airline business july 2013

CONTENTS Contents text CONTENTS Contents text CONTENTS Contents textCONTENTS CCCooonnnnnnnntttttttttteeeeeeeeeeeennnnnnnnnnnnnnttttttttttttttttsssssssssssss ttttttttttteeeeeexxxxxtttt CONTENTS CCoonntttteeeeeeeeeeeeeennnnnnntttssss ttttttteeeeeeeeexxxxxxttttt CONTENTS Cooonnttteeennttsssss tttteexxtt

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flightglobal.com/ab July 2013 | Airline Business | 5

VOLUME 29 NUMBER 7

$# " "!

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SPANISH PAIN page 18

SHOWING APPLICATIONpage 28

HOT TICKETS page 36

AB INTERACTIVE6 IATAs African adventure

BRIEFINGINTERNATIONAL8 IATA Cape Town annual general meeting round-up10 Airlines lift 2013 profit forecast12 Industry titans clash on demand for ultra-large aircraft

AMERICAS14 United keeps a lid on capacity growth

EUROPE15 Turkish chief to remain at helm of expanding carrier 15 Air Berlin reshapes network to streamline operations

ASIA16 AirAsia Japan parents may separate

AFRICA17 AFRAA and IATA in drive to promote African safety17 SA Express plans spin-offs beyond South Africa

SPECIAL REPORTIT TRENDS28 Growing IT A snapshot of the key findings from the

Airline Business/SITA Airline IT Trends Survey 32 Heart of the issue Why IT departments are

being integrated into the centre of the airline business structure

36 Hottest tickets in town Airlines have increasing ways to ensure their seats and products are the most in demand

39 Now its personal SITA chairman Paul Coby looks at the lessons to be learnt from retail in customising offers

FEATURESFOCUS40 Beijing airports How a new airport for Chinas

second city could redraw the map for airlines44 Biofuels Airlines must invest in alternative fuel

production to truly make a difference

REGULARS46 Market outlook Structural change needed for

improved performance in BRIC economies49 Feedback Single solution51 Feedback Nonstop service52 Executives on the move

COMMENT54 Is big still beautiful?

COVER STORY 20 Viking raider

Norwegians chief Bjrn Kjos follows his European campaign with forays into the long-haul market to Asia and North America

Airline Business is published monthly by Reed Business Information. Reed Business Information Ltd 2013. ISSN 0268-7615. Printed in the UK by Polestar, Colchester.

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6 | Airline Business | July 2013

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LOW-COST AND NEW ENGINE SECTORS IN THE SPOTLIGHTDownload our latest Airline Business interactive special reports: one is our regular scrutiny of the low-cost sector, the other is an all-new propulsion-focused special edition. Packed full of videos, graphics and data tables, both interactives are produced in conjunction with CFM International and are fully compatible with PCs and iPads. The interactives can be downloaded free for your iPad using the Airline Business app from the App store. Alternatively, go to: ightglobal.com/iLowCost13 or ightglobal.com/BottomLine

Chief executives from the worlds major airlines gathered in Cape Town for the 2013 IATA AGM in June.

The usual suspects made the headlines this year, including IATAs New Distribution Capabili-ty, safety and the environment. With regard to the latter, members endorsed a key resolution present-ing a single voice ahead of ICAOs

The AGMs CEO panel saw some lively debate, as usual

Billy

Pix

crucial assembly later this year. As usual, the Airline Business team was out in force, gathering all the news and producing three daily papers alongside a stream of on-line news from the event.

Catch up with all the happen-ings at this years AGM and download the digital issues of Airline Business Daily at:ightglobal.com/IATA13

DAILY

INSIDE THIS ISSUEAirbus closes in on A350 first flight 3IATA chairman Joyce on shifting landscape 6Tyler outlines his Cape Town agenda 8Why the pain still rains on Spain 14

IATA bids to change perceptions of NDC 18The big challenge facing SAAs new boss 24Big strides tackling African safety record 28Taking the pulse of the industry 33IATA Airline Business Daily is available online at: ightglobal.com/iata13

Cape CrusaderIATAs touchdown in Cape Town marks its first AGM in Africa for two decades and director general Tony Tyler is leading the associations charge to help the continents airlines realise the regions huge growth potential.The Economist a few years ago referred to Africa, the lost continent, but now everyones talking about Africa, the future continent. The economies in Africa are really starting to go well and everyones excited about the growth potential of this continent, he says.

But improving the regions aviation safety standards must be a key priority if the airlines are to achieve their growth ambitions, he says. The fact of the matter is that African aviation can be right up there with world standards. But theres a lot of work to be done to make that happen. Tyler says the AGM provides a great opportunity to push forward and build the momentum in the complex process needed to achieve this. Full story page 8

IDN_020613_001 1

3IATA chairman Joyce on shifting landscape 6Tyler outlines his Cape Town agenda 8Why the pain st

IATA bids to change perceptions of NDC 18The big challenge facing SAAagenda 8Why the pain stil

18hallenge facing SAA

DAILY

IATA Airline Business Daily is available onli

ne at: ightglobal.com/iata13

Cocktail reception in pictures

5

Asia pain as freight recovery fails to take of

f 6

CSeries and A350 first flights near

12

Low-cost takes steps in Africa

14

The IATA board line-up

16

IATAs retiring safety guru

20

African airlines alliance analysis

22

The Dreamliners return to fight

31

Franz: Lufthansa not pushed

into a commercial relationship

INSIDE THIS ISSUE

IATA is demonstrating how it can offer cons

umers transparency, more information and

a greater choice of fares

with its New Distribution Capability here in

Cape Town.

IATA head of business development passen

ger Yanik Hoyles says the demonstrator on

display at the annual

general meeting shows what software comp

anies, travel agents and travel managemen

t companies may be able

to do under the new standard.

A key feature on show is how a customer ca

n access more information about seat type

s, in-flight amenities

and other parts of the passenger experienc

e during the booking process. That includes

the possibility of being

able to sort and choose fares based on the

amenities on offer, while also allowing pas

sengers to add on addition-

al products, such as in-flight wi-fi, as part of

the same process.

Its about transparency, choice and inform

ation for the consumer, says Hoyles. The

more information you

give to customers, the more choice they hav

e.

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Cocktail reception in pictures

5

ht recovery fails to take off 6

12

The IATA board line-up

16

IATAs retiring safety guru

20

African airlines alliance analysis

22

Dreamliners return to fight 31

INSIDE THIS ISSUE

DAILY

IATA unveiled an improved industry outlook for 2013. But while a collective profit of $12.7 billion may sound a lot, director general Tony Tyler illustrated just how small airline margins are. Last year airlines made about $2.50 for every passenger travelled thats about the price of a coffee. This year we might make $4 less than the cost of a sandwich in most places, he says. This is a tough industry.

See page 3 for full story

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IATA Airline Business Daily is available online at: ightglobal.com/iata13 #IATAagm

Airline chiefs fuel debate at AGM 5American on track to seal merger in Q3 6Air Berlin restructuring takes shape 9Why passengers are the new smokers 10

Big jet demand under the spotlight 12Oneworld begins rapid expansion

16The new world order in the USA

25Whats next for southern Africas carriers 28

INSIDE THIS ISSUE

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flightglobal.com/ab8 | Airline Business | July 2013

BRIEFING INTERNATIONAL

Legacy carriers ponder Gulf tie-ups with caution

MAX KINGSLEY-JONES CAPE TOWN

As more network players manoeuvre to secure partnerships, Lufthansa is carefully examining whether to follow the crowd while American/Oneworld says nothing is ruled out

While much has changed since airline leaders met at the IATA AGM in Beijing a year ago, probably nothing has been more signicant than the way the previously lukewarm network carriers have embraced the Gulf mega-carriers.

Emirates landmark co-opera-tion deal with Qantas put the ball in motion when they struck a ground-breaking alliance in Sep-tember 2012. That was one of a series of changes which led to Qatar Airways being accepted into Oneworld and Etihad partnering with formerly vocal critics Air France-KLM and Air Canada. If you cannot beat them, join them seems to be the order of the day.

As Europes network carriers jostle for position in the changing world order, Lufthansa now stands alone as having no link with one of the big three Gulf carriers.

We are carefully observing how the world is moving forward

France-KLM and Qatar/One-world developments that oc-curred in late 2012, Lufthansa had a calm look at its own posi-tion with regard to the Gulf play-ers, says Franz. We did not feel we had to act immediately.

