s MARKET DYNAMICS & PORTFOLIO STRATEGY ... CURRENT BELIEF COST COST REVENUE PROFIT PER FLIGHT PROFIT...

36
1 PRIVATE AND CONFIDENTIAL © Bombardier Inc. or its subsidiaries. All rights reserved. MARKET DYNAMICS & PORTFOLIO STRATEGY PATRICK BAUDIS Vice President, Marketing

Transcript of s MARKET DYNAMICS & PORTFOLIO STRATEGY ... CURRENT BELIEF COST COST REVENUE PROFIT PER FLIGHT PROFIT...

Page 1: s MARKET DYNAMICS & PORTFOLIO STRATEGY ... CURRENT BELIEF COST COST REVENUE PROFIT PER FLIGHT PROFIT REAL OPERATIONS SEATS/FLIGHT REVENUE COST PROFIT ≠ 9 Associated Revenue per Passenger:

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MARKET DYNAMICS &

PORTFOLIO STRATEGY

PATRICK BAUDIS

Vice President, Marketing

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A HEALTHY BUSINESS?

Source: IATA Economic performance of the Airline Industry – Mid year 2017 Report

IF INVESTING IN AIRLINES

DOES MAKE SENSE NOW,

IS THE CURRENT TREND

SUSTAINABLE?...

0

2

4

6

8

10

12

Return on capital invested in airlines

% o

f in

ve

ste

dca

pita

l

Return on Capital

(ROIC)

Cost of Capital

(WACC)

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$60

$80

$100

$120

$140

$160

$180

$200

Average passenger fare

33%

DROP

CONTINUOUS PRESSURE ON FARES

Source: IATA, Oxford Economics, Bombardier analysis

… BECAUSE YIELDS KEEP DECREASING

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HOW CAN WE BREAK THIS VICIOUS CIRCLE?

Source: Diio

Lower Yields

Increased

Capacity

Larger Aircraft

Lower Unit

Costs

and therefore require

forcing intoresulting in

AROUND 4,000

INTRA-REGIONAL ROUTES

WERE DROPPED IN 2016

GLOBALLY

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ARE MATURE LCCs RUNNING OUT OF DESTINATIONS

TO DEPLOY LARGE SINGLE-AISLES?

Source: Diio

NEW ROUTES LAUNCHED

(% Of Total Routes In Operation)

0%

5%

10%

15%

20%

25%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150%

10%

20%

30%

40%

50%

60%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

0%

10%

20%

30%

40%

50%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

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AIRLINES CORPORATE CULTURES

Engineering

Culture

Cost Efficiency

Commercial

Culture

LF and market share

Financial

Culture

Route per route

profit contribution arbitrage

BUSINESS MODELS & ORGANIZATIONS ARE EVOLVING

AS AIRLINES FOCUS MORE ON FINANCIAL METRICS

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Revenue

Management

OBJECTIVE

REVENUE/TRIP

Fleet

Planning

OBJECTIVE

COST/SEAT

DemandPax

FaresSupplySeats

= PROFIT OPTIMIZATION ?

MANAGING PROFITS

WHERE IS THE PROBLEM COMING FROM?

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MANAGING PROFITS

WHERE IS THE PROBLEM COMING FROM?

SEATS/FLIGHT

CURRENT BELIEF

REVENUE

COST

COST

REVENUE

PROFIT

PER FLIGHT

PROFIT

REAL OPERATIONS

SEATS/FLIGHT

REVENUE

COST

PROFIT

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THE LIMIT OF UP-GAUGING

CASE STUDY

Profit before taxes

A B

145 seats

Current Load Factor: 93%

Associated Revenue per Passenger: 100

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FROM 145 seater, Load Factor 93% (135 pax)

TO 175 seater, Load Factor 85%(149 pax)

MARKET

(ROUTE)ELASTICITY

REVENUE

PER PAX

REVENUE

PER TRIP

PROFIT

PER PAX

MATURE-1.0 -20% -8% -133%

-1.4 -14% -1% -95%

DYNAMIC

-1.6 -12% +1% -81%

-2.2 -9% +4% -61%

-2.6 -8% +6% -54%

VERY DYNAMIC

-2.8 -7% +7% -48%

-3.4 -6% +8% -41%

-4.0 -5% +9% -35%

THE LIMIT OF UP-GAUGING

CASE STUDY

Source: Bombardier Analysis

UP-GAUGING = MORE REVENUE & LOWER COST / SEAT

BUT LESS PROFIT / PAX

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WHATEVER THE STUDY PARAMETERS ARE…

DEMAND ELASTICITY TO FARES From -4.0 (very dynamic market) to -0.5 (mature market)

AIRCRAFT CONFIGURATION Dual Class or Single Class High Density

LOAD FACTOR 70% or 90%

BUSINESS MODEL Network Carrier or LCC

THE LIMIT OF UP-GAUGING

CASE STUDY

UP-GAUGING = MORE REVENUE & LOWER COST / SEAT

BUT LESS PROFIT / PAX

Assuming aircraft of the same generation

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MANAGING PROFITS

REAL OPERATIONS

DEMAND

ELASTICITY

TO FARES

CAPACITY

& REVENUE

ARE LINKED!

