Keynote address The Future of the Travel Industry

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					Keynote address:
The Future of the Travel Industry
Dermot Mannion – Chief Executive


International Society of Tourism and Travel educators Annual Conference
The Future of the Travel Industry….?




                                       1
Key issues……present and future……

 Sustained ultra-high fuel prices


 Slowing consumer demand in key markets


 Intensifying competition


 Industry consolidation


 Environmental issues
.
.



                                           2
       The credit grenade and its consequences


                  Housing/Consumer Slowdown



                       Huge Volatility
Credit Crunch          In Commodities               Falling
Banking Crisis                                    Asset Prices




                        Interest Rates
                           $/£/€ FX


            Western Economies In Sharp Slowdown
                                                                 3
                    Jet fuel velocity




• Rate of increase, not actual price, has undermined airlines

                                                                4
                The stock market reacts




• Travel companies and airlines capitulate on all stock markets

                                                                  5
Airline Industry Response

 Step 1 - Hold firm, take market share


 Step 2 - Curb capacity growth and raise yield


 Step 3 - Restructure costs and rationalise


 Step 4 - Survive, merge or capitulate




         • Consolidation phase accelerating amid current crisis

                                                                  6
Challenges amplifies in Ireland

 Economy at centre of Anglo-American crisis


 Open economy with heavy $/£ exposure


 Short-haul – Direct fight with lowest cost provider


 Long-haul – Fast changing transatlantic alliances




             Aer Lingus under extreme market pressures

                                                         7
                          What faces Aer Lingus ?

 Sharp slowdown in home market + $/£ revenue pressure

 Unit costs rising – labour, fuel, airports

 Short-haul - key competitor expanding – 15% pa minimum

 Long-haul - competitors merging to cut costs, exploit market share. Open Skies
  a game changer. Star, Skyteam, OneWorld = 70% transatlantic market




              • Rapidly changing environment creates real threats

                                                                              8
The European Airline Industry in 2015

                                                     2015
                       2008              Scenario A           Scenario B
                       British Airways   British Airways/IB   British Airways/IB
                       Lufthansa         Lufthansa            Lufthansa
                       AF/KLM            AF/KLM               AF/KLM
                       Ryanair           Ryanair              Ryanair
                       easyJet           easyJet              easyJet
                       Air Berlin        Finnair
                       Iberia            Aer Lingus
                       SAS               Virgin Atlantic
                       Alitalia
                       Austrian
                       Finnair
                       Aer Lingus
                       BMI
                       Virgin Atlantic

Brent per Barrel       $125               $100                  $200



Source Goldman Sachs



                                                                                   9
The Original Challenge for Aer lingus

 Preparing for an IPO
 Major expansion
 Compete on short haul and long haul
 Deliver a consistent product to the customer
  – Low prices on direct flights
  – Extras that make flying easier
  – High level of customer service
  – An experience with a human touch


 Grow profit




                                                 10
The new Challenge……(or is it really a “New” challenge

 Survive
 Innovate
 Compete
 Exploit opportunities
 Remove cost from the business
 Deliver a consistent product to the customer
  – Low prices on direct flights
  – Extras that make flying easier
  – High level of customer service
  – An experience with a human touch


 Return to profit

                                                        11
2008 and beyond - Changing perceptions

 Since 2001 Aer Lingus has had to change to remain (become?) relevant
 “Aer Lingus Brand” still has natural advantages
  – Customers still have high expectations……
  – ….at very Low fares

 Post IPO, Aer Lingus has a greater number of constituencies/Audiences
  – Customer
  – Staff
  – Market
  – Regulators
  – Shareholders

 Airline needs to drive the business profitably forward
  – While retaining all that sets Aer Lingus apart from the rest



                                                                          12
Network Development 2001- 2008
2001 | Short Haul Point-to-Point   2008 | Short Haul Point-to-Point




                                          2008      2001   Change
Routes                                      86        31      + 55
Aircraft types                               1         4        (3)

                                                                 13
Positioning




Full Frills     Few Frills   No Frills
Impressive      Friendly     Cranky
Sophisticated   Practical    Basic
Flexible        Fair         Unapologetic
Expensive       Relevant     Tolerable

  Pricey         Cheap       Cheap
   and            and         and
  smart         cheerful     nasty


                                         14
… based on “value-for-money” positioning
                      Operational focus on cost reduction
                  Key aspects of service delivery differentiation
                   Low fares at the core of all communication
Cost focused                                                        Customer focused




Economy pricing                                                     Premium pricing




                                                                                  15
How our Customers currently perceive us:
• Warm, welcoming (typically Irish)
• Professional, punctual, safe.
• In the Irish market:
  • Expect our brand to deliver higher levels of service and customer care.
         • Arguably a hangover from past experience/communication ?
  • A real alternative to traditional Low cost carriers


• Markets outside of Ireland (e.g. NI, GB, Ger, USA)
  • Stronger on aspects of service and customer care.
  • Often aligned with traditional carriers rather than Low cost carriers.