Likewise, Oneworld chairman and American Airlines president Tom Horton also has an open mind on Emirates. While One-world member Qantass partner-ship with the carrier has been concluded outside of alliance, Horton says nothing is off the table with regards to a potential tie-up between Oneworld and the unaligned Dubai carrier.

We at American and Oneworld are in constant talks with airlines around the world and well pursue ones that make sense to Oneworld members, says Horton.

He adds that the tie-up was Qantass decision. They had a very unique challenge that they had to resolve. O

Franz: never say never to Gulf link

IATA will bring its annual gen-eral meeting to Doha in 2014, after announcing Qatar Airways will host the event.

It will be the fourth time the AGM has been held in the Middle East, but the rst since 1997s meeting in Jordanian capital Amman. Plans to hold the 2011 event in Cairo ended with the Arab Spring political disturbances.

Qatar Airways has been an in-creasingly prominent player at IATA, arguing strongly in 2011 for greater board transparency ahead of much of the restructuring of its governance subsequently carried out by director general Tony Tyler.

The airlines out-spoken chief executive Akbar Al Baker has served on the IATA board of gover-nors since 2012. O

Carriers hope the emissions problem can be resolved at an international level

and share the view that the old perception that the Gulf carriers developing their network exclu-sively on their own is modify-ing, says Lufthansa chief execu-tive Christoph Franz.

When it comes to an airline-to-airline relationship, we are not pushed into some kind of com-mercial relationship at this mo-ment. Maybe this is changing in the future and it would not be wise for Lufthansa to say not now and never in the future, he adds.

In light of the Etihad/Air

Doha to host AGM in 2014

NDC will not bypass agents: Tyler


IATA delivered on one of its central aims at the AGM: agreeing on a resolution presenting a unified voice from the sector to governments ahead of the ICAOs crunch assembly in September.

In endorsing a resolution on aviations carbon-neutral growth post-2020 at the AGM, IATA members signalled their intent not to lose traction in attempts to secure a global deal for aviation emissions.

All eyes are on whether governments can reach a global deal on tackling emissions at the ICAO meeting, after the European Commission agreed to stop the clock and temporarily suspend the

intercontinental element of its controversial emissions trading system. With so much riding on striking a global deal in this window, IATA delegates stressed the importance of taking leadership.

If we do not give guidance as an industry, the likelihood of ICAO coming to a solution is a tiny one, warned Lufthansa chief executive Christoph Franz during the AGM debate on the issue.

IAG chief executive Willie Walsh added: Its vital this AGM sends a message... that we are determined to play our part in sharing a solution to this global problem.

The resolution covers

emissions growth post-2020 and includes a series of principles which recognise early moves, accommodates fast-growing carriers and market entrants in their initial years of operation as well as adopts an equitable balance for determining individual carrier responsibilities. Fundamentally, the aim is to provide a common voice from the sector to help inform governments ahead of the ICAO meeting.

For governments, finding agreement on market-based mechanisms [MBMs] will not be easy, says IATA director general Tony Tyler. It was difficult enough for the airlines, given the potential financial

implications. Bridging the very different circumstances of fast growing airlines in emerging markets and those in more mature markets required a flexible approach and mutual understanding. But sustainability is aviations license to grow.

With that understanding and a firm focus on the future, airlines found an historic agreement. This industry agreement should help to relieve the political gridlock on this important issue and give governments momentum and a set of tools as they continue their difficult deliberations, he says. See P44 for latest on biofuels

Airlines agree on one voice for global issues GRAHAM DUNN CAPE TOWN

IATAs NDC ambitions take big stride forwardAmong various initiatives being developed by IATA, the one grabbing the most headlines and which it was keenest to address during the AGM was its efforts to shake up the global dis-tribution system sector.

IATAs New Distribution Capa-bility (NDC) has been designed to decommoditise airlines product offerings and has been the topic of much debate since director general Tony Tyler outlined plans for the new standard in his 2012 AGM speech in Beijing.

IATA used the AGM to host a demonstration of the technology. This isnt a product IATA will be selling. Its an example of what will be possible once these stand-ards are developed and in use by every airline, says Tyler.

The DG has been encouraged by the qualied support IATA has from some GDSs, but also used the AGM to address some criticisms of the initiative.

Frankly, some of our oppo-nents are not telling the truth, said Tyler in his AGM address. NDC will not contravene priva-

cy laws. Nothing in the NDC standard requires passengers to supply personal information to receive an offer. But it does pro-vide the opportunity for custom-ers to identify themselves if they so choose to have their loy-alty recognised by the airlines.

NDC will not bypass travel agents. It will enable them to sell all of what airlines have on offer. And, NDC will not eliminate comparison shopping. It will give customers better information on which to make decisions.

During the AGM, airlines reaf-rmed their support for the NDC initiative by endorsing a resolu-tion outlining the aims of the IATA project. OSee P36 for more NDC analysis

Frankly, some of our opponents

are not telling the truth

Pict

ures

: Bill

yPix



Proting from changeGRAHAM DUNN CAPE TOWN

Another raised industry outlook sees hope turning to conviction for sustained improvement

transforming their businesses. Amid high aircraft delivery lev-els, airlines have managed capac-ity well enough to ensure aircraft have never been fuller. IATA esti-mates load factors will top 80% for the rst time in 2012 at 80.3% as trafc growth of 5.3% will out-pace the extra 4.3% capacity added to the market this year.

Executives at US carriers now seen as almost the most protable after IATA lifted its prots forecast for the region by another $800 mil-lion to $4.4 billion have encour-aged many by putting a renewed focus on returns. IAG chief Willie Walsh noted these comments in the airline groups recent results, describing capacity discipline on the transatlantic market as one of the most positive features weve seen in the last 24 months.

Tyler also highlights the increased role of ancillary reve-nues, which have moved from a fraction of total revenue in 2007 to about 5% today. We expect that gure to grow signicantly again this year, says Tyler. While a por-tion of this reects revenue moved out of the ticket price via unbun-dling, it also represents where air-lines are innovating and creating new revenue streams.

IATA now sees revenues rising to $711 billion in 2013 as passen-ger numbers will top 3 billion for the rst time. Business travel has been one of the success stories and I think that reects the emerg-

ing markets success in expanding trade, says Pearce.

He also sees little sign of slow-ing economic growth in China impacting on travel demand. Clearly the economics matter, but frankly we have not seen any sign of that [weakening demand] in the domestic travel market. Consumers still seem to want to be travelling more, he says.

The sector which has affected Asia carriers most is cargo, where airlines are more exposed than most. IATA was relatively less optimistic over Asia-Pacic lift-ing its forecast only $400 million to $4.6 billion. While North Amer-ican carriers are expected to make the same money this year as they did in 2010, Asian carriers will make less than half the $11 billion prot they generated that year.

Air cargo, despite a couple of false dawns, has failed to recover.

Association of Asia Pacic Air-lines director general Andrew Herdman says the cargo market has been stagnant for nearly three years and an expected 2012 recovery failed to materialise. 2011-12 has been moribund and that has taken everyone by sur-prise, he says.

Pearce notes there are renewed signs of increased business con-dence, but it is too early to say if that will prove sustainable or another false dawn. We think this year will be a better year, but not quite as good as 2010, concludes Pearce. Given the last 15 years, that historically is not a bad per-formance. But, as Tyler reminds: It is still a very tough business. O

Billy

Pix

If the mood was not exactly jubi-lant in Cape Town, there was certainly a feeling that for all the economic challenges thrown their way, airlines are faring pretty well.

IATAs latest outlook raised its forecast from March by another $2 billion to $12.7 billion, the fourth consecutive positive revi-sion in its quarterly forecasts.

While director general Tony Tyler points out these improve-ments will still only take its prof-its per passenger from the price of a coffee to almost that of a sand-wich $2.50 to $4 it is, by the industrys poor returns track record, a relatively positive result. A $12.7 billion surplus would mark only the third time collec-tive prots have topped $10 bil-lion in the past 15 years.

Some easing in conditions has helped. A further fall in the cost of oil the barrel price of Brent Crude oil is now expected to aver-age $108 for the year rather than the near $112 of 2012 is helping on its biggest costs pressure.

We are looking at some decline, says IATA chief econo-mist Brian Pearce. Some of the factors behind that are we are seeing increasing supply from North America, while economic growth is not as strong, so there is some softness. Yet this is far from the benign fuel price level of the past, while economic growth historically the key driver of nancial performance remains sluggish.

