Facing up to regulatory challenges
The Association of Asia Pacific Airlines (AAPA) comprises 17 of the region’s largest carriers, which collectively handle about 285 million passengers and 10 million tonnes of cargo a year. AAPA Director General Andrew Herdman spoke with Asian Aviation’s Andrzej Jeziorski during the Asian Aerospace 2011 show in Hong Kong.
Q: What has changed in the industry since the last Asian Aerospace show?
A: Two years ago, we were in the depths of the downturn. I was trying to express some optimism about the first signs of an upturn and I was trying to project a positive view of that which wasn’t commonly accepted wisdom at that time. Now, you look at the graphs and it’s a very sharp V-shaped recovery and we all enjoyed that in 2010. You see that in the results of the airlines.
Q: You’re confident that that will persist?
A: Well, the long-term growth dynamic hasn’t changed, and even in the depths of that downturn we still had faith in the future. But it was tough. And it was tougher for people in Asia, because their business is basically skewed towards premium traffic, long-haul and cargo, so there was no hiding place. So you had the situation where Cathay [Pacific Airways] was reporting big losses and Singapore Airlines was barely profitable. Then you get the flipside of that. When things pick up, everything picks up, and so [you have] very strong revenue performance and that translates into good bottom-line performance. For this year, I’m optimistic. The long-term growth story’s still intact. We’re talking single-digit growth – traditional growth levels, but compounding it over time and airlines are planning on that basis.
Q: Are you that optimistic for both passenger and cargo traffic?
A: Well, cargo had this huge slump, huge rebound and it’s hard to separate out what the current trend is for this year. It’s a bit soft in some places – outbound from China [for example]. But I think we’re probably back to a more normal seasonal pattern, where January, February – depending on the Chinese New Year – starts off, the March is often pretty good, then April-May-June is rather soft, and then you get the big seasonal peak July through to the end of the year. So trying to forecast what the growth’s going to be at the midpoint [is difficult]. It’s probably just the long-term growth rate. So: 6 [percent]?
Q: Do you anticipate a lot more fleet expansion this year?
A: Well, a lot of orders have been placed. Both Boeing and Airbus have got six-year backlogs, so these are incremental orders. The planning horizon is long, because there’s a backlog, so you’re talking in terms of what we need in five to seven years’ time. That’s what we need to place orders for now. So I don’t think it reflects a change of view about the future, it’s just business as usual in terms of which aircraft and when. Obviously, the uncertainty is when will the 787 finally enter into service, will the A350 face delays, the 747-8 has also faced its fair share of difficulties, and the A380. So, overall, you’ve got the backlog and you’ve still got this uncertainty about new programmes. But people are just ordering equipment based on their projected growth rates and retirement plans for the existing fleet, and supply and demand should be pretty much in balance. I don’t detect a lot of overcapacity.
Q: Looking forward, what are the key challenges facing the AAPA?
A: We are a trade association so we’re focused very much on regulatory issues. This is an extremely heavily regulated industry, both technically and non-technically. If you’re in the international aviation business, you are bound by multiple overlapping and often-contradictory regulations.
You find you’ve got to abide by [national guidelines in your home market] and other guidelines issued by countries you fly to, guidelines issued by countries on aircraft certification and so on. The strong regulation in the industry can account for the extraordinarily good safety record, but we also have regulations on security, which aren’t about security – they’re about security procedures. We’ve got regulations on passenger rights which seem to us to encroach on what should be just customer-service provider relationships. And that carries on. We’ve got regulations on environmental targets, we’ve got carbon taxes, we’ve got arbitrary taxes, which aren’t green at all, they’re just taxes.
So there’s a whole lot of doing-business issues and regulatory issues, where we’re of the view as international airlines doing business across the world, that sometimes it’s almost impossible to comply. So we keep pushing for global harmonisation and standardisation. Governments accept that principle, but then embellish it with ‘new and improved’ regulations of their own. So we spend a lot of time arguing for harmonisation before the fact, not after the fact, to try to balance how much you can trust the industry to do it and let the market discipline the providers, and to what extent it has to be laid down.