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DemandPax

FaresSupplySeats

MANAGING PROFITS

THE LONG TERM SOLUTION

Profits

ONE METRIC IS ENOUGH!

MONITORING YOUR

PROFIT PER PAX

WILL CONFIRM THAT

BOTH

YOUR FARES AND SUPPLY

ARE OPTIMIZED !

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MARKET DYNAMICS

STRATEGY SHIFT

« GOING BIG » STRATEGY

PROFIT / PAX

COST FOCUS

COST / SEAT & REVENUE / TRIP

CAPACITY DISCIPLINE & FLEXIBILITY

RIGHT-SIZING

NEW REALITY

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WE UNDERSTAND THERE ARE

DIFFERENT MARKETS

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PORTFOLIO STRATEGY

Source: Ascend, Bombardier Analysis

4,0002,500

WIDEBODIES

> 220 pax

SMALL

REGIONAL

< 60 pax

150 pax

60%40%

10,6006,900

60 pax 220 pax

CURRENT WORLD COMMERCIAL FLEET

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Current Fleet: BCA Market Forecast 2017 – 2036 ; Current Backlog: Ascend, as of December 31, 2016

100- to 150-seat aircraft: A318/A319CEO/NEO, 737-300//500/600700/7, CS100/CS300, E195, E190/E195 E2, 717, MD-80s, DC9s, F100, BAe146/Avros, Yak42

SMALL SINGLE-AISLE SEGMENT

IS UNDER-ORDERED

4,000

WidebodyLarge Single-Aisle

10,600

Average Fleet Age:

7.6 years

Average Fleet Age:

9.1 years

Large Regional

3,300

Average Fleet Age:

8.1 years

CURRENT

FLEET

CURRENT

BACKLOG

2,300

WidebodyLarge Single-Aisle

Large Regional

1,100 700

Small Single-Aisle

10,200

3,600

Average Fleet Age:

17.0 years

Small Single-Aisle

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RIGHT-SIZING ALLOW AIRLINES TO DELIVER

NEW STANDARDS OF EFFICIENCY

Lower Trip

Costs

New Markets

Greater

Profitability

Right-Sized Aircraft

Requiring

and therefore

enabling

offering

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BOEING 787 IS A GAME CHANGER

Source: Boeing website

THE POWER

OF BEING

FIRST

MOVER

# of new non-stop routes

never operated before:

12955

2015 2017

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787 & C SERIES ARE MARKET DISRUPTORS

Flight Global – Feb 10, 2017

“It's got CASM rates that are equivalent to much larger airplanes.

So it may enable us, or give us the opportunity, to rethink our bank

structures, how our network is designed”Benjamin Smith, President of Passenger Airlines at Air Canada

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ALMOST 60% OF REGIONAL JETS ARE

FLYING IN THE UNITED STATES

Source Ascend:

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SCOPE CLAUSES

WHERE DID THEY COME FROM?

Opportunity to connect markets with large yield premiums

while bypassing hubs

Regional pilots paid ~20% the salary of mainline pilots

Small single-aisle aircraft becoming uneconomical

Mainline pilots want to protect their jobs!

An attractive

solution because…

Regional aircraft =

…BUT

= restrictions in terms of aircraft seat count, fleet size,

aircraft MTOW, etc…

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SCOPE CLAUSES

WHEN DID THEY CHANGE?

Bankruptcies

Mergers

Misalignment of scope clause limits

Retirement of smallest narrow-body aircraft

Continental in 1983 and 1990, America West in 1991, US Airways in

2002 and 2004, United in 2002, Delta and Northwest on the same

day in 2005, and American in 2011.

America West and US Airways in 2005, Delta and Northwest in 2010,

United and Continental in 2012, US Airways and American in 2015.

Scope clauses ranged from a very limited number of 50 seat jets allowed

at United and TWA to an unlimited number of 70 seat jets at Delta

DC-9s, Fokker 100s, 737-200s, etc…

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SCOPE CLAUSES

WHAT HAS CHANGED SINCE THE EARLY 2000s?

(*) Source: DOT Form 41 Schedule P5.2

*

Pay difference between mainline pilots and regional pilots

is no longer what it was

Scope clauses

are now aligned in seat gauge, quantity, and weight limits

1 2

“NOT ONE PASSENGER MORE, NOT ONE POUND MORE”

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SCOPE CLAUSES

WHAT HAS CHANGED SINCE THE EARLY 2000s?

