ROUTES EUROPE: Inside the Strategy Summit - The Key Discussion Points

Yesterday’s Routes Europe Strategy Summit highlighted some of the most interesting aspects of aviation in Europe today. More than a dozen high-profile speakers from Europe and beyond shed light on the “Big Freeze” concerning EU ETS, the situation in Cyprus, life after legacy carriers and on the question whether we will see fewer airlines in Europe any time soon. One participant even went as far as predicting a change in the ownership structure of Turkish Airlines in the coming twelve months.

Jost Lammers, CEO, Budapest Airport

Kicking off the event, Jost Lammers, the CEO of Routes Europe host Budapest Airport, was candid about the challenges of the past 18 months: “2012 was an extremely difficult year with the collapse of our national carrier, but it was an amazing achievement to carry 8.5 million passengers here last year, a mere 5% drop despite the demise of Malev, our national carrier.” 

The German national who is heading Hungary’s capital city airport outlined how he and his team were fighting back. “We now look very positively into the future and are rather optimistic that we will see continuous growth in the coming years. There are still a lot of white spots on the map and we have strengthened our marketing efforts to fill these gaps”, saying that he still sees potential in Germany, Scotland, France and Spain, among others.

"So far 2013 gives us good reason to be optimistic into the future," he added.

József Váradi, CEO, Wizz Air

József Váradi, CEO, Wizz Air, speaking in his home country, didn’t mince his words either: “Budapest just said that it has recovered from Malev 18 months ago. At the time it was claimed that a country can’t survive the demise of its national carrier. As Hungary’s new national carrier, we stepped up and filled the vacuum that Malev left. The tourism industry has flourished since then and tourism numbers are up to new heights. There is life beyond national airlines.”

“There are many airlines for sale in Europe because their owners and governments don’t know what to do with them. I am sure there will be consolidation, and we have to be prepared. It is exciting times.”

"The paradigm of how airlines and airports used to be set up is changing and Budapest represents those changes here. We heard the case that Malev would no longer by flying as Hungary’s national carrier and we have a duty to rebuild the confidence in the country’s aviation market.”

“New carriers in Hungary have actually managed to make tourism numbers the highest recorded this year.”

“We have 120 airlines here, I do not know if you will have 120 here in a few years time. For that change we have got to be ready, I am not being negative, I’m being realistic, it is dictated by economic realities.”

Vijay Poonoosamy, Vice President International & Public Affairs, Etihad Airways & Chair – IATA Industry Affairs Committee

Following the two men who set the scenes with their analysis of the aviation in Hungary - which they see as exemplary for the situation in Europe – came an even livelier discussion on Europe’s contentious emission trading scheme.

“If the EU hadn’t stopped the clock, ETS would have cost the aviation industry € 3.5bn in 2012 and more every year after that,” said Vijay Poonoosamy, also criticising the various national taxes on aviation in countries such as the UK and Germany. 

John Hanlon, Secretary General, ELFAA

Mr Hanlon, representing Europe’s low fares airlines, was highly critical of the EU’s decision to stop the clock for one year: “The reduced scope means that only 12.5% of European aviation emissions fall under EU ETS now. The derogation is a knee-jerk, quick-fix to appease the European manufacturing industry. Once you blink, you lose your credibility.”

“You wonder how such a law gets adopted. Well, making laws is like making sausage; you better don’t look too closely how it is done.”

“What proportion of intra European aviation is made up by non European carriers represent, its 0.0000%, its decimal dust, so it enables you to call it non-discriminatory because they are captured in it, you are talking about nothing, its really a burden visited on European operators.”

“The Commission’s justification for ETS was that it had the most environmental effectiveness at the lowest cost to society, not just a burden on European airlines but on European citizens whose their ability to travel freely will be adversely affected because the airlines are competing on a very uneven playing field with carriers of which 80% of their operations and most profitable routes are exempt from it."

“It clearly should have been a global moratorium, and it still could be. The dissidents who were opposed to this think their off the clock, they say they haven’t stopped the clock, the clock is irreparably broken, for me its like a grandfather clock.”

“ICAO had 20 years to find a solution. We will see whether one more working group will make a change. In the meantime, we will use the legal challenges available to us”, he added, referring to ELFAA’s announcement to challenge the stop-the-clock legislation in the European Court of Justice.

“I have difficulty with the notion of competition that begins a year later, you can’t be a little bit pregnant, it either distorts competition in which case its already doing now or it doesn’t.”

Christian Holzleitner, - International Carbon Market, Aviation and Maritime, DG Climate Action, European Commission

The European Commission representative on the panel stressed the common interest of industry and governments: “The industry and the European regulator have a common interest, namely to come to a market-based, global system that is easy to administer and is fair, so that there are no market distortions. All the ingredients are there for ICAO to reach constructive solution.”