Q: So does the market always work better for the industry than regulation?
A: Certainly in this part of the world, airlines compete very heavily on service and price – it’s about who can deliver the best value – and the market works. When I’m talking to colleagues in America, there’s a feeling that the market hasn’t been working. It’s driven fares to competitive levels, but it’s led to service across the board really being degraded. So there’s a feeling that the market solution may not be the best.
In Europe, it’s a mixed picture. The LCCs are driving the short-haul market towards no-frills, no-service. But that’s leading to regulatory action, saying they’re going to mandate recovery levels, compensation levels – we’re starting to hear regulators talk about what should be included in your ticket, what should the baggage allowance be … So the pendulum is almost swinging back. We used to have standardised baggage, standardised ticket-refund policies, then because of anti-trust and competition concerns we had a proliferation of different offerings, to the point where now the regulator’s saying this is awfully confusing for customers.
It’s a bit like mobile phone pricing plans. Does complexity reflect more choice for consumers? To some extent, yes. But does complexity create a game that the providers are more adept at playing than the consumers? It’s ironic that it’s the regulators who are [asking for standardisation of services] and we’re saying – well, we used to be there!
Q: Would you like to see more consolidation in the industry?
The industry has grown phenomenally and it’s liberalised at a pace which has allowed us to meet that growth. But who’s serving that demand? The answer is hundreds of airlines around the world, when in any other industry you’d be saying the big eight or the big five. So you haven’t seen the consolidation in this industry that you have in banking, car manufacturing or pharmaceuticals. And that comes back to national ownership control rules and – even further than that – that it’s got to be management control and so on. And that’s preventing cross-border mergers. So we’ve had instead a lot of bilateral co-operation and then we’ve had alliances.
Right now, we’re beginning to see consolidation finally in the US and Europe, with BA-Iberia, Air France-KLM and United-Continental. You’re not seeing that in Asia, because it would still be very difficult to do a cross-border merger. There’s a temptation to assume that because consolidation is taking place in the US and quasi-consolidation in Europe, the large players in those continents are getting larger and that begs the question, does that give them a competitive edge globally?
But one observes that it’s the Asian airlines that are winning the commercial battle in terms of profitability and growing market share, and that’s rewarded with high market capitalisations. So you have a situation where, combining Northwest and Delta, you get a very large entity, some cost synergies, you get very large passenger numbers and revenue numbers. But when you look at profitability and then market capitalisation, it comes to about US$25 billion, which is the enterprise value of Air China. And the big players in Asia – Cathay Pacific, Singapore Airlines, Air China, China Southern, Qantas, All Nippon – have market valuations as enterprises which are comparable to those major players.
So, even without consolidating, the big Asian players can hold their own in terms of market valuations. And if these historic restrictions were released, it would be interesting to what extent the Asian players would be shaping future strategies [globally].
Q: Your membership is now 14 airlines – do you see that changing?
We’d like it to be bigger. The way I view it, we’re representing the community of airlines based in the region. The only membership criteria are [that an airline should be] based in the region and operating scheduled international, not pure domestic, and that’s it. And you’ve got to be prepared to pay the cost of membership to support the secretariat, because we’re non-profit.
We’re representing the interests of the community. We’re certainly not representing the interests of members vis-a-vis non-members. The members are currently 60 percent of the capacity in Asia.
I’m keen to welcome new members – that would include the mainland Chinese airlines, who are currently not members. There’s also a question, are we open to membership from smaller carriers, LCCs, call them what you like. I’ve said from the beginning: yes. I don’t think it’s helpful in Europe to have split into business-model based associations. The issues crop up regardless. Safety, security, environment, taxes – these are industry issues, not specific to business models.