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Finding Your Partner Outlook: Alliances, JV’s M&A’s Dr. Emre Serpen Executive Vice President InterVISTAS Consulting Group WORLD ROUTES 2012, ABU DHABI, UAE


Air transport growth is greater in emerging economies in Asia, Latin America, Middle East, ďƒ˜ Shifting market growth: The GDP growth of emerging economies is significantly higher than mature economies ďƒ˜Small growth in GDP translates to significant market growth in Asian, Latin American markets

Partnership and cooperation with airlines in emerging markets is critical for future growth Airbus August 2011 Forecast

1


Using geographic advantage Gulf Carriers and TK are growing connecting emerging markets in particular Asia, Middle East and Africa The emergence of Gulf/Middle East carriers causing shift in global traffic flows across major connecting hubs

2


With significant new aircraft orders, growth is set to increase in coming years

3 Source: Diio Mi Sept 27th, 2012. Both directions total.


Emirates supported its network thru code shares

 Profitable year-on-year growth Second brand worldwide  Significant marketshare in India, many African states Changed dynamics of Kangaroo route

Emirates

Continuing growth More market penetration in US Canada FlyDubai expanding regional routes Positioned to take advantage of markets with significant potential – Iraq. Iran etc 4 Source: Diio Mi Sept 27th, 2012 (For Sept 2012).


Emirates/QANTAS Partnership Signals Change in Traditional Alliance Relationships - Immediate impact on One world QANTAS Before Emirates Partnership: • 5 One-Stop Destinations in Europe (via QF operations or code shares) • No service to Middle East/North Africa

Did BA had to use its aircraft in flights beyond Singapore ? Reduction in feeder traffic with CX code shares ?

:JAL – BA Start 1st October •Include Paris /FR •19 Flights LHR/NRT •March 2013 ? Deal with CX, MH QANTAS After Emirates Partnership: • Stop flying from Singapore and BKK to Europe • Drop Frankfurt Service • Drop code share plans with MH to 5 European Countries • Discontinue BA code share (SIN/TPE), CX (HK/Rome) • 32 One-Stop Destinations in Europe & 31 One-Stop Destinations in Middle East/North Africa via DXB • Revised service to SIN/HKG/KUL for better connectivity to Asia 5 Source: Sample Summer 2012 schedule


Etihad using code shares supporting its growth

Source: Diio Mi Sept 27th, 2012

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Etihad adding partnerships to support its growth strategy 2011 profitable Interim 2012 revenues 30% increase 800,000 passengers from passenger airlines $ 281 Million from partner airlines Since 2008 growth fro 2 to 35 code share partners Mergers and Acquisitions key to 20 year plan 10 year strategic partnership with Virgin Australia

40 %Stake in Air Seychelles 29% Air Berlin Stake, access to high yield European Markets ? Partnership with Air France & KLM – one world indicated no issues with Air Berlin Economies of Scale in 787 fleet , 56 aircraft common activities 7 Source: Diio Mi Sept 27th, 2012 (For Sept 2012).


Strategic Partnerships Cross Alliance Boundaries and are Becoming More Complex

Sample of selected strategic partnerships of Etihad and Emirates

Cooperation under discussion

Codeshare/ FFP benefits under Discussion

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Alliance focus on emerging markets, Asia, Middle East, Latin America The three Global Airline Alliances continues see strong coverage in the Americas, Europe and Asia. Nevertheless, there is notable absence of membership in the Middle East and India.

Passengers carried by Middle Eastern airlines that belong to a global alliance account for only 2.4% of total alliance passengers and 1.8% of daily departures. 9


There may be further impacts on Alliances due to JV and Merger activity Membership in Global Alliances is very fluid. LATAM, Emirates-Qatar Deal

join SkyTeam

exits SkyTeam & joins Star join SkyTeam

joins Star Malaysian Sri Lankan

join SkyTeam

join oneworld

10 Source: OAG Max


Ownership laws, national interests typically restricts industry consolidation Perceived national Interest •

Ownership rules

Singapore/China Eastern

Public opinion against foreign multinationals

Some improvements (Malev, Air India)

Competition Law •

The interpretation of the competition law often inhibit ed consolidation EU/US

In 2001 DOJ blocked United/US merger on the grounds that the fares would increase

Practicalities •

Fleets, cultures, work practices, IT, seniority lists


Hence level of airline consolidation is still relatively low compared with other industries, Airlines Share of Industry

