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Alex Dichter Leader, Global Airline and Travel Practice McKinsey & Co, Atlanta Thai Airways 50th Anniversary Conference: Challenges in global aviation management Bangkok, 15 October, 2010 Moderator: Siva Govindasamy Asia Managing Editor Flight Global Group, Singapore The Airline industry faces many challenges and it is very tough industry. In the early 2000, Mckinsey did some researches and the only industry in the world that has consistently under-performing is the airline industry. Thai Airways, however, not only survived the hard times but also continue to profit in the future. The difference between success and failure in the airline industry is the choice in time in the market. Most regions eventually fall prey to industry dynamics. The International Air Transport Association (IATA)’s Four Phases of Market Development are as follow: Phase 1: Limited competition Phase 2: Emerging competition Phase 3: Traditional competition Phase 4: Intense traditional and non-traditional competition Over 50 years, the airline industry has been destroyed. But why would people like to invest in this kind of industry. There are enormous reasons for the government to support this business. These reasons are, for example, cost efficiencies immediately are passed on to consumers. Airline unit cost against airline unit price has been decreased. Most airlines have done a good job in reducing cost. Airline has been extraordinary generous in passing what they have saved in their cost to consumer. So, ticket price has become lower every year because the airline is effective in saving their cost. Moreover, there has been 99% correlation since industry deregulation in late 70s, profits are passed onto suppliers, etc. During the course of the airline industry, cyclical performance is linked to mismatch between supply and demand. Accordingly, recent downturn was predictable, even before the financial crisis. However, the airlines are doing better now, especially, in Asia where airline industry is particularly strong. In the U.S. Industry Example, there are three “Cs” of recovery from this downturn as follows: - Capacity restraint - we have seen airline working to control capacity at a rate that in line with passenger demand growth or below. In US, we see it come down 4% per annual. - Cost control - improvement in cost structure - Charges - change in airline ticket price structure Asian carriers are doing better than peers, but still not earning cost of capital. In a better performing industry, some clear winners are emerging. Regarding the focused, traditional players, what we have to be considered are low cost among peers, high asset utilization, high labor productivity, and high percentage of unique markets. On the contrary, when it comes to the low cost players, what have to be considered will be absolute lowest cost possible, high percentage of unique markets, and high ancillary revenues. In Asia, the challenge will include the significant labor cost advantages to European and North American competitors, strong service reputation, limited runway capacity; bilateral agreements keep controls on supply, robust demand growth likely to outpace supply growth for next 3-5 years, labor cost advantage not reflected in overall CASK advantage, focus on large aircraft increases exposure to commodity markets; limits frequency. As markets open and new urban centers emerge, new hubs will absorb excess demand and barriers to consolidation will limit rationalization. In summary, Asian is much better than their peer with very strong underline fundamental.
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