Source: (*) RAA, (**) IATA

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2013 2014 2015

Portion of Regional Pilot Training Classes Filled*

Pilot ShortageAirlines will not negotiate for

new regional jets they cannot crew

US airlines’ net post-tax profits

was the highest

at $20.3 billion in 2016

3 4

-20

-15

-10

-5

0

5

10

15

20

US Airlines’ Net Post-Tax Profits**

20162010 2015

20052004

2011 2012 20142013

2008 2009

20072006

MAJORS NOW PARTNERING WITH REGIONALS

TO DEVELOP FUTURE PILOT POOL

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SCOPE CLAUSES

WHAT HAS CHANGED SINCE THE EARLY 2000s?

… AND EFFICIENT SMALL

SINGLE-AISLE AIRCRAFT ARE

BACK!

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SCOPE CLAUSES

WHY WOULD THEY CHANGE?

US airlines make money!

Pay difference is not what it was

Scope clauses are now aligned

Efficient small single-aisles are back!

Shortage of regional pilots

KEY REASONS WHY SCOPE CLAUSES

ARE NOT LIKELY TO CHANGE

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TURBOPROP MARKET DYNAMICS

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-

50

100

150

200

60 TO 79 SEATS

40 TO 59 SEATS

20 TO 39 SEATS

80 TO 90 SEATS

TURBOPROP CAPACITY DEMAND

KEEPS GROWING

New Turboprop segment

emerging in the 80-90x seats

Growth is in

60-90

seat category

TP SEATS PER YEAR (M)

+215%

-28%

-66%

Source: Diio MI, Sept 2017

2004 2005 2006 2007 2008 2010 2011 2012 2013 2014 2015 2016 20172009

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AIRLINES TODAY WANT TURBOPROPS TO

COMPLEMENT THEIR EXISTING FLEETS

POINT-TO-POINT

STAND-ALONE FLEET

BASIC LEVEL OF SERVICE

SHORT DISTANCES

PAST TURBOPROP OPERATIONS AIRLINES’ CURRENT NEEDS

NETWORK INTEGRATION

TYPE INTERCHANGEABILITY

SEAMLESS PAX EXEPRIENCE

GATE CAPABILITY

FULL NETWORK COVERAGE

PRODUCTIVITYBASIC NEEDS BASIC PRODUCT

ADVANCED NEEDS ADVANCED PRODUCT

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ADVANCED TURBOPROP NEEDS

EXAMPLES OF Q400 OPERATORS

Source: Diio, August 2017

TYPE INTERCHANGEABILITY

PRODUCTIVITYNETWORK INTEGRATION

GATE CAPABILITY

EXTRA CARGO

PRODUCTIVITY

TYPE INTERCHANGEABILITY

FULL NETWORK COVERAGE

TYPE INTERCHANGEABILITY

PRODUCTIVITY

FULL NETWORK COVERAGE

SEAMLESS PAX EXPERIENCE

NETWORK INTEGRATION

FULL NETWORK COVERAGE

NETWORK INTEGRATION

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150

200

250

2001 2006 2011 2016

RANGE (NM) - AVERAGE MISSIONQ400

AIRCRAFT

OVER

40%

EXTRA

RANGE

Q400 MISSION LENGTH EVOLUTION

WORLD FLEET AVERAGE

Source: DiiO and Fleet analyzer. Yearly data based on 12 months ending June

Q400 EIS 2000

ATR72 EIS 1989

RANGE IN NM (AVERAGE MISSION )

Q400

ATR72

They fly today beyond 700 NM:

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3

4

5

6

2001 2006 2011 2016

NUMBER OF FLIGHTS PER 1 AIRCRAFT

Q400 DAILY UTILIZATION EVOLUTION

WORLD FLEET AVERAGE

Source: DiiO and Fleet analyzer. Yearly data based on 12 months ending June.

Q400 EIS 2000

ATR72 EIS 1989

AVERAGE NUMBER OF FLIGHTS(PER AIRCRAFT PER DAY)

Q400

ATR72

Q400

AIRCRAFT

OVER

20%

ADDITIONAL

FLIGHTS

They do 7 to 9 flights

per aircraft per day

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Q400

AIRCRAFT

TWICE

THE

PRODUCTIVITY

Q400 PRODUCTIVITY EVOLUTION

WORLD FLEET AVERAGE

Source: DiiO and Fleet analyzer. Yearly data based on 12 months ending June.

ASK PER AIRCRAFT PER DAY

Q400 EIS 2000

ATR72 EIS 1989

25,000

75,000

125,000

175,000

225,000

2001 2006 2011 2016

DAILY PRODUCTIVITY PER 1 AIRCRAFT (ASK PER A/C PER DAY)

Q400

ATR72

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MARKET DYNAMICS & PORTFOLIO STRATEGY

SUMMARY

PROFIT PER PAX IS THE NEW METRIC FOR SUSTAINABLE PROFITS

US SCOPE CAUSE WILL NOT CHANGE ANYTIME SOON

AIRLINES NEED MORE FROM THEIR TURBOPROPS

C SERIES IS A MARKET DISRUPTOR

1

2

3

4

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#1

IN THE

60- TO 150-

SEAT SEGMENT

Ingenuity

in flight.

BOMBARDIER COMMERCIAL AIRCRAFT