Distribution Company Share of Industry

12 months ending March 2007

12 months ending March 2007

Delta 12% United 16%

Continental 12% Northwest 10% US

Galileo / Worldspan 30%

Sabre 34%

Top-3

95% of Industry AirwaysRevenues

4%

Other 5% Amadeus 31%

Rental Car Company Share of Industry Top-3 American 48% of Industry 20% Revenues

Other 26%

12 months ending March 2007

Avis / Budget 20% National / Alamo 9%

Hertz 29%

Network carriers reduced From 20 Carriers to 8 (90-06) Regional Carriers Reduced From 150 -70 (90-06)

Thrifty / Dollar 6% Other 5%

Top-3 80% of Industry Revenues Enterprise 31% Note: Other based on estimates from industry reports


Some consolidation has started within EU, also some flag carriers ceased to exist Lufthansa 

The synergies from integration with Swiss, exceeded 200 million Euros •

expanded route network with more destinations and better connections

interlinked frequent flyer programmes and mutual lounge access

Total synergies from integration of Austrian are estimated at around EUR 80 million Euros (both revenue and cost) •

improved access to international passenger flows and joint international marketing,

Nonstop Total Weekly seats Operated by Lufthansa Group Aug. 2003–Aug. 2008, Dec. 2008

cost advantages and economies of scale

The scope of integration Swiss /Austrian were similar •

Autonomous carrier own business management, own crew and fleet

Zurich integral part of Lufthansa’s multi hub strategy

Air France / KLM 

The airline related savings of €525 million over three years by combining purchasing, sales and information technology. Depending on further progress of discussions between FAA – EU in future we could see similar deals between US/EU


Joint ventures increasing in across the board Joint Venture / Anti-trust Immunity relationships allow for better coordination in scheduling and pricing to offer passengers more convenient travel options.

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Short haul routes : LCCs have quadrupled their intraEuropean market share in the last ten years RAPID LCC EXPANSION ACROSS EUROPE

LEADING TO INCREASED MARKET SHARE

2001 2008 2012

FSC

LCC 2001 Source: OAG, 2011; Lit search;

2004

2008

2012E


Similar patterns in Asia, Middle East , also closer business models may lead to further cooperation between network and LCC Focus on short haul profitability, reduction in CASK, Eg Malindo, Air Asia, Cooperation between Network and LCC carriers -Eg LH/Jetblue. Etihad/VA et Network carriers to leverage LCC relationships much better Air Arabia

Do we have more opportunity for further partnerships between Network And LCC ??

Flydubai 16 Source: Diio Mi Sept 27th, 2012 (For Sept 2012).


Increasing Joint Ventures and “Innovative Partnerships” Alliances and • Joint Ventures • • • Mergers Cross-Border • • •

Innovative Partnerships

• • •

Central Africa / India / Middle East / CIS carriers likely next to consider Global alliances membership Potential new JVs to form in light of recently announced Emirates / Qantas Joint Venture and codeshare partnership Global Alliances attracting LCCs to join via hybrid partnership platform (SkyTeam)

Within the EU: Lufthansa with Austrian, Swiss, Brussels Airlines; IAG: British Airways and Iberia Latin America – AviancaTACA; LATAM Airlines Group Potential US-EU airline mergers? (Pending regulatory approvals)

China Eastern & Qantas (carriers in different competing Global Alliances) to form Hong Kong based LCC Etihad /Australia Porter (small, regional Canadian airline) signs interline partnership with South African Airways via Washington IAD


Finding Partner: Analysis, Strategy, Execution


Analysis Overview Identify changes in region and market level in both demand, supply, considering circuitry and yield

RegionRegion EU-NO NO-EU AP-AF AF-AP

Circuitry

108% 109% 107% 106%

1.

Relative growth of region to region flows considering yield and circuitry

2.

Benchmark connectivity with key competitors considering yield

Yield Aug-09 8.8 8.7 9.4 9.4

Onboard O&D Aug-09 Aug-10

Aug-10 9.0 9.1 9.3 9.3

869,909 835,797 657,943 655,028

1,019,118 986,496 703,314 701,660

Industry O&D Aug-10 Aug-10 8,330,229 8,330,229 5,776,835 5,776,835

8,479,367 8,479,367 5,630,906 5,630,906

Region EU-EU LA-EU EU-NO AP-EU Connect Markets CDG-MED DAM-MXP PEK-ODS BKK-TLV

3.

Historical growth O/D growth

4.