“The European Commission has done its part. We are the last ones wanting to stand in the way of an agreement, which is why we have stopped the clock on this. We need the next ICAO Assembly to take a decision, and then implement it by the one after that.”

“I think is now time to act and go forward, I think all the ingredients are on the table for the ICAO conference in 2013 to make up a global solution, something forward thinking, that is constructive and helps everybody and gets us out of this limbo.”   

“We have exempted international aviation for one year for 2012, this is not a long term solution, not something for the long-term, to give a signal to the international community that we are willing, we are the last ones who want to stand in the way of a global solution.”

In response to the challenge that the derogation distorts competition as ETS still applies to intra-European flights, Mr Holzleitner responded: “The rules are the same for everyone. We want to show that we will continue with ETS. It is not just the Commission, but also the member states and the European Parliament. Restarting the clock is written in the law.” 

Jochen Schnadt, Senior Aviation Executive

“It is ludicrous to claim that the cost of ETS is negligible for airlines because the price of carbon is low.”

“It would be refreshing to see the same sort of vigour that is applied to ETS in areas such as the Single European Sky and operational inefficiencies.”

“Very few believe that ICAO will reach an agreement this year, nor that the EU will be able to bring back ETS in full.” 

“I think the concept of having a scheme like this makes sense, the principle, but there are key questions that have not been thought through. If you look at intra-European aviation the emissions caused and look all the transport nodes actually you will find that aviation is not the main contributor in the ETS so my question would be why do we start with an aviation cap.” 

“One issue is we have not been as effective in lobbying and putting our thoughts across to key decision makers. The second issue, as a passenger flying from Stuttgart to Perth I probably have dozens of options for flying from A to B and depending on the option I choose under today’s legislation the amount of ETS to pay could be very different, which doesn’t make any sense to me at all.”

"A very interesting point is that Europe is at the forefront of low-cost from aviation’s point of view opposite the European initiative which is to make sure all regions in Europe are prospering equally, because look at current structure of ETS it tends to favour young, modern aircraft, completely the opposite of regional aviation.”

Yiorgos Lakkotrypis, Minister of Commerce, Industry & Tourism, Cyprus

Speaking about the future plans for tourism in his country, Mr Lakkotrypis underlines that “the near collapse of the banking sector in my country makes the tourism sector even more important. The main challenge is that we have not been growing in recent years. In 2013, we are looking at marginal growth due to weak numbers in March and April.” He went on to outline the strategy his government put in place to revive the sector, which focuses on year-round use of capacity, better quality and special interest tourism. “We are open for business”, was the message he clearly wanted the industry delegates to take home.

“People have been hearing there is something wrong in Cyprus but could not work out what is was, let me say it loud and clear. The banking sector has shrunk but hasn’t collapsed."

"Cyprus has a population of 1 million and welcomed 2.5 million tourists, a very good mix of business to build on."

"Numbers were showing a double digit growth in March and April, that has been reduced for now but we are still looking at marginal growth.”

"The country is known as a summer destination, it is not at all, very well kept secret by us but we to change that. There is potential to develop in terms of other activities on the island, the history of the island, I truly believe there is no other place that so vividly reflects the character of the Mediterranean.”

Tony Griffin, Senior Vice President, ASM

Tony Griffin moderated a lively debate on airline consolidation. The speakers agreed that the alliance model is changing, although there was no agreement what the result of this evolution was. While there was agreement that consolidation in Europe would continue, there were diverging opinions on the speed of consolidation.

Christian Schneider, Chief Commercial Officer, Darwin Airline SA

“The European economic crisis is not a challenge; it is a reality for today and for the future. The game is changing and can only be won if airlines and airports work together.”

“Legacy carriers have lost a major part of the short-haul market to low-cost airlines, and the Gulf carriers have entered the long-haul market. I have not seen a good answer from anyone, so I expect significant consolidation.”

"Over the last five years there has been 44 new entrants in the regional carrier market, of those 22 went bust after the first year.”

Asked about his predictions for the coming twelve months, Mr Schneider pointed to the impressive growth rates of Turkish Airlines. “I think that a big Star Alliance carrier will act and that we will see a change in ownership at Turkish.”

Kam Jandu, Executive Director Aviation, Budapest Airport

“I think there will be more airline consolidations but I think the real issue is alliance sector, it has turned into a free for all, that is where I would evaluation is necessary.”

“The alliance model is changing. The Emirates-Qantas link is giving things a new dynamic. In long-haul, the Big 3 Gulf carriers are leading the way. They have a big impact now on the Big 3 in Europe.”

