A discussion on key themes and topics raised at the 2022 CAPA Americas & LCC Summit.

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Rush transcript

Karen Walker:

So hello everyone. And thank you for joining us for Window Seat Aviation Week and Transport Podcast. I'm Air Transport World and Group Air Transport editor-in-chief, Karen Walker, so welcome on board. Today, I am joined by my colleague, Laurie Ranson, senior analyst, Americas at CAPA. Laurie, welcome. Laurie just returned from the CAPA Americas and LCC Summit in Puerto Rico, where we were covering the conference and moderating panels. There were some great discussions and lots of insights into what's foremost on the minds of those running airlines, airports, and tourism authorities. So we wanted to share with you some of the key themes that came out. Laurie, I have to start by saying my immediate impression was just how happy people were to reconnect in-person. There was a real sense of back-to-normal and not a moment too soon. Did you get that feeling too?

Laurie Ranson:

Absolutely, and I heard several people comment this was maybe their first or second conference that they had been to in a couple of years. So there was really a lot of excitement in the air and, I thought that as a result, people were really engaging in terms of subjects. And I really thought that it was a really good atmosphere and people were ready to talk about what the future holds for the industry.

Karen Walker:

Absolutely, yes. Yeah, so overall, a lot of optimism we saw and we're seeing the numbers as soon as the rules lift and the restrictions lift people are eager to fly. We heard quite a lot of talk about people saying that they're back to 2019 levels for some of the low cost carriers. We're talking about being back to 2019 levels, or even above. So all that was good news, but there was also a lot of conversation and discussion about operational disruptions that there, those headwinds that they're meeting as they go into this summer surge. So we had several airlines talking about that. What struck you most there?

Laurie Ranson:

I thought that Bert Van Der Stege from Swoop made sort of a very interesting observation and had some interesting comments. He said that we're all happy to be here, but you know, that's followed up by, well, did you miss your connection here, and how long did it take you to arrive? And he said the two biggest issues for the industry at the moment in his opinion are fair fare integrity, and integrity is going to take a while to restore simply because no one expected demand to return as quickly as it did. And so there've been operational issues over the last few months. They've been in the news, there were some over the last weekend. So, I thought he was spot on in saying that those are the two things that the industry should focus on, especially just to ensure that passenger loyalty will grow.

Karen Walker:

Yeah, and so Swoop is an ultra local carrier based in Canada. And, yeah, absolutely, he was saying that airlines have got to be really agile now. They had to be agile to adapt very quickly to COVID and the horrific impact of that. Now they're having to be very agile to deal with some of these operational problems, but it's not just in the Americas. We were also hearing some airlines either set work in the transatlantic market. I thought it was very interesting. We had Rikke Christensen, she's the Virgin Atlantic Vice President Networks, Alliances and Commercial Planning. And what she's saying, really seeing a lot of interest now in for tickets, a lot of people wanting to fly, the problem is there's also, as she said, a lot of challenges on the operational side. And it was interesting that she was saying this just the last week, she's saying a disruptive summer is not what we need. And then we've just seen this last weekend was a holiday weekend here in the U.S. And there were a lot of canceled flights. And then there was also, we saw issues happening in the UK and Amsterdam and other European cities. And it's mostly labor shortages, things still related to people having to call in sick late because of COVID, just all sorts of issues. Did you hear of sort of any of the airlines talking about what can we do about this, all the airports?

Laurie Ranson: 

Well, I think particularly here in the U.S. ATC has been a problem as well, especially in Southern Florida. I know that the airlines mentioned that they've been working with the organization of a organization in Florida, but that is just one issue of a whole complex web of challenges that the airline space, you just mentioned labor and calling in sick, but there's also round staff shortages and weather. And so what I think the airlines are trying to do is get on top of it. You've seen them pull back some capacity for the summer just to build some integrity into the system, but it just shows that this is sort of a beast that's going to be sticking around for a while until all of these issues are abated somewhat. So, I think the challenge is real, and I think what the airlines are realizing is communications with customers is key because some of these customers are just coming back to air travel, and if they don't have a feasible experience, then you know, it's just going to reflect poorly on the operators. And some of this is out of their control, which is unfortunate. But I think that they're trying, I just think this problem is so huge that it's going to continue to pop-up throughout the summer.

Karen Walker:

So yeah, absolutely. A lot of talk about operational disruptions and, on top of that, testing, because even where restrictions have been lifted in terms of people are able there to cross borders this often, including in the U.S. there is a requirement still to have a COVID test before you come back with a very defined window of when it can be done. It's cost, it's hassle, and there was quite a bit of talk about that. I know, Bert Van Der Stege at the Swoop said, "people don't want to invest time and resources into a, 'I don't know,' and that's the problem." It's people just don't know where to get the tests and, even more worringly, what happens if that test is a positive? You know, do I get stranded somewhere for 10 days or whatever? Again, what did you hear on the concerns about testing?