                                                                              16
The message….Consumer

 Low Fares
 Direct services to popular destinations
 Professional and efficient customer service delivered with a human touch
 Central city airports
 Allocated seating
 One-way fares (short-haul and
  long-haul)
 e-booking
 Efficient check-in (FastPass kiosks)
 Frequent Flyer programme
 Customer care in event of disruption
 Although the Airline has changed, the primacy of the customer remains


                                                                             17
The message….Market/Investors

 Profitable enterprise
 Well run company
 Strong management team that are on top of the significant issues that the
  company and industry face
 Robust business model
 Continues to compete strongly in all markets
 Investors are comfortable with Aer Lingus' hedging approach to fuel
 Management has a clear plan and is executing it well




                                                                              18
The message…..Staff

 Customer is at the centre of everything we do
 The airline is well placed to grow for the benefit of all stakeholders
 Progressive organisation
 Rewarding and fulfilling place to work
 Management has a clear plan and is executing it well
 Change has been, and will be ever present




                                                                           19
Innovation
To Drive Revenues without driving Cost

 Expand network reach into new markets


 Leverage our “Know-how” bulit up over many years – aerlingus.com


 Selectively leverage other distribution channels in existing markets
  – www.aerlingus.com
  – Travel Agent Consolidators
  – Dot.Coms etc.


 All to be achieved without adding infrastructural cost or complexity

         Sum of Sectors (EI Short-Haul and Long-Haul networks)
         jetBlue Farelink (EI Long-Haul and B6 Short-Haul networks)
         United Codeshare
                                                                         21
Sum-Of-Sectors

 To access bigger markets - connect Europe to North America.


 To leverage connection opportunities between our 2 standalone networks


 To use Sum of Sector technology on the website to ensure that both LH and SH
  component of connected product are sold at the optimum yield. Avoid cross-
  subsidisation


 To leverage existing Sales and Marketing efforts in US and Europe to sell Europe
  out of the US and US out of Europe




                                                                                 22
Sum of Sectors - What is it?

 We conducted an analysis of connecting possibilities from Short Haul to Long Haul
 In many cases, there were no valid connections (without adjusting schedules) or a
  strong direct incumbant existed
 In the case of 28 cities, connections existed, incumbants were expensive or in
  some cases, no direct services existed
For Example
 JFK & BOS
  – BCN, MAD, CDG, NCE, LIN, MAN, GLA, LGW
 JFK Only
  – FCO, NAP, WAW, KRK
 BOS Only
  – DUS, FRA, BRU, BHX, CPH
                                                                                   23
      How we sell it - Search Engine Marketing




 Strategy is to bring customers to aerlingus.com through Search Engine
  Marketing
 (above) UK customers search for Manchester to New York
                                                                          24
Driving Passenger Revenue through partnership
 Linking Aer Lingus lowest fare short-haul and long-haul sectors to offer
  customers seamless connections
 Industry first partnership with jetBlue to offer connections between Ireland
  and 40 destinations in the US - seamless booking process on
  aerlingus.com
 New codeshare agreement with United Airlines commencing Nov 2008
  covering all of Aer Lingus’ US gateways with access to over 200 additional
  UD destinations
 The codeshare which will apply to all Aer Lingus transatlantic flights to and
  from Shannon and Dublin will also result in simplified reservations,
  ticketing, through check-in and coordinated baggage handling for
  passengers.