FINANCIAL BACKINGPearce notes airlines have been backed on the nancial markets their share performance has been outperforming the equity market and increased business con-dence evident in IATAs latest sur-vey of airline chief nancial ofc-ers. Thats pretty interesting because if you look at the general economic conditions, it still looks pretty difcult, he says.

At the heart of the more opti-mistic outlook is growing indus-try condence that airlines are

Compare IATAs latest forecast to that it gave in March at:ightglobal.com/marchforecast

Herdman: Moribund 2011-12 cargo market surprised everyone

ON THE UP

Prot forecast for 2013 lifted $2.1 billion from IATAs

March outlook

AMERICAN WAY

Forecast for regions carriers up another

$800 million as prots strengthen

$4.4bn

CABINS FILLING

Passenger load factor set to top the

80% mark for the rst time in 2013

SOURCE: IATA June forecast

0

1

2

3

4

5

$ b

illio

n

North America Asia

Europe Middle East

Africa Latin America

PROFIT FORECAST BY REGION

80.3%

OIL SLIPS

Further fall in average Brent crude oil barrel price offers easing

of cost pain

$108

$12.7bn

Given the last 15 years, that $12.7

billion prot historically is not a bad performance

BRIAN PEARCEChief economist, IATA

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MAX KINGSLEY-JONES & DAVID KAMINSKI-MORROW CAPE TOWN

Despite sluggish sales, heavyweights remain faithful to their ultra-large types but still differ strongly on long-term demand view

Theres a lot of demand for the A380, Leahy says. The big-ger the aircraft, the longer the sales campaign takes.

John Wojick, Boeings senior vice-president for global sales, says that while the US manufac-turers view is that the 747-8/A380 market is not huge, it will continue to compete with its 747 derivative for at least another 10 years. Were committed to both the 747-8I and -8F well into the next decade, and youll see more success in the coming months for both versions, he says.

As competition around the world continues to evolve, you see hubs emerging in many dif-ferent locations. That dynamic is going to continue to evolve all over the world and drives our 20-year forecast, which says yes, there is demand for large aircraft but its not as large as our com-petitors forecast, he adds.

When you divide [Boeings 760 aircraft forecast], it is about four airplanes a month. Were building two 747s a month and we think that is a sustainable market in this size category.

Leahy insists that carriers will need to turn to larger aircraft to handle climbing passenger num-bers at slot-constrained airports.

Airbus missed its 2012 A380 sales target of 30 aircraft by some margin, securing just nine orders and Leahy accepted that the noise around the wing-crack issue had hampered short-term sales efforts. He said in Septem-ber last year, Whenever you have an issue like that it slows down discussions. People who are thinking about buying it say they want the aircraft coming off the line with the new wing.

Wing cracks are probably not to blame for the lack of an Ameri-can customer for the A380. Leahy expects this to rectied, pointing out that US passengers have been exposed to the aircraft through foreign operators. He adds that US carriers will need the aircraft if they want to be competitive, especially on the Pacic.

However, Boeing maintains that the drivers it says are reden-ing the shape of airliner demand are evidence of why the US mar-ket has been moribund for the big Airbus. Wojick points to the US markets multiple hub system as

preventing Airbus from securing a customer for the passenger A380 variant there. Why are there no A380 operators in the USA? Because there are so many multiple hubs. You can connect passengers from anywhere in the USA over probably 10 different hubs to most international desti-nations, he says.

The one certainty is that this long-running row about the true demand for large aircraft shows no sign of abating. O

Airbuss 20-year market forecast for ultra-large aircraft

1,710

stopped Boeings sales chief from proclaiming (correctly, if some-what disingenuously, given the longer-term comparison), that the 747 is currently outselling the A380. To 31 May, Boeing had landed three new 747 orders in 2013 (all freighters for Cathay Pa-cic), against zero for the A380.

Cancellations and deferrals are probably to blame for Airbus having some open delivery slots in 2015, but Airbus sales chief John Leahy insists that this avail-ability is not evidence of a weak-ening appetite for the type. He maintains his target of 25 orders this year, as Airbus embarks on a new advertising campaign for the aircraft.

To read an analysis on the airline industrys appetite for Boeings 747-8 visit: ightglobal.com/747-8sales

Airbuss John Leahy is sticking to his sales target of 25 A380s this year

SOURCE: Flightglobal/manufacturer data

A380/747 GROSS ORDERS LAST FIVE YEARS

0

5

10

15

20

25

30

35

40

2013*20122011201020092008

747 A380

129

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*to 31 May 2013

In the build-up to this years Paris air show, proponents of the ultra-large aircraft as the an-swer to the worlds congestion problems have been hoping to witness a reawakening of sales for the Airbus A380 and Boeing 747.

Both companies were talking up their ultra-large aircraft at the IATA annual general meeting in Cape Town last month, but retain very different views of long-term market demand. Airbus remains convinced that the ultra-large aircraft market is as big as its product offering, predicting some 1,710 sales over the next 20 years. Boeings estimate is less than half at 760 (both gures in-clude freighters). However, sup-porting evidence of high demand in that size category has been thin on the ground of late.

According to the manufactur-ers own numbers, from the be-ginning of 2012 (to the end of May 2013), airlines have placed just eight net orders for the A380 and 747. Gross orders over the past 18 months stand at 19.

In the past ve years, 109 new orders have been placed for A380s and 747s. But cancella-tions have meant the orderbooks of the two quad-jets have grown by just 75 aircraft. These are al-most entirely A380 orders, as nearly all the new 747 deals have been offset by the cancellation of existing contracts.

This poor net sales perform-ance for the latest iteration of the worlds rst jumbo jet has not

Clash of the titans rumbles on

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WORLD ROUTES 2013 CO-HOSTS

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BRIEFING AMERICAS

EDWARD RUSSELL HOUSTON

US carrier plans rapid expansion of 787 operations, but is set to keep overall fleet growth at a minimum in the next five years

For a full analysis of the 787s return to service after the battery issue, visit the FG Club:ightglobal.com/FGclub

United Airlines is looking to its new Boeing 787 eet to give it exibility to enable it to grow during the coming years, should economic growth warrant it.

A tight grip on capacity has been central to improved prot-ability by US carriers in recent years, and United itself has cut capacity in all but one of the past seven years.

The Star Alliance carrier plans to introduce 25 787s into its eet by the end of 2015, but at present, it expects little or no growth in capacity during the same period.

Really its the economic con-ditions at the time and also what we really like about the aircraft is its so exible, says Ron Baur, vice-president of eet at United. Because of the range and the operating costs, it gives us a lot of exibility.

That exibility allows the air-line to choose between replacing older Boeing 767-200ERs and 767-300ERs, upgauging long-haul

Fast growing Latin American carriers Azul and Volaris have both turned to initial public offer-ings to help fund the next stage of their development.

Brazils third-largest carrier Azul aims to raise about R$1 bil-lion ($470 million) from its IPO in the USA, using the proceeds to expand its eet, fund capital expenditure for network expan-sion, and repay debt. Azul will offer shares on the So Paulo stock exchange as well as in the USA.

The IPO signals the next phase for the growing carrier, which began operations in December 2008 with a eet of only ve Embraer 190s and 195s. Azul now operates 118 aircraft and growth has been accelerated by its merger with fellow Brazilian operator Trip. The merger, approved in March, added another 46 cities

to Azuls network. We believe we have created a

robust network of protable routes by stimulating demand through frequent and affordable air service, says Azul.

It argues the use of smaller air-craft, unlike its competitors Gol and TAM, and ensures it can serve these markets protably. We believe our main competi-tors, with their larger aircraft, are unable to generate sufcient demand to serve most of our mar-kets protably, it says.

Mexican carrier Volaris hopes to raise up to $100 million through its IPO, and plans to list on the Mexican and New York stock exchanges. Volaris aims to use the IPO proceeds partly to fund air-craft pre-delivery payments.

The IPO ling caps off years of aggressive expansion by Volaris, one of the Mexican carriers that beneted from the demise of Mexicana and other Mexican car-riers in the years since Volaris was launched.

Since we introduced our ULCC

[ultra low-cost carrier] business model in 2006, eight airlines have gone out of business in Mexico, notes Volaris in its ling.