Relative growth of airline Connect Markets market share share compared BKK-ARN PEK-TIP to O/D market flow IKA-YYZ considering yield and circuitry ALG-MED

Service Share Jan-09 0.8% 0.6% 1.4% 50.2%

Jan-10 0.9% 0.7% 1.3% 100.0%

2005 87 1,452 847

2006 391 35 2,050 1,294

O&D Share 2009 2.0% 1.6% 7.3% 86.0%

Growth A1 Share A1 Industry of Industry 17.2% 18.0% 6.9% 7.1%

A1 6.2 9.4 9.1 9.5 2007

853 29 1,195 2,308

A2 6.6 9.2 9.1 9.1

2008 793 56 1,539 3,745

% Change 2010 Service O&D 3.3% 8% 61% 2.9% 4% 79% 8.9% -9% 23% 86.3% 99% 0%

1.8% 1.8% -2.5% -2.5%

12% 12% 12% 12%

A3 Yield 8.5 9.6 11.0 9.1 10.6 9.0 8.8 9.3 2009

1,717 2,347 2,539 3,679

2010 2,566 2,561 2,528 2,499

CCt 101% 101% 110% 117%

O&D 6,786 5,968 5,674 5,196

Focus on city pairs we want to develop/improve 19

Yield 3.0 3.0 2.8 7.7


Strategic Evaluation - is critical to establish competitive strengths and determine scenarios for growth opportunities

ďƒ˜Market analysis -the demand and supply, competitor activities and strategic change ďƒ˜Market Growth compared with Client Growth, where client growth may be slower than market growth, also vis-a-vis fare changes. ďƒ˜Strategic evaluation is used in the of the development scenarios 20


Strategic Evaluation Market Analysis and SWOT

Market share growth compared with total market growth ďƒ˜ lose marketshare whilst reducing its average fares. ďƒ˜marketshare growth and fare protection in growing markets

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For example growth of competitor activities at airline’s hub. This analysis shows though this particular client is growing y-o-y 25% on its hub serving top 500 markets, 22


Other deeper analysis include analysis of an airline’s hub which may be poorly designed with the lack of a clear arrival/departure bank structure. This for instance equates to lost opportunities in connecting O/D markets

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Market forecasting to determine priorities Top-down elements include GDP-driven passenger growth.

There is an established correlation between year-over-year GDP growth and corresponding growth in passenger volumes. For increased accuracy, the GDP of respective countries on a route network and point-of-sale data are considered in the analysis  This smoothes temporary fluctuations of bottom up analysis The bottom-up elements include regression analysis utilizing IATA Paxis and MIDT flown passenger data. The market forecasting results are then used as an input to network optimisation tools.

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Development of Route Strategy  Selected scenarios evaluated to establish

route strategy and route structure Test different scenarios and business models and evaluate respective differences in variable contribution towards selection of the best model  Use of optimisation models.

New destinations with better market growth, and yield advantages. The route structure that maximises marketshare, and variable contribution improving competitiveness is selected Identify key changes to Long Haul, Medium Haul, Regional and Domestic Identify key changes for better use of alliance and code share partnerships

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Deciding on code share, alliance, Joint Venture Strategies Strategic Plan Market Forecasting

Network Planning Long & Medium Term

Capacity growth (incl competitors)

Average Fares Costs Service Objectives

Scenario Development

Hub Optimisation

Changes to Fleet Plan

Network Design

MIDT/BIDT

Shorth Term Strategic Plan Network Planning Long & Medium Term

Scenario Development MIDT/BIDT

Network Design

Identify value of current codeshares

Identify new codeshare opportunities to improve sustainable variable conytribution

Monitor Performance of current codeshare agreements

Identify alliance to opportunitie improve sustainable variable contribution

Monitor execute changes to improve gains from the current alliance

Identify Joint Venture Partners to improve sustainable variable contribution

Monitor Benefits from JV partnership

Alliances Shorth Term

Pricing Alliances

Contact candidate airlines and initiate new codeshare agreements

Develop code share agreement

Execute codeshare agreements

Contact alliances to initiate membership

execute Alliance Participation

Contact JV Partners towards agreement

Execute Joint Venture Agreement

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Determination of code share benefits

Following the network optimisation analysis, bilateral and codeshare development opportunities can be identified and examined ďƒ˜ or long-haul flights with codeshares to other alliance hubs including beyond points, ďƒ˜medium/short-haul flights in a feeder role.

As some alliances selectively restrict code shares with rival alliances, the value of current code shares must be evaluated. beneficial for the airline. Example: Value of Current Codeshares

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Evaluation of Alliance Benefits

Network Benefits Additional pax due to meaningful and advantageous connections. Develop the best strategic fit with the alliance for own strategy Different Objectives feeder to alliance hubs protect stratetic interests Bilateral agreements excluding other airlines .