“We spent €100m on a new terminal and a year later the national airline goes bust. Airports have to be more flexible today. The romantic model of the past is broken, at least in our case.” 

“What we did was to focus ourselves to change our way of thinking, a certain low-cost carrier came and said we do not want a bridge, we do not want a bus, low-cost carriers are changing airports thinking in the way it does business."

George Karamanos, Aviation and Travel Consultant

“It is no longer a crisis but day-to-day operations. Each airport has to become much more flexible, just as airlines had to become more flexible when low-cost carriers entered the scene.”

“Airports in Europe are so different, Eastern European growth still there then Western European showing big declines.”

Jeremy Robinson, Partner, Gates & Partners

Mr Robinson said that he was not holding his breath concerning consolidation in Europe due to the considerable regulatory hurdles that need to be overcome: “We have a confusing regulatory environment. For regulators the question is not whether consolidation is a good idea, but how consolidation is affecting customers. Airlines have to ask themselves, What is the potential for customer harm?”

Máté Gergely, DG MOVE International Transport Affairs, European Commission

Mr Gergely gave an overview of the EU external aviation policy, outlining the Commission’s strategy in this area which rests on two pillars. Firstly, to forge closer relationships with neighbouring countries in the region, and secondly, to work more closely with key partners all over the globe.

“We are pursuing comprehensive agreements with key partners to normalise aviation, including the US, Canada, Brazil, Australia/New Zealand. The cover a whole range of topics, such as safety and security, environment, fair competition, ATM, and so on.” Next in line were Turkey, India, Russia, the ASEAN states and possibly even the Gulf states. 

Nigel Mayes, Vice President Commercial & Routes

Routes’ Nigel Mayes moderated the final panel on “The Future Evolution of the LCC Business Model”. He highlighted that the growth of low fares airlines has been fairly flat in recent years and questioned whether this was a result of the economic crisis in Europe or maybe a sign of structural changes in the aviation market.

Francois Bouteiller, CEO, Nasair

The head of Saudi-Arabia’s leading low-fares airlines was quick to point out the differences between Europe and his home market: “We operate in a very different market. The regulations are very restricted. We even pay more for fuel than airlines in Europe. But wherever you are, someone always wants the best product and service for his money, regardless of how wealthy they are.”

Asked by Nigel Mayes whether Emirates is the ultimate low-cost carriers, he responded: “Absolutely. How do you compete on a route where an airline operates three A380 flights a day. It’s tough”

“There will be more consolidation. We are slowly preparing for our IPO, but that won’t happen tomorrow.”

Fernando Estrada, Strategy & Alliance Director, Vueling

“We suffer from overcapacity in Europe, that’s why lowest cost always wins, at least so far. Our strategy is to keep our cost low, but we also think that some passengers are willing to pay €10 more to fly with us.”

“[on the IAG takeover] it is a different model, IAG has two big airlines – Iberia and BA, one at Madrid and the other at London Heathrow. We are flying to Madrid as a destination, while at the same time operating out of Barcelona, on the other hand there are synergies in flying to other airports we don't see any big conflicts but there could be synergies.”

“Europe is the one market with the most over capacity, when we have a lot of competition on routes, Spain is a great example of that, we have got to put on the lowest fares possible”

“Strategy of maintaining the lowest fares possible, it’s a different model to say Ryanair at the same time we think there are some passengers willing to pay €10 more to fly with Vueling.”

“20% of our traffic in Barcelona is connecting traffic and its still growing but it will reach a limit. But we won’t change our model. We are profitable on a point-to-point basis, and the moment you change that you have lost your edge.”

Dirk V. Kokott, Director of Business Development, Germanwings

Commenting on his airline’s take-over of Lufthansa’s short-haul network outside the big hub airports, Mr von Kokott said: “Lufthansa needed to come up with a better idea this is where Germanwings has proved to the group we can be the solution. The big problem is how do you keep the Germanwings low-cost DNA while harvesting the advantages of the Lufthansa Group. This is what we are trying to work out.”

“We want to give the customer everything they are willing to pay for, but will charge for what they are not willing to pay for. We want to be the best of both worlds. One of our biggest discussions is What do customers expect? One of our challenges is not to get sucked into all the complexity of a network carrier.”

“As a low-cost carrier when you got too complicated you lose your passengers.”

“Even in Germany 30-40% of the population in rural areas do not have Internet access, how do you book those flights, this is the typical GDS approach, if you do it properly you can still increase the yield.”

Asked about consolidation in Europe, he declares: “It will be survival of the fittest; it will be a dog fight to some extent.”

(Compiled for The HUB by Oliver Aust and Oliver Clark)

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