Indeed, Mexicanas demise has proven to be especially benecial for Volaris. Mexicana held the lions share of the international air trafc market out of Mexico before it ceased operations in August 2010. This was obvious in the severe 42% year-on-year fall in international trafc in Septem-ber 2010, the rst month after Mexicana exited the market.

However, regulators in the USA and Mexico have since granted their route authorities to the remaining Mexican carriers Aeromexico, Volaris and Interjet. Volaris says it took over 15 routes that were mostly operated by Mexicana before the carrier entered bankruptcy protection. O

Latin low-cost units turn to IPOs to fund development

Boeing 757-200s or adding capac-ity, he says.

The airline took delivery of six 787s from September 2012 until January, before a US Fed-eral Aviation Administration grounding of the type halted deliveries. This increased its widebody eet by three to 159 during the period. The airline resumed 787 ights in May.

United plans to add two more 787s and remove ve 767s for a

total widebody eet of 156 air-craft by year-end. This will return it to the same number of wide-bodies as at the end of 2011.

These moves are in line with the carriers capacity guidance. During a May investor presenta-tion, United chief nancial ofcer John Rainey said it plans for a nominal increase in ASMs of about 1% annually and to keep its eet count at for the next ve years. One of the things were

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Range and operating costs make 787 a flexible choice for United

doing at United is trying to have a measured, metred replacement of our eet, he says.

The airline forecasts capacity shrinking by 0.75% to 1.75% this year, compared with 2012.

However, capacity growth is not entirely out of the question. Brian Znotins, vice-president of network at United, says the 787s will be used largely as replace-ment aircraft if the economy is stagnant, but could be used for expansion if the economy picks up. [We] have a lot of aircraft coming off lease over the period, he says. This creates options.

The US economy is expected to grow by 1.4% in 2013, 3.4% in 2014 and an average of 3.6% annually during the following four years, according to a report by the non-partisan US Congres-sional Budget Ofce. O

BRAZILIAN SNAPSHOT

Azul Volaris

Fleet 118 x ATR/E-190/195 42 x A320 familyRevenues $4bn $904mProt ($171m)* $29m**

Pax 14m 11.7mNotes: Azul data includes Trip. *Net profit. **Op profit. SOURCE: Flightglobal Pro.

CHIM-LAY-YEO SINGAPORE

United keeps capacity in check

BRIEFING EUROPE

July 2013 | Airline Business | 15flightglobal.com/ab

AirAsia Japan parents may divorce

PAGE 16

Turkish chief vows to nish the jobDAVID KAMINSKI-MORROW CAPE TOWN ALEX THOMAS LONDON

Kotil insists he will stay in the post as long as necessary to fulfil contract for up to 117 Airbus A320s and 95 Boeing 737s

The German carriers chief believes the airline is pursu-ing a valid business model, despite heavy losses.

Air Berlin chief executive Wolf-gang Prock-Schauer, appointed to head the airline ve months ago, insists the business model is right, but it needs much more focus. He also warns that share-holder Etihad Airways, which has a 29% stake in the German opera-tor, cannot be viewed as a nan-cial safety net. Etihad has engaged in initiatives to help stabilise the carrier and support its restructur-ing programme, which has been dubbed Turbine.

Prock-Schauer told Airline Business during the IATA AGM in Cape Town that Air Berlin has tried to serve too many destina-tions and operate too many crew bases in Germany.

He says the airline has cut 20% of its routes over the past year in favour of increasing frequencies

on stronger sectors. The restructuring effort is

streamlining the carriers opera-tion, which expanded through various diverse activities, includ-ing the takeover of low-cost opera-tor DBA and holiday airline LTU.

Air Berlin is reshaping its net-work to capitalise on its One-world membership and the alli-ance with Etihad, which enables it to channel Asia passengers via Abu Dhabi. Prock-Schauer insists there will be no conict between its dual Gulf partnerships when Qatar Airways becomes a mem-ber of Oneworld later this year.

Etihad, which is unallied, is an

excellent co-operation partner for us, he says, adding that the air-lines combined status as share-holder and partner is ideal.

Were in very close discus-sions with them, he states. Eti-had is playing a role in address-ing Air Berlins eet requirements and is taking surplus pilots from the German carrier.

While the investment from Eti-had has been crucial to the carriers restructuring, Prock-Schauer says there is a very clear message that the Middle Eastern operator cannot act as a nancial safeguard for a loss-making operator. We have to survive on our own, he says. O

Temel Kotil is intending to remain at the helm of the rap-idly expanding Turkish Airlines as long as necessary to oversee its extensive eet revamp.

The airline has contracted for up to 117 Airbus A320s and 95 Boeing 737s, agreements which include re-engined versions of

both types, a eet plan which extends to 2021.

Reports suggested he had been suspended in the fallout over claims the airline had tried to ban crew from wearing bright lipstick. The airline and Kotil strongly deny this.

Kotil, in Cape Town for the IATA

AGM, said he took responsibility for the eet renewal as well as the contracted aircraft, and that he plans to see the deliveries through. He added that he has an open employment contract and will stay in his post as long as necessary.

Turkish Airlines has backed away from plans to order even larger aircraft such as the Airbus A380 or Boeing 747-8 because, Kotil says, it still has outstanding orders for A330s and 777s.

Its maybe not the right time to talk about additional long-haul, he says. Kotil is condent that the recent political unrest in Tur-key will be temporary and will not affect the airlines business in the long term, adding that he believes good things always come after bad.

He says the Star Alliance carri-ers employees are also shunning

strike action called by their union over pay and previous sackings.

While the strike, which started on 15 May, was still ofcially ongoing in mid-June, Kotil says that Turkish recently raised salary levels by 8.1% for all employees and everybody is back at work.

He says that out of over 15,000 Turkish Airlines employees, only around 200 went on strike, so the employees didnt follow it. He says no pilots were involved and only a small percentage of its 6,000 cabin crew. O

New focus key to Air Berlin turnaround hopesDAVID KAMINSKI-MORROW CAPE TOWN

Amount of routes cut in past year in favour of higher frequencies

20%

Kotil is condent that the political unrest will not affect business

Kotil: not the right time to talk about more long-haul equipment

Low-cost

airline specialAvailable now at ightglobal.com/iLowCost13


BRIEFING ASIA

AirAsia Japan parents may divorceMAVIS TOH SINGAPORE

While Peach and Jetstar Japan take shape, the Narita-based low-cost ventures spluttering start is causing a rethink

Read our interactive low-cost carriers special at:ightglobal.com/ilowcost13

Disagreements over the LCC stem from different operating styles

JAPANESE LCC SNAPSHOT

Shareholders Base Fleet

AirAsia Japan ANA (67%), AirAsia (33%) Tokyo Narita 4 x A320

Peach ANA (39%), First Eastern, INCJ Osaka Kansai 8 x A320

Jetstar Japan JAL (42%), Jetstar (42%)Tokyo Narita, Osaka

Kansai 12 x A320

Source: Flightglobal Pro

Less than a year after the launch of their Japanese low-cost car-rier joint venture, AirAsia and All Nippon Airways are on the brink of dissolving their partnership.

The partners formed AirAsia Japan in August last year. But the two one a traditional full-service Japanese operator and the other Asias most protable low-cost business seem unable to recon-cile differences in operating styles.

AirAsia has even come out to say that the partners have a dif-ference of opinion in manage-ment, most critically on the points of how to operate a low-cost business and operating out of Narita. The joint-venture carrier has also not been able to manage costs, and it does not rule out a dissolution, it adds.

CONFLICTING IDEALSKeeping costs low is key for LCCs, and something that AirAsia prides itself as being able to do well. Chances are it is struggling to change the ways of legacy car-rier ANA, especially as AirAsia Japans management team, in-cluding its chief executive and chief nancial ofcer, comprise mainly of ANA staff, analysts say. ANA has a 51% stake in the LCC.

Operating out of Narita airport can also be problematic, especial-ly for an LCC. Narita is one of the worlds most expensive airports and besides slot constraints, there is also a night curfew, which greatly limits aircraft utilisation a key for LCCs to keep costs low.

ANA however remains ada-mant about having a low-cost op-eration at Narita, not because it needs AirAsia Japan to act as a feeder to its full-service opera-

tions, but because it believes more LCCs will y there, and it wants to have the rst mover advantage.

Chinas Spring Airlines, for one, is awaiting approval from the Japanese authorities for a local air operators certicate, and plans to y out of Narita.