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Evaluation of ATI Benefits ATI Benefits: Commercial and operational alliance-wide cooperation, reciprocal participation in each other’s FFP, proration of passenger fares,  co-operation on facilities and passenger handling,  lounge exchange program, common promotion and advertising

Category

Low High Revenue Com es From …

CRM

1.5

1.5

FFP

5

15

Opportunity cost of not having ATI/Open Skies

0

0

Low er COUNTRY distribution costs

6

9

Reduce commissions/overrides

Net Fares in COUNTRY mkts

0

0

Better coordination of net fares

Target corporate accounts

0

0

Internet sales increase

0

0

Increase in COUNTRY sales

30

30

Competitive effect in COUNTRY marketplace

0

0

Low er Country distribution costs

39

39

Negative competitive effect in domestic marketplace

0

0

Franchise Country CTO's

0

0

CRM improvements Increase costs per KM to suppliers using Alliance FFP. Could lose many benefits currently offered from Alliance

Offer corporations deals for their entire travel needs Joint coordination of sales campaigns & promotions Combination of pricing, RM, sales & marketing Competitive response (pricing, RM, sales & marketing) Reduce distribution costs Competitors erode Client market share Spin-off Country CTO's through franchise concept

common procurement 29


Joint venture success requires careful planning, stakeholder engagement and change management

 Realistic assumptions, especially on yield increases  Governance of network, pricing, revenue management, distribution

Cultural fit Tone of the Joint Venture Discussions Clear execution and communication plan towards JV, M&A activities Focus on revenue growth not just cost reduction Equity, ownership issues/value part of the business plan, as well as network and other benefits Emphasis of the alternative scenario during discussions 30


Critical success factors for successful JV’s and MA’s Benefits Economies of Scale Purchasing Synergies IT Synergies

 Pre-merger Agreements 

Delta/Northwest

 Sufficient time Both Planning and Execution 

AF/KLM

 Business Case + Communications Plan + Funds 

US Airways / United was blocked.

 Realistic expectations + Benefits  Cultural fit + Change management  IT  Don’t Touch Brands

 Governance and organisation for JV M&A management

Maint. Synergies Corp. Planning Synergies Marketing Synergies Financial Synergies Economies of Scope Network Optimization Alliances & Mergers

New Market Growth

Mergers

Economies of Destiny

Alliances

Hubbing 0%

20%

40%

60%

80%

100%

Source: Dr Iatrou, Global symposium on Air Transport Liberalisation ICAO Dubai, results of global survey of 32 airlines


InterVISTAS’ Client Experiences Selected Current Clients • Qantas • Malaysian Airlines • Garuda • Turkish Airlines, • MAZ Holding, • DAS Holding, • Oman Airways, • Sri Lanka Airlines, • RAK airlines, • Royal Jordanian • Porter Airlines • Etihad • British Airways • Amadeus • Belleair

Sectors

Team Members’ Client Experiences: 60+ Airlines

Regions • Europe, • Middle East, • South Asia, • Eastern Europe 32

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Our Airline Practice Service Lines are Focused on Airline Strategy and Airline Performance Improvement Strategy and Finance

Strategy – Develop strategy, feasibility studies and business planning – Market Forecasting (Airline, Airport, MRO, Cargo) – Start up Airline and MRO feasibility and business plan – Mergers and acquistions planning

Network and Fleet Planning – Develop and optimise network and route plans for airlines – Route Planning and Schedule Development, Alliances – Hub design and optimisation, slot remarketing – Fleet planning , Aircraft leasing and remarketing

Financial Services – Evaluate airline investment opportunities – Due diligence (Airline, Airport, MRO, Cargo, GH) – Privatization and spin-off and financing of Airline, MRO, Pilot School, GH, Cargo

Performance Improvement Commercial Improvement – Airline Revenue Improvement – Pricing and Revenue Management – Marketing, Sales and Distribution – Technology solutions supporting revenue growth

Operations Improvement – Airline Productivity Improvement and Cost Reduction – Diagnostic and Cost reduction – MRO – Crew Resource Management

– Integrated Operations Control

Restructuring & Change Management – Airline Transformation and Turnaround – Restructuring (Airline, MRO, Cargo, Aerospace) – Start up Implementation – Performance management – Organisation improvement and change management.

IT Strategy IT Implementation 33


Thank You! Emre.Serpen@Intervistas.com

+447944163891 www.InterVISTAS.com

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Finding Your Partner - Outlook: Alliances, Joint Ventures, Mergers and Acquisitions  

Presentation by Emre Serpen at World Routes 2012 Conference held in Abu Dhabi, UAE on September 29, 2012 to October 3, 2012.

Finding Your Partner - Outlook: Alliances, Joint Ventures, Mergers and Acquisitions  

Presentation by Emre Serpen at World Routes 2012 Conference held in Abu Dhabi, UAE on September 29, 2012 to October 3, 2012.

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