­ing the global de­ployed of Ra­dio Fre­quency Iden­ti­fi­ca­tion (RFID) for bag­gage track­ing. Part of this in­cludes the in­tro­duc­tion of mod­ern bag­gage mes­sag­ing stan­dards that will, in turn, bet­ter track pas­sen­ger bag­gage in real-time. To com­ply with the res­o­lu­tion, air­lines are en­cour­aged to switch to bar-coded bag tags with RFID in­lays and to utilise RFID data alerts that en­gage pro­cesses with air­ports and their re­spec­tive ground han­dlers. This, in turn, will min­imise in­stances of the mis­han­dling of lug­gage.

A con­cept that IATA has pushed for the past cou­ple of years and im­ple­mented to a limited de­gree at select lo­ca­tions, the or­gan­i­sa­tion has now re­solved to push the global im­ple­men­ta­tion of the One ID ini­tia­tive. Util­is­ing a sin­gle bio­met­ric iden­ti­fier, the idea is that a pas­sen­ger can be pro­cessed through an air­port and through­out the en­tire jour­ney, with­out the need for paper travel doc­u­men­ta­tion. The newly en­acted res­o­lu­tion calls for cross-col­lab­o­ra­tion be­tween air­lines, air­ports, and gov­ern­ment author­i­ties to im­ple­ment a pa­per­less pas­sen­ger process util­is­ing bio­met­ric tech­nol­ogy.

The fi­nal res­o­lu­tion passed is fo­cused on im­prov­ing the air travel ex­pe­ri­ence for the es­ti­mated one bil­lion peo­ple liv­ing with dis­abil­i­ties world­wide. IATA’s mem­bers are com­mit­ted to en­sur­ing that pas­sen­gers with dis­abil­i­ties have ac­cess to safe, re­li­able and dig­ni­fied travel. As part of the res­o­lu­tion, air­lines will work with their re­spec­tive gov­ern­ments and other el­e­ments of the travel sec­tor to har­monise reg­u­la­tions and de­liver a global stan­dard that will im­prove travel for peo­ple of de­ter­mi­na­tion.

Pi­eter El­bers’ KLM Royal Air­lines will play host to the 76th IATA AGM in 2020.

The as­so­ci­a­tion has pro­jected $28bn profit for the global air trans­port in­dus­try for 2019, down from $35.5bn fore­casted back in De­cem­ber 2018.

Al­bakri: Africa and the Mid­dle East is one of the most promis­ing re­gions of all the re­gions world­wide.

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