                                                                                  25
United Network




                 26
JFK Connections With
  JetBlue Services


                       27
Long Haul Product Enhancement

 Long Haul Product needs to be relevant
 Current product is inconsistent
 Recent new aircraft arrivals set the new standard
 Major retrofit programme underway
 At least 80% of Long Haul fleet at new standard by Summer 2009

      New seats in both cabins
      Enhanced Premier Inflight Entertainment system (IFE)
      Video on Demand in Economy
      Other misc. cabin enhancements




                                                                   28
Driving Revenue through

Ancillary Revenue

 Baggage Charges introduced with 60% of customers pre-paying online

 Introduction of Seat Selection fees on Short Haul and Orlando


 New Travel Insurance option at point of booking provided by Mondial

 Improved Car Hire proposition through dynamic packaging at point of
  booking


 New hotel provider, lastminute.com contributing increased hotel bookings

                                                                             29
Delivering Growth | New Bag Tag Kiosk




                                        Bag Weighing Scale


                                                             30
The Environment
  Aviations contribution to climate change

•Aviation accounts for about 2% of total anthropogenic CO2 emissions

                                                       Contribution to man-made
                                                       carbon dioxide emissions
                                                       according to different key
                                                       studies
                                                       Sources: IPCC, UNFCCC, IEA and DLR




•Domestic aviation is included in Kyoto – commitment to find a solution through
ICAO for international air transport




                                                                                     32
2007 | Reducing Fuel Consumption
                                Average specific fuel consumption
                                     (litres per 100 revenue passenger kilometres)
8.5
             8.15
8.0
                    7.64                                                                                  Aer Lingus fleet 2007
7.5
                                                                                                          4.04 litres /100 RPK
7.0
6.5                           6.56

6.0                                  5.91
5.5                                     5.19
                                               5.08          5.00
5.0           50%                                                   4.86           4.82
              reduction since 1991                4.92                                      4.52
4.5                                                                         4.65                   4.21
                                                                                                             4.10                 4.04
4.0
                                                                                                                3.94       3.98
3.5
      1991




                       1993




                                                                                                   2003




                                                                                                                    2005




                                                                                                                                     2007
                                        1995




                                                      1997




                                                                     1999




                                                                                     2001




                                                                                                                                            33
2007 | Reducing Fuel Consumption – New Aircraft
Fuel burn - kilos of fuel, per seat, per flight hour


      19.0

                            18.1
                                                   17.2




                                                              15.4




    A330-300             A330-300                A350-800   A350-900
      (OG)               Enhanced



                    Reducing fuel burn and emissions


                                                                       34
Emission Trading Contd
CO2 production / tonnes




                                                          This amount of CO2 must be
                                                           purchased from the open market
                                                          CO2 can only come from other
                                                           industries which can reduce their
                                                           CO2 below the cap
                                                                CAP
                                                   This amount of CO2 is allowed without
                                                                  charge


                          2005 2006 2007 2008 2009 2010 2011 2012 2013


                                                                                           35
Outlook

          36
2008 First Half | Financial Summary
 Loss reflects difficult consumer and fuel environment

 Delivery on cost saving initiatives through PCI and maintenance contracts

 Worsening market conditions call for a fundamental overhaul of our cost base



  €m                                                                     2008     2007   Change

  Total revenue                                                         632.9    574.1   + 10.2%

  EBITDAR                                                                36.0     56.5   (36.0%)

  Operating (loss)/profit (before profit share)                         (22.3)     2.6       NM

  Return on Invested Capital (%)**                                      17.4%    17.3%    +0.1pt

**As measured by EBITDAR/Replacement Value on 12 month-rolling basis.
                                                                                             37
Future imperatives

 Economic outlook in main markets uncertain - exacerbated by continuing rise
  in oil prices
  – 64% of 2008 fuel exposed to market
  – US$5 change in the price per tonne of jet fuel has US$1.5m impact on cost of
    unhedged fuel requirements for the period March to December 2008.

 Key focus will be to increase awareness and traffic on new gateways while
  continuing to drive performance on current gateways
 Open skies now offers us the means of supplying the market purely against
  demand and market dynamics
 Sum of Sectors allows us to harness demand to/from 17 of our Short haul
  points feeding into our long haul
 Our new relationships with United and Jetblue give us the opportunity of
  significantly increasing our footprint in the US market
 Open Skies offers us new and exciting opportunities for growth


                                                                                   38
Outlook
 Difficult market conditions will continue
  – Significant cost pressures in all areas of the model

  – Further fare reductions required to drive volumes

 Driving value through active network and fleet management
  – Winter LH capacity will reduce by 11%; SH capacity will reduce by 1%

  – Deferral of delivery of new A330 aircraft from September 2009 to June 2010

 Operating environment and rising costs will continue to have a significant effect
  on the financial performance of the business

  – Aer Lingus will at best, break even in the second half, delivering a loss for the full year

 Further fundamental changes needed to operating cost base to minimise losses
  in 2009 and to ensure the long term viability of the business


                                                                                                  39