PROLOGIS Review & Outlook

Review 2017

In last year’s winter newsletter, PROLOGIS provided an outlook on how the year could develop. Now it is time to take stock: Overall, our forecasts for the year 2017 were quite accurate! Even though the predicted joint venture of TUIfly and Niki did not happen due to the failed negotiations between TUIfly and Etihad, topics like hybridization of low-cost airlines did progress further.

This year, we want to try again and give a new outlook for 2018. However, first of all, we need to review the year 2017, where the major headlines definitely involved the bankruptcies of Air Berlin and Monarch, the continuing unification of airlines, and how digitalization could change the world of flying in the future.

Consolidation is an increasingly important topic in aviation. New partnerships continue to be established in the form of joint ventures or code shares. One famous example for a joint venture agreement is between Lufthansa and Singapore Airlines. The contract was already signed in 2015, but was extended to new destinations in 2017 Furthermore, Air France started a cooperation with Vietnam Airlines to improve the connection between Europe and Vietnam.

Another form of consolidation in a more involuntary way will now be experienced in Europe. Due to the bankruptcy of Air Berlin, this former major German airline will be partially incorporated into different carriers. Contrary to announcements at the beginning of the year, which stated that Niki, the Austrian subsidiary airline of Air Berlin, would form a joint venture with TUIfly to create a large European leisure carrier, the airline was supposed to be purchased by Lufthansa. Along with the Luftfahrtgesellschaft Walter (LGW), it was intended to integrate the carrier into Eurowings. Due to the fact that Lufthansa was not very optimistic with regards to a positive outcome of the Commission, the carrier announced in the last week that it will not take-over the Austrian Air Berlin subsidiary. Niki filed for bankruptcy and other European Airlines will once again be able to place an offer.

After intensive negotiations, easyJet decided to take over about 25 aircraft and numerous slots from Air Berlin, concentrating especially on routes from and to Berlin Tegel. For easyJet, this means that they are finally able to fly within Germany. For now, Air Berlin definitely leaves a gap in the European network, but it is one that will soon be filled by other airlines. For a deeper insight into changes and growth of other airlines due to the end of Air Berlin’s operations, please read our article Turbulences in German and European Air Traffic.

It was quite surprising news when Ryanair established its first flights in Frankfurt this year. However, the Irish carrier could not grow any further at the biggest German airport. In spite of reports about badly-paid crews and botched crew planning, the airline did operate as successfully as in recent years, though. Michael O’ Leary expects the biggest-ever profit for Ryanair in 2017.

Now let us have a look at the new airlines being established in the market: Air France came up with a new airline that also has a new concept: Joon Airlines is designed to address the so-called millennials. The customized concept for young travelers includes an on-board bar with organic snacks and smoothies, wireless internet access and free movie streaming. Flight attendants wear sneakers and hip, casual clothes. First flights will connect several cities in Europe with Paris; plans for next year involve the operation of long-haul flights. Also, a new German charter airline called Azur Airlines started operations in 2017. For now, they have three Boeing 767s in their fleet. Next summer, they are apparently due to receive an additional three Boeing 737s to expand their program. SundAir, another German charter airline, based in Berlin Schoenefeld, started operations in May 2017 with two A320s flying for tour operators. And, last but not least, Thomas Cook founded a new Airline called “Thomas Cook Airlines Balearics”, to be based in Mallorca, Spain. This new airline will start operating short- and medium routes for Condor in 2018.

Looking abroad, there are two new airlines – which we are proud to count as our valued customers, having supported their commercial launch. JetSmart, based in Santiago de Chile, is a low-cost carrier founded this year. For now, they are operating three aircrafts for destinations in Chile. Flyadeal, also a low-cost carrier and based in Saudi Arabia, started operations in 2017 with three aircrafts and serve four domestic destinations so far.

Digitalization is one of the essential drivers of change today, offering a unique chance to shape the future. In aviation, it provides an opportunity to reduce operational costs and increase revenue. In times where airlines are hampered by slim margins, it is even more important to focus on new business models. Also in 2017, airlines implemented new innovations, which will help them address the future demand of digital passengers.

Overall, when it comes to industry growth, the latest IATA survey from October reveals that 80% of interviewed airline CFOs indicated an improvement in year-on-year profitability, the strongest result within the last 10 years. Furthermore, a sustained growth of passenger demand and better load factors are listed. The IATA forecast for air passengers for the year 2036 reveals that, in about 20 years’ time, there will be twice as many passengers flying as there are today. Within the next five years, the China will replace the US as the world’s largest aviation market. The most important thing is that the increased demand will be covered successfully by the industry as well as governments.

Major trends for the upcoming year

First cooperation of Low Cost Carriers

After the first LCC alliances, U-Fly Alliance and Value Alliance, were formed in 2016 in the Asia-Pacific region, European low-cost carriers also entered talks on partnerships. The outcome is that Ryanair started selling Air Europa flights on their webpage in September 2017. In a further step, feeder flights are planned from around 50 European destinations, flying to Madrid and connecting to long-haul flights run by Air Europa. With these plans, Ryanair is facing new challenges; their business model is usually based on point-to-point flights and now baggage forwarding and compensation payments in case of delays have to be taken into account. Air Europa serves destinations in South America – it remains to be seen which other airlines Ryanair will negotiate with to be able to offer destinations in America and Asia-Pacific. Discussions between Ryanair and Norwegian have not yet been successful. In exchange, in September 2017, easyJet launched an intercontinental alliance called “easyJet Worldwide” with Norwegian and Westjet. Transit connections are available through London-Gatwick. Further airlines from Europe, Asia and the Middle East are in talks with easyJet to expand the alliance. It remains exciting to watch how these alliances will develop over the next year. For the LCCs, this means new and more complex flight-handling, which is associated with cost increases. For legacy and network carriers, this means that, due to increased range of market, competition by low-cost carriers is no longer restricted to short-haul routes. Overall, we are seeing an on-going hybridization of low-cost carriers as well as legacy carriers, which will not be attenuated in 2018.

IT-Security and Digitalization

The year 2017 has once again shown that it is becoming increasingly important to deal with IT security. In May, thousands of passengers stranded at London Heathrow Airport after British Airways’ computer system was brought down by a hacker attack. Different reports are warning that airline IT systems are very vulnerable, which may be due to the fact that airline systems have been in use for many years and are in need of an update. It is therefore even more important to have IT security on the agenda for the coming year. Highest attention should be paid to the fact that airlines primarily need to install protective measures against attacks, because, as a result, general and passenger data can be lost. Even flight operations can be interrupted. Furthermore, continuous monitoring is essential to detect vulnerabilities and eliminate them before major damage occurs. Since no system can provide 100% security so far, airlines also need to have an incident response strategy in place, so they are able to act quickly and efficiently in case of a cyberattack.

The ongoing IT trend for the year 2018 is digitalization. Numerous innovations were already implemented in 2017, and these need to be further expanded and promoted. In particular, the combination of big data and artificial intelligence will change the airline business and enhance customer experiences. As highlighted in our previous study – Digitalization and its impact on aviation – there are several examples of how digitalization will change the industry, and of new possibilities to create better and personalized customer experiences.

Airline Distribution

For more than 40 years, airline distribution was a relatively rigid environment, and it took quite some time to establish changes here. But digitalization and the importance of customer experiences has provided new impulses for strengthening customer relationship on one side and reducing costs on the other side. Hence, airlines need to have the latest distribution trends on their agenda for 2018. From the customer’s point of view, the respective airline websites have the best overview of available products, including ancillaries and personalized offers. But it is important to catch up with a quickly changing environment when it comes to customer satisfaction. Also, the NDC standard introduced by IATA will continue to feature in some airlines’ distribution strategy. Like Lufthansa and British Airways, Air France and KLM, too, will be establishing a GDS fee in April 2018. All bookings made via a GDS system will have an additional cost of EUR 11 per leg. Alternatively, travel agents will be given a direct NDC API interface to book flights and additional services offered by the airline group.

Nevertheless, Metasearch and online travel agencies (OTAs) will retain an important share in ticket sales. It is important to observe how sales channels are evolving through social media. For example, Instagram has already added a “book-in-the-app” reservation button. And the rapid development of language assistants such as Amazon’s Alexa or Google’s Homes will offer further possibilities for distribution.

Besides the topics we mentioned here, there are many more areas that airlines will need to deal with in the new year. With regards to oil prices, one can state that there was no significant rise in 2017. As was the case the year before, this led to reduced ticket prices and thus to an increased travel volume. Brexit has not yet been completed and will bring further changes to airline companies. The UK is already prepared to request to be allowed to remain in the European Aviation Safety Agency as a non-EU Member, like Switzerland and Norway. This move is important to prevent major disruptions for the UK aviation market. The negative development of travel limitations and demand shifts due to terror attacks and political uncertainties will hopefully not continue. In the face of all these changes within the aviation industry, we hope that the tourism industry as a whole will experience many positive developments in 2018, helping to achieve many goals and many satisfied customers.

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