Laurie Ranson:

Yes, so we heard concerns from both Frontier and Spirit. So Barry Biffle was speaking at the conference, Frontier CEO, and he says, international, the testing is still a real kind of clutch for airlines because they have a pretty big Caribbean network. And he says it hurts those Caribbean nations and it hurts demand. And sometimes I think when we think about testing, we think about trans-Atlantic. It just, that's the first thing that pops into our mind, but we have to think about Caribbean as well. Matt Klein from Spirit said the same thing. About 20% of Spirit's network is Latin America and the Caribbean. And he said they were seeing some slight revenue pressure from the testing that's in place. And so they've had to sort of move their network around, maybe put some more capacity back into domestic, just like everyone else. And it can be a real drag for airlines, especially it just hinders the international recovery. And I think Rikke from Virgin also mentioned that this testing, especially for sort of transatlantic business travel is really slowing their recovery because no one wants to go on a business trip and get stuck for five, 10 days. So it's hard to say what the government's going to do, but based on the comments at the conference, I just sensed growing and growing and growing frustration with it.

Karen Walker:

Absolutely, a real frustration point. And also I think it was just yesterday that the A4A, the association here in the U.S. that meant that [inaudible 00:07:54] the major airlines put out a statement just saying this testing requirement needs to be lifted. And they said that if it was, they believed that they would immediately see an additional 4.3 million international passengers. So, as you say, I think we could sense the frustration at the, at the conference, and now you're seeing some of the numbers on this. So, one of the things I thought was interesting, another thing that was like a common theme, and we heard quite a bit, again, and what was interesting was it's both in the low cost carrier segment and in the full service, but a big interest in premium cabins. And this is leisure people. I think, again, Rikke, at Virgin sort of talked about people with extra savings and they're going to treat themselves and they're buying tickets in the premium cabin. Several people will do that. For the low cost carriers, they're seeing a greater willingness for people to buy the ancillaries, to buy the extras, the early boarding, the seat they want. So, do you think that's a permanent transition for people?

Laurie Ranson:

Yeah, it's a great question. I think probably for the foreseeable future, it's a trend that's probably going to stay in place for a while, simply because as you mentioned, people have their savings built up. They want to splurge own experiences because they've been buying products over the last two years. So, I think it will say in place and some of the large network carriers probably want to have their corporates back just because that revenue is higher and it's a steady stream of revenue. I think obviously those airlines have probably discounted their premium products over the last couple of years. Just the sort of shore up load factors. I think for the low cost airlines, it could be more permanent people, especially for the ultra low cost carriers. People are getting used to that business model and there's not as much pushback anymore for buying add-ons. So I do think that both Frontier and Spirit really want to push up their ancillary revenue for passenger. I think during the pandemic, it set record highs, so I wouldn't anticipate that trend going away anytime soon, but we should talk again a year from now and see if that's still the case.

Karen Walker:

That's absolutely. And then a couple of other things that we heard booking curve is still very compressed. People are buying tickets much closer to when they're going to fly. And that seems to still be the case. People are still really waiting until they, although here in the state, people are also seeing their term because, of the surge of interest, they may not be able to get the flight they want, or it will be a lot more expensive. So there's a little bit of a tension going on there. And then the other thing that I thought was interesting that several people spoke about was shifts in geographic demand, because people have moved during the per pandemic. They were able to move out just into a more rural location because they're not working in the office as much, et cetera.

        And so they were saying that there's different cities now that might be where their focus is because people are sort of moved to secondary cities. So I thought there was some just interesting topics that came out of there. Another big one was consolidation. We had several airlines at this conference that are all in the negotiation stage of consolidation. The interesting thing is that this is really, now, a low cost carrier story. We've seen the whole consolidation of the majors, but there were several low cost carriers and also some South American carriers that are making moves. Laurie, tell us what's happening in South America, first of all?

Laurie Ranson:            

Sure. Well, it's sort of been a hot bit of activity over the last two months or so. First, Avianca announced that it was going to buy its ultra low cost rival, Viva. Both of those airlines are based in Columbia. And then that was followed up by the announcement that Avianca, GOL, and Viva were going to create a huge group, Abra group. So it's that airline group they're under this Abra umbrella, they're all going to keep their respective business models and brands and goals, a part of that group as well. So Abra will have representation in two of South America's largest markets, Columbia and Brazil. And Viva CEO, Felix Antello, spoke at the conference. And he basically said, this was a very positive development for his company. Being part of a larger group obviously gives you scale. It gives you an ability to implement technology in a much faster way.