AirAsias global strategy has been to operate out of secondary airports, so operating out of Nari-ta doesnt t, says Ravi Mada-varam, aerospace consultant at Frost & Sullivan.

He adds that since ANA has a 38.6% stake in Peach Aviation, which is based at Kansai Interna-tional Airports dedicated low-cost terminal, it is reluctant to have an-other operation there. The latter has signicant strengths as a budg-et carrier base: it is open 24h with no slot constraints, and has cheap-er landing and parking charges.

What AirAsia Japan can look forward to is Naritas commitment to build a low-cost terminal, set for a March 2015 completion. Whether the carrier will still be around, with its parents willing to let it bleed until then, is another story.

AirAsia Japan recorded a net loss of ringgit (M$) 67 million ($21.4 million) in the quarter ended March 2013. Its domestic and international load factors stood at a disappointing 63.9% and 61.9% respectively.

In a bid to boost load factors, it brought forward the launch of its second hub at Nagoya airport in March, but it seems that the carrier is still behind Peach and Jetstar

Japan. Both carriers have been able to keep load factors above the 70% mark Peach recorded 78.9% in scal year 2012, while Jetstar Ja-pans May gure was 75.8%.

Peach has a good stretch of market to South Korea, Taiwan and Hong Kong and this is impor-tant as it brings inbound interna-tional trafc, which often brings higher yields than domestic op-erations to its network, and com-pensate it for the competition in the domestic markets, says Rich-ard Wu, a senior lecturer at Uni-versity of New South Wales school of aviation.

Jetstar Japan is playing a simi-lar card that while it extends its domestic network, it also con-

nects with Jetstar Asia and Jetstar on international routes. AirAsia is not responding quickly enough in network expansion.

AirAsia Japan operates a eet of four Airbus A320s to four domes-tic destinations and Seoul. It com-petes on routes from Narita to Fukuoka, Sapporo and Okinawa with carriers such as Jetstar Japan, ANA, JAL Express and Skymark.

Innovata schedules show that AirAsia Japan operates seven, 14 and 21 weekly ights to Okinawa, Fukuoka and Sapporo respective-ly, far fewer than the 20, 27 and 40 weekly ights offered by Jetstar Japan on the same routes. Besides its peers, it also has to compete with tier two carriers such as Sky-mark, Air Do and StarFlyer.

Jetstar Japan has 12 A320s and plans to grow its eet to 20 by end-2013. While it started operations out of Narita last July, it also swift-ly set up a second base at Kansai. Analysts however say that the car-rier has been offering promotions to attract more passengers.

Peach has a brand that the Japa-nese are familiar with and a eet of eight A320s. ANAs challenge, therefore, is to get its strategy right.

Having two airline subsidiar-ies for ANA is one too many. This has or will lead to brand dilu-tion and also increase its costs, suggests Madavaram. O

The joint-venture carrier has also not been able to manage costs

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The Abuja Declaration, which was endorsed by all the African heads of states in January, requires all African airlines to be IOSA-compliant by the end of

running free courses that IATA is funding and AFRAA is hosting so that airlines can be enlightened about how they can go about their IOSA audit, Chingosho says.

The safety drive should also not necessarily force airlines to invest in more modern aircraft, as safety is not determined by age if

the aircraft are properly main-tained. But if you have an old aircraft, the maintenance costs can be very high, he says.

AFRAA identies two coun-tries that consistently drag down Africas safety standards: the Democratic Republic of Congo and Sudan. Chingosho says these two countries account for 50% of Africas accidents every year, but points out that they have both been involved in conicts and there is also the issue of trade sanctions. You need secu-rity to create an environment for safe operations, he says. And we believe sanctions should not apply to airlines, as their passen-gers often comprise many differ-ent nationalities. O

July 2013 | Airline Business | 17

BRIEFING AFRICA

MAX KINGSLEY-JONES CAPE TOWN

Associations link up to help carriers meet 2015 IOSA certification deadline in line with Abuja Declaration

For more news and analysis from the IATA annual general meeting in Cape Town, visit:ightglobal.com/iata13

AFRAA, IATA in African safety drive

IATA and the African Airlines Association (AFRAA) have joined forces to bring the conti-nents air safety record in line with global standards. And AFRAA is condent that with a little help from IATA, all the con-tinents airlines will be able to meet the 2015 deadline to achieve the IATA operational safety audit certication.

Last year, IATA members did not suffer a single Western-built jet hull loss. But while the safety standards of Africas IOSA regis-tered carriers is up with the best, the continents safety statistics still dont look too good because its the other airlines that are not on the IOSA registry, says IATA director general Tony Tyler.

He adds that improving safety must be the priority if Africas air-lines are to reap the rewards of the continents growth.

SA Express is undertaking a major strategic review with its sister carriers, South African Airways and Mango, which should see it set up a West Afri-can operation and take on a major eet revamp.

We are looking to duplicate the hub operation we have in

South Africa in other parts of the continent, SA Express chief ex-ecutive Inati Ntshanga says. These will be set up as spin-offs in conjunction with local part-ners, and West Africa is likely to be the location of the rst hub.

He adds that talks are under-way with potential partners and

that the operation could begin in a year or so. The operation will serve as a feeder network for SAA, which will operate the trunk routes between hubs.

SA Express eet comprises 10 Bombardier CRJ200s, three CRJ700s and nine Q400 turboprops.

It is currently engaged in an evaluation of various 70 to 90-seat jets to replace its 50-seat CRJs, and met with the Canadian manufac-turer along with Embraer, Mitsubi-shi and Sukhoi at the Paris air show in June. We need around 14 air-craft and would like deliveries to start in 2015-16, Ntshanga says. O

IATA director general Tony Tyler has attacked the EUs list of banned air-lines, labelling it absurd for its lack of transparency and consistency.

While he grants that the inten-tion of the blacklist is honourable, Tyler argues: The way they are going about it is unhelpful.

The list came into effect in 2006 and covers operators and in some cases entire countries that are banned from operating in the EUs airspace as a result of safety concerns.

The issue has been particularly in focus during the annual general meeting in Cape Town, as a number of carriers and countries from Africa are subject to the ban. That includes some IATA members that have successfully passed the IATA operational safety audit certi-fication process but remain sub-ject to the ban as a result of concerns over their home nations safety oversight.

The problem with the EU banned list is that there is no trans-

parency and no standard for it, Tyler said at the IATA annual gen-eral meeting in Cape Town. So a carrier never really knows why it has gone on the banned list and, more importantly, it doesnt know what its got to do to get off it.

Whats needed is a clear ad-herence to international, globally agreed standards and not the ap-plication of opaque procedures that dont leave anybody clear about what are the problems and how to fix [them], he says.

Tyler sees red over EU blacklist

Share of Africas annual accidents

Democratic Republic of Congo and Sudan

50%Some airlines

could potentially lose their AOCs in

January 2016ELIJAH CHINGOSHO

Secretary general, AFRAA

2015 to qualify for an air opera-tor certicate.

It means potentially that by January 2016, without IOSA, air-lines could lose their air operator certicates, AFRAA secretary general Elijah Chingosho told Air-line Business at the IATA annual general meeting in Cape Town.

Chingosho says the two asso-ciations are working together to assist those airlines that are cur-rently non-compliant to prepare for the IOSA audits through a series of workshops.

Weve also jointly held a workshop with CEOs of airlines not in IOSA, so they understand what is required and appreciate that safety is an investment and not a cost, he says. Im con-dent the 2015 deadline can be achieved.

AFRAA believes that the costs should not be high. We are also

SA Express plots move to create local spin-offsMAX KINGSLEY-JONES CAPE TOWN


INSIGHT SPAIN

THE PAIN IN SPAINKERRY REALS LONDON NIALL OKEEFFE BARCELONA

The spotlight is on IAG as it restructures loss-making Iberia and adds Vueling as a new family member, while airlines across the country shrink and consolidate

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Spains airline market has been forced to consolidate by the countrys ailing eco-nomic situation, and players have been combining, shrinking or, in the case of Spanair, disappearing altogether. All eyes are now on International Airlines Group as it seeks to restructure struggling Spanish ag carrier Iberia, strengthen its budget arm Iberia Express and extract benets from its latest acquisition, Vueling.

The extent of the task ahead for IAG in attempting to return Iberia to protability could clearly be seen in the groups rst quarter -nancial results, where operating losses deepened to 278 million ($368 million), of which 202 million was associated with Ibe-ria. An exceptional charge of 311 million, primarily related to Iberias restructuring costs, was included in the results.

The transformation plan will see the loss of 3,141 jobs, a 15% capacity cut and an 11% average salary reduction. An additional 4% salary cut has been applied and will remain in place if pro-ductivity talks fail to produce the required results.

The airline was crippled earlier this year by 10 days of strike ac-tion, which had a net impact of 29 million, and tense negotia-tions are continuing with Span-

Vuelings focus remains on its El Prat hub, with an eye on network growth

ish pilots union SEPLA. The key is getting meaningful im-provements in labour costs and its not clear theyre going to get there with the pilots, says Espir-ito Santo analyst Gerald Khoo. Its not clear how much can be imposed on them.

GROUP CONSOLIDATIONIAG chief executive Willie Walsh points out that there are other options available to us, noting that the group could potentially restructure under new Spanish labour laws. We would do this if we had to, he says.

On the capacity front, Iberia is

not the only carrier to be making signicant reductions in the Spanish market. Capacity at Ma-drid Barajas Airport fell by 9% in 2012 compared with the previous year and Walsh says that we were only a part of that.

The Spanish market is affect-ed by low demand due to the eco-nomic crisis and high airport charges, which have increased very much in the last couple of years. This has forced airlines to make very signicant capacity cuts, says Iberia director corpo-rate affairs Manuel Lpez Col-menarejo, adding that it is too early to say if there is still over-capacity or not.

Khoo believes further rationali-sation is needed in the country. There has been consolidation in the Spanish market with the col-lapse of Spanair, and Iberia and EasyJet have been cutting capaci-ty, but there is some sense that maybe there needs to be a bit more rationalisation, he says. Were not in a position where anyone feels comfortable. Khoo adds that existing players are get-ting smaller and you could argue that someone else could pass by the wayside.

One of the big questions over the Spanish airline market is how IAG will assimilate Barcelo-na-based low-cost carrier Vueling into its family. The group earlier this year acquired an additional 44.66% stake in Vueling, bring-ing its total share of the airline to 90.51%. IAG plans to keep Vueling as a standalone business and Walsh says he will allow [Vueling] to continue doing what theyve done so well. However, he adds that where we can identify areas to work together we will do.

Vueling chief executive Alex Cruz who reports directly to Walsh under the post-acquisition structure says: I dont expect a

tremendous amount of IAG-in-duced change, certainly in the short to medium term, He has been encouraged by all the com-ments that the leadership of IAG has been making, and does not foresee any interference with his airlines processes or culture. Rather, he expects the new parent will provide support to make Vueling a better airline.

Referring to IAG-owned Iberia, Cruz comments: A tremendous amount of effort, time and atten-tion, is being put on restructuring an airline that requires restructur-

There will be a reduction in

Iberias short- and medium-haul

WILLIE WALSHChief executive, IAG


Rex

Feat

ures

ing. Cruzs blunt assessment is that the traditional legacy airline model no longer works in the short and medium haul.

GROWTH STRATEGIESEspirito Santos Khoo does not be-lieve IAGs acquisition of Vueling will have a signicant short-term impact because they already viewed themselves as part of the same family. While he expects that well see a modest degree of migration of Iberias [point-to-point ying] into Vueling where theres a lower cost base, he

stresses that the key issue is to make sure Vueling remains low-cost and successful.

The key challenge for IAG is to extract some benet from owning Vueling over and above just owning it as a standalone entity, without cannibalising the mainline, says Khoo. Its very likely Vueling will remain a stan-dalone entity with its own air operators certicate. If not, it be-comes Iberia and loses its dis-tinctiveness.

Another option for Iberia to make its short- and medium-haul operation protable could be to transfer more of these routes to its low-cost arm Iberia Express, which launched operations in March 2012. However, as Khoo points out, the problem with outsourcing to Iberia Express is there is a limitation under the ar-bitration agreement on how big Iberia Express can get.

Walsh views this as a tempo-rary setback, with restrictions set to end in 2014, and it is clear he intends to play hardball: Ibe-ria Express has been a fantastic success and in the absence of being able to expand there will be a reduction in the activity of Ibe-rias short- and medium-haul, he says, adding that IAG is trying to overturn the restrictions. Ma-drid-based Iberia Express oper-ates a eet of 14 Airbus A320s. Its former chief executive, Luis Gal-lego, has since been promoted to lead Iberia, following the sudden departure of previous Iberia chief Rafael Snchez-Lozano.

In terms of long-haul capacity cuts under Iberias transformation plan, Lpez Colmenarejo says: The plan includes strengthening the most strategic and protable routes and dropping loss-makers. This means we are boosting serv-ices to some long-haul destina-tions such as Brazil, Mexico, Cen-tral America, Chile and Ecuador,

and we have suspended routes dominated by holiday trafc, where Iberia competes on unfa-vourable terms with other airlines.

These include Santo Domingo and Havana, while San Juan de Puerto Rico is now offered via Miami and Montevideo via Bue-nos Aires and Sao Paulo.

Returning to the Spanish do-mestic market and excluding Iberia, Iberia Express and Vueling, few players remain fol-lowing the demise of Spanair early last year. Those still stand-ing include Iberias regional fran-chise partner Air Nostrum, Air Europa and newcomer Volotea.

Vuelings Cruz does not view any of these carriers as a threat. He believes Air Nostrum needs to dene what its role is in terms of connectivity because there are players with lower costs and big-ger aircraft appearing in their markets. And as for Air Europa and Volotea: There are several airlines we religiously monitor every month and Volotea and Air Europa are not on the radar.

Volotea launched operations out of Venice in Italy, despite being a Spanish airline estab-lished by Vueling co-founders

Carlos Muoz and Lzaro Ros. Another telling sign of what Khoo describes as a lacklustre domestic demand picture in Spain is the fact that Vuelings future growth plans centre main-ly on the international market, with 90% of the carriers growth this year being outside of Spain.

This year we will also increase routes that dont touch Spain this is what we want to do, says Cruz. He adds that the carrier will continue to grow its four interna-tional bases in Amsterdam, Paris, Rome and Florence, and will look for other bases. The main source markets for any additional foreign bases will be the Benelux countries, France and Italy.

Vueling will continue to focus on its Barcelona El Prat hub, where Cruz says 18% of its trafc is made up of connecting passengers. As for its regional strategy: We see ourselves with a role of connecting regional Spain internationally.

IBERIAN PUSHMeanwhile, Iberia will keep plug-ging away at its restructuring plan in the hope that it can one day drag itself back into the black. The aim [for Iberia] is to again be-come a protable airline, as it was from 1996 to 2008, to consolidate its leadership between Europe and Latin America, and to be per-ceived by customers as a reliable, innovative and competitive air-line, says Lpez Colmenarejo.

Whether it can achieve these goals will be the question on eve-rybodys lips. The rst question on everyones mind is what on Earth will happen with Iberia, says Khoo. Its going to be inter-esting to see how things develop over the next 12 to 24 months. O

Billy

Pix

I dont expect a tremendous

amount of IAG-induced change

ALEX CRUZChief executive, Vueling

Read an analysis of how unit revenues are central to Iberias recovery ightglobal.com/iberiarecovery


INTERVIEW BJRN KJOS

They span the worlds of music, lit-erature, philosophy, science and sport. They include such lumi-naries as Henrik Ibsen and Edvard Munch. But the array of heroes

adorning Norwegians aircraft tails tells a tale not just of national pride, but of Nordic kin-ship, too: in a nod to the neighbours, they include the odd Swede (Greta Garbo) and Dane (Hans Christian Andersen).

But the character of the patriotically named airline is changing: what was once a local story is becoming not just continental, but also global. Dramatic notice of the carriers intentions has been served. In January 2012, it placed an eye-popping order for 222 aircraft, split between Boeing and Airbus: 100 737 Max narrowbodies, 22 737-800s and 100 A320neos. This summer, the carrier commenced long-haul services from Oslo to New York and Bangkok, using A340s for interim lift. Now, it is poised to put into service its rst of eight 787s. Nor are the low-cost air-lines ambitions conned to far-ung destina-tions and the latest in airliner technology: in an ongoing campaign to cut costs and maximise ef-ciency, it has shown that it is not prepared to let parochial concerns stop it from locating crews or registering aircraft outside Norway.

I think we have to learn to compete with everyone, says Bjrn Kjos, the former ghter pilot, spy novelist and lawyer who bought into a revamped Norwegian Air Shuttle 20 years ago and has been at its helm for a decade. In the future, you will compete with everyone. Obviously, our stronghold has been the Nordic countries, but on the leisure market, its having a good product and good price... If you have a low cost then you are of course able to le low prices. Its as simple as that.

On the day Airline Business caught up with Kjos, Norwegian revealed plans to make the Spanish destination of Fuerteventura its 15th direct route from its newly opened base at Lon-don Gatwick. The day before, it had added ights from three German cities to its new Spanish bases at Alicante, Gran Canaria, Mala-ga and Tenerife, making clear its commitment to being a pan-European carrier as well as a Scandinavian and long-haul one. But does hav-ing a brand name that ties it to a particular na-tion present a challenge? Everything connect-ed to Scandinavia is normally very good quality, says Kjos, but he adds: Looking at the leisure market, especially if you go long-haul, there will always be changes in the pat-

flightglobal.com/ab

What was once a local story is becoming

global. Dramatic notice of the carriers intentions

has been served


REPORTNIALL OKEEFFE

OSLO

PHOTOGRAPHYJAMES ROBBINS

BILLYPIX.COM

After driving Norwegian on an aggressive growth path across Europe, chief executive Bjrn Kjos is beginning

his most ambitious assault yet with the launch of long-haul ights to Asia and North America

VIKING RAIDER

INTERVIEW BJRN KJOS


cause it will decrease our average cost level. And theyre seeing it working now. So theyre seeing that were not going to exchange them, we need them all and we need more people but you cannot compete with Norwegian crews ying between Spain and Germany. That has to be either Spanish or German crews.

The Spanish market being one where lei-sure travel is the growth driver, a particular focus on cost is required, says Kjos: We have a different product than Ryanair, but we can compete with Ryanair not necessarily on Spain out of Norway, but we can denitely compete with Ryanair when [we] y out of the Spanish bases... If you cannot compete with everyone, you should stay out.

EYE ON IRELANDTowards a goal of operational exibility, Nor-wegian has looked at registering aircraft in Ireland. Flying a Norwegian-registered aircraft into Norway, resting its crew there and ying them out again is not permitted, notes Kjos, who delivers a blunt verdict of the regulation: Its a stupid rule. I dont think you will nd that in another country in the world.

Competition faced by Norwegian naturally varies by route and market EasyJet, Vueling and Germanwings between Spain and Ger-many; EasyJet and Ryanair between Spain and the UK; SAS and Ryanair in and out of Scandinavia but, broadly, Kjos considers SAS and Ryanair the main rivals. As to how market dynamics will change in the next dec-ade, the critical mass of aircraft will in-crease, he predicts: You have to y new air-craft because its too expensive to y old aircraft, and, secondly, you have to have a mass of around maybe 100 aircraft or more, so you wont see newcomers, and you will see a lot of small airlines disappear.

Kjos foresees consolidation around four or ve larger low-cost operators and some of the big legacy carriers like British Airways, Lufthansa, Air France-KLM. He adds: Many of the legacy carriers will not be able to survive the future, because, rst of all, the competition is too tough, but secondly, you havent even started to see the competition from the Far East. Asian airlines the carriers you will meet in the future can be far more competi-tive than most of the European long-haul carri-ers are today, and big opportunities are offered by the likely inux of Asian tourists to Europe: This is one of the reasons why we set up the crew bases in Asia: thats because that is where

tern where people y in the future. Speci-cally, he predicts, more people will y from Asia to Europe than in the opposite direction, raising a question: If you have a good brand in Europe, what is this worth in Asia?

By Kjoss reckoning, the internet provides global visibility on low fares, and this will dic-tate the competitive dynamic in future: In our digital world, people will go: do you have a good price? Maybe theyll look at the air-craft... but then theyll look at what area of the world you come from if you come from Eu-rope and Scandinavia, it means that you will normally have a good quality and then its price, price, price. Because people will always nd cheap tickets in our digital world.

Norwegians strategy for attaining the low costs required for low fares is based partly on embracing the newest airliners, for which huge gains in fuel efciency are promised. Its decision to split an order between Max and Neo aircraft was aimed at ensuring a steady ow of clean-burning narrowbodies into its eet. We couldnt get enough Maxes in the early years, because its limited, whats avail-able, says Kjos.

Arrival of Norwegians rst Max is scheduled for the third quar-ter of 2017. Even though we will be launch customer, they will still not be up to speed in

production before 18, 19, he says. We need new aircraft before that, and the Neo is avail-able. And the Neo is a very good aircraft. Thus, the required volume of aircraft dictates that the advantages of commonality can be traded off: Obviously, it would have been easier for us to go with the Boeings, but the Boeing wasnt available in that scale, and then its a matter of pure mathematics. Even though Im a pilot I dont care what the different air-craft look like! Theyre both very good.

It is not just from more efcient airliners that Norwegian is seeking cost savings. Set-ting up bases in the UK and Spain, as opposed to pricey Scandinavia, gives us stability of costs, says Kjos: Its lower-paid crews, and everything is cheap.

UNION OPPOSITIONInevitably such outsourcing has met with union opposition. Many feared that they would be out of their jobs, says Kjos, but we try to ex-plain: this we have to do in order to grow, and it will benet you, it will safeguard your jobs be-

NORWEGIAN AT A GLANCE

Operating revenue ($m) 2012 2,223Change $ 17.5%Change local 22.1%Operating margin 3.1%Net margin 3.6%Year-end 31 Dec 2012AB 2011 Financial ranking 62 AB 2011 Traffic ranking 73

RPK Growth (2012) 16.8%ASK Growth (2012) 18.0%Load Factor (2012) 78.5%

BROUGHT TO BOOK

Moonlighting as a writer, Bjrn Kjos authored a spy novel titled The Murmansk Affair, and he has since switched his attention from fiction to fact. He has been putting the finishing touches to a tome that tells the story of his time with Norwegian.

This follows publication of Jacob Trumpys airline biography Hyt Spill (High Stakes), which was unauthorised, notes Kjos: He was only guessing on some things, and the most interesting things he doesnt know about and nobody knows about. His own book will have the true story, he adds.

Unexpected twists and turns have defined Kjoss career: for years after he joined Norwegian, he was technically on a leave of absence from being a partner in a law firm, but that has finally concluded. Im out! he says. Id forgot everything...


the ow will originate in the future.History is littered with failed attempts at

low-cost long-haul operation Eos, Silverjet, Maxjet and Oasis Hong Kong Airlines among them but by Kjoss reckoning, new airliner technology has radically changed the game. I think the A350 and the 787 are the only ones that you can y low-cost long-haul with, be-cause they are so much lower on operating cost, he says. We looked into it with older types of aircraft like the 767, A340, and the g-ures wouldnt add up at all. The A330 may be economical for ights shorter than eight hours, but not for Norwegians 11-hour Oslo-Bangkok service. The A340, meanwhile, is way too high cost per seat-kilometre in order to com-pete, and you cannot run a low-cost with an all-747 which would explain Oasis Hong Kongs demise. We wouldnt even think about setting it up with those types of aircraft.

Kjos seems unconvinced by the notion that the dynamics of long-haul and short-haul differ fundamentally: We can run short-haul prota-bly. Most of the legacy carriers cannot run short-haul protably or just about none of them so why shouldnt we run long-haul protably? To me, long-haul is three hours longer than a short-haul. We use the same infrastructure we use everything that we have developed and paid for by the short-haul. The only thing thats different is the airframe and the crews. We have crews based in Asia and not in Europe... The airport, whether its in Dubai as we y to or New York, its just about the same.

Part of what makes the 787 a totally different ballgame, in Kjoss view, is the GoldCare arrangement under which the airframer takes charge of maintenance to reduce initial cost

and complexity for the airline: That, we will see in the future: airlines wont do their own maintenance operation because its too costly. You cannot even be close to competing with the cost that Boeing can run it for, because there is a huge eet that they can look after. The impact of delays to Boeings Dreamliner was reduced by Norwegians decision to pursue a soft launch of its long-haul services, says Kjos: We can sub-stitute two Dreamliners [for] two A340s, but if it had gone on for a longer time, we would have needed three A340s to substitute for two Dream-liners. You can see the cost saving... You cruise at much lower speed, you need more mainte-nance time on the ground. It adds up. Thats why it is a game changer, the 787. Norwegian

will initially assign its rst 787 to European routes for a month, ying it from Oslo to Ali-cante, Barcelona, London, Malaga and Nice.

Of the challenges facing low-cost airlines, none keeps the Norwegian chief awake at night, he jovially insists. But its an extremely interesting game and its extremely challeng-ing, also, he acknowledges. The most dif-cult thing is that its today decided how you are going to look like in ve years time: how you operate and the eet you operate, maybe in what areas you operate, how you compete.

Planning so far ahead requires you to build yourself a view of how are people ying in the future, he adds. His theory? It will be totally different in 10 years. For consumers, Kjoss outlook is a happy one: It will be cheap to y in the future. Youll probably see long-haul ights down the road for maybe half the price you have today... Is it that amazing to say, look for twice the price when you y twice as long? It shouldnt be. Leading the revolution in fares will be carriers with maybe less than half the cost of airlines that you see today.

LONG-HAUL SHIFTKjos expects a lot of players in the short-haul market to follow the example of Norwegian and AirAsia X by going long-haul. I would be surprised if Ryanair wont, he says al-though at a subsequent results brieng, the Irish budget carriers deputy chief Howard Millar says that any long-haul venture wont be Ryanair and wont involve Ryanair man-agement. Of US carriers, meanwhile, Kjos sees JetBlue and Southwest as highly likely to embrace long-haul.

Provision of onboard wi- included in the ticket price sets Norwegian apart from the hardline no-frills brigade as do the 32 seats it is allocating to a premium economy class in its Dreamliners. Kjos sets out a vision of tech-nological advances making rising service lev-els possible for low-cost airlines. It will be a normal thing that you will supply to the pas-sengers, for instance, their IFE, he says. On the long-haul you will have the possibility [to] bring your own food if you dont want to pay. [But with] the new modern IFE, you will have your own kiosk punching for a gin and tonic, or punching for a sandwich, or punch-ing for a beer. And you will put in your credit card, so it will be like a bar and they will come and serve you what you have ordered.

This ts with a strategy of technology-ena-bled dynamic packaging offering passen-

PICKING A FIGHTER

Pure mathematics may dictate Bjrn Kjoss choices when it comes to ordering airliners but the former pilot is emphatic when he names his favourite aircraft of all.

As a fighter pilot with the Norwegian air force, Kjos flew the Lockheed F-104. It was a fantastic airplane the best ever built! he says. It was a difficult airplane to fly at low speed you shouldnt put inexperienced people on an F-104 but otherwise it was a fantastic airplane to fly.

During the eight years he spent flying military jets, Kjos couldnt think of any other life, he recalls. But just as a hobby, he took a law course while stationed at Bod air base, and it led to a change of career.

Along the way, he nearly ended up working for an airline that Norwegian is now a nemesis to. But Scandinavian Airlines, which was in need of pilots, required him to take tests on a day when he had a legal exam scheduled. Faced with a binary choice, Kjos made a selection that led to a stint as an assistant judge.

Kjos remembers courtroom life with fondness. Its an intellectual game, he says. Its a competition, and I loved it. Obviously there was always the risk of losing.

Likewise, airline leadership is no career for the risk-averse, and Kjos still draws on lessons from his air force days. As he puts it: One thing you learn about when you fly fighters is: stay away from the risk, and dont enter a risk zone, and if you have to enter it, know where the risks are.

flightglobal.com/ab

INTERVIEW BJRN KJOS


gers a living charter operation where you put your own things together, be it hotel book-ings or car rental.

Kjos notes a problem faced by airlines that struggled to compete in the past: they didnt have the websites, their tickets werent avail-able like they are in our digital world people couldnt even nd them. So, its a totally dif-ferent world we are living in.

Despite his airlines exponential growth track and his own dra-matic career history, Kjos chooses to occupy a modestly sized ofce at Norwegians simi-

larly functional headquarters in Lysaker, a business district on Oslos western fringes. It is a at structure; it will always be a at struc-ture, he conrms. You have to have a at structure in order to really be in touch with everything that goes on, and you have to have very advanced IT systems... I have to have an overview of all thats going on, and then you need to delegate everybody has to be respon-sible for their own things. They can always run it better than I can. And if they cannot run it better than I can, then they have to nd something else to do. Thats why I need them. Because theyre better than me!

Of his leadership style, he offers a simple analysis: You have to be yourself, because you cannot change yourself. At least I cannot! But to run an airline, its not something that you do on your own. A football analogy is drawn: Even though you have a captain, you need all the players... and they have to have different types of quality in order to be a winning team.

To be a winning team, of course, Norwegian must face down fearsome competitors in the shape of Ryanair and EasyJet. Discussing the Irish behemoth, Kjos argues that higher service levels can compensate for a gap in cost: We y to main airports, of course, and I think we have a better product. We cannot reach the cost level

that Ryanair has [but] the people that we y are inclined to pay a little more for the type of serv-ices that we add into our product.

As for EasyJet, Kjos sees Norwegian standing toe-to-toe with the UK carrier: We will not close the gap on Ryanair on the cost side, but we should denitely be able to y on lower cost than EasyJet out of the different areas. His reasoning is based on seat counts: EasyJets A319s are 156-seaters, while Norwegian ies 186-seat 737-800s. The Carolyn McCall-led car-rier has a eet almost three times the size of Norwegians 212 aircraft versus 75, as shown by Flightglobals Ascend Online database in mid-June but Kjos argues that today we are just about the same cost level as EasyJet, but we denitely have a much lower cost level out of the bases outside Norway.

New threats must be engaged by Norwegian as it welcomes the 787 to its eet and extends its long-haul foray: There will be a lot of air-lines trying to protect their own turf, and try-ing to prevent airlines from selling cheap tick-ets. Thats what we experienced in Norwegian when we started up, and that you will have to anticipate that we will meet in the long-haul sector as well. But Kjos nds hope in a his-torical precedent: Its easy to enter into mar-kets where you have high-priced markets as you used to have in Europe, but luckily, today, everybody can nd cheap tickets thanks to Ryanair, Norwegian and EasyJet.

Clearly, Kjoss task has evolved beyond rec-ognition since his rst year with the airline, when, he recalls, the challenge was how to save Norwegian because it could easily have gone down the drain. Now, the carrier ies on some 330 routes, employs about 3,000 peo-ple, and has more than 270 aircraft on order

As comebacks go, its almost heroic. O

To read an analysis of how an expanding Norwegian will fit into Europe, visit:ightglobal.com/Norwegianexpansion

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IT spend in the airline industry is shown by the Airline Business/SITA Airline IT Trends Survey to be once again on the rise, as technology becomes increasingly integral to every aspect of carriers businesses. Mobile is seen as a key area of investment as airlines get to grips with an ever-growing number of distribution channels

SPECIAL REPORT IT TRENDS

flightglobal.com/airlines July 2013 | Airline Business | 27

CONTENTS

All our special reports are available online at ightglobal.com/airlines

Rex

Feat

ures

28 Growing IT A snapshot of the key findings from the Airline Business/SITA Airline IT Trends Survey

32 Heart of the issue Why IT departments are being integrated into the centre of the airline business structure

36 Hottest tickets in town Airlines have increasing ways to ensure their seats and products are the most in demand

39 Now its personal SITA chairman Paul Coby looks at the lessons to be learnt from retail in customising offers

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IT TRENDS SNAPSHOT

28 | Airline Business | July 2013

GROWING IT Celebrating its 15th year, the Airline Business/SITA Airline IT Trends Survey shows airlines are looking to capitalise on possibilities offered by the increased use of new consumer technologies, with expenditure up across the industry

2013 AIRLINE IT TRENDS SURVEY SUMMARYThe Airline Business/SITA Airline IT Trends Survey has tracked IT developments and strategic thinking in the industry for 15 years. Respondents in the benchmark study represent more than half of global airline passenger traffic. You can download the executive summary of this years survey now at the IT zone (ightglobal.com/ITzone) and the full report will be available for purchase later this summer at ightglobal.com

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VERBATIM COMMENTS

Major IT successesMaturing our mobility offeringsImplementation of customer-focused business intelligence toolsIT reorganisation, IT people consolidationIn-ight communication, baggage handling, hub operationsEnterprise resource planning, implementation and integration to allianceBeing able to increase revenue generation opportunities in the current economic situation Developing new distribution channel (mobile)Reducing operating costs

Major IT failuresCore systems upgrade projects were delayedDid not invest en

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