        It also gives you some leveraging power when you're negotiating with suppliers. So for him, he says, "Hey, if we can do this in the right way, I mean, the opportunities are just enormous." I mean, obviously they have to go through all the regulatory approvals. So other operators are obviously trying to absorb this news and determine what, if any, moves they need to make. So this is going to be a really interesting space over the next few months, but Avianca has really sort of made bold news. I mean, and it only merged from Chapter 11 at the end of last year. So interesting space, keep watching it. Felix said that Abra will probably get anti-trust approval within a year or so.

Karen Walker:              

Yep. Felix was very optimistic for how this was going to all work out. I think he said, if we do this right, the opportunity is massive. So they clearly, and this is really, you know, game changing potentially for that whole market. And then of course the other one, the other LCC merger proposal, that's getting all the headlines here in the U.S. Is for Frontier based in Denver to acquire Spirit based in Fort Lauderdale. And meanwhile, Jet Blue has put in a hostile bid to take over Spirit. Barry Biffle, as you said, CEO at Frontier was there, nd he was quite Frank in his remarks about what he thought about what the Frontier-Spirit deal would do versus a Jet Blue deal. Do you want to just mention some of the things he said?

Laurie Ranson:            

One of the things that I found interesting that he said is 80 to 90% commonality in sort of it systems, and you and I have seen enough mergers to know and wait for the famous cut over of the reservation system that can always cause just operational chaos. And he said, it's not as easy as we're putting a switch, but whatever the outcome is, if it's Frontier and Spirit, that's going to be a big advantage as they work through the integration process. Another thing that he mentioned was sort of in previous mergers, you kind of have this older staff and younger staff in the airline sort of more legacy employees and then not legacy employees. And he seems to think that won't be as big of issue and this proposed merger because they're both growth companies, so they both kind of, their seniority is probably more equal than mergers in the past. This is based on the assumption that Frontier and Spirit are going to be successful and that's going to be up to the shareholders on June 10th. He seems to think that the Jet Blue-Spirit proposal would create higher fares. Obviously, Jet Blue wants to incorporate Spirit more into its business model and spend money reconfiguring aircraft. He just thinks that's not as big of a win for the consumer. So it'll be interesting to see how this progresses, and then there's just the whole issue of regulatory approval for each deal, whatever happens.

Karen Walker:              

Yeah, absolutely. He said of the Jet Blue proposal that it defies common sense because of, he believes that the regulatory hurdle will be too high there. Meanwhile, he said a Spirit-Frontier merger, he said distribution is the big winner. We have a lot more dots on the map for people to earn and burn, and that's because one airline is based in Denver and has sort of a West Coast reach and then the others in Lauderdale. So it's got that sort of East Coast and the North-South reach. So, yeah, it's going to be a very interesting, interesting one to watch. We were in Puerto Rico, a U.S. territory that's of course, in the Caribbean. And so there was quite a bit of talk also about that Caribbean market, again, quite a lot of positive talk, but also some guarded thoughts as well, about how everything comes back. What were you hearing there, Laurie?

Laurie Ranson:            

So one of the biggest issues is that the Caribbean faces is sort of interactivity in the Caribbean. So there was one gentleman from Caribbean airlines and had to fly from, Trinidad and Tobago to Miami to get to Puerto Rico. And that's a lot more common in the region than people probably realize. And so if you want to bolster air travel and tourism, that's something that needs to go away. You need more connectivity, you need more cooperation amongst the countries there. And there's also just the issue, it's pretty bad in Latin [inaudible 00:17:30], and it's been historically tough in the Caribbean, the taxes that those countries levy on the airlines. There's a lot of discussion and lobbying going on to change that, but it's a slow process and I'm sure it's hard for the airlines to be patient in that regard, but it's a real issue. And when you're trying to get back to your full span of operations and you're trying to get passengers to travel, those taxes can be a real deterrent.

Karen Walker:              

Yeah. Peter Cerdá who is Vice President Americas for IATA, the International Air Transport Association. He stressed that his concern is that some of the big countries, most especially countries like Brazil, for example, were heavily taxing airlines and putting rules on airlines that they don't put on other parts, other transport sectors before the COVID pandemic. And it's going to be a real concern if those patterns continue. So there's a lot of focus on trying to sort of change that still.

Laurie Ranson:            

One thing that I found that he said that was really interesting that I didn't realize, cause buses are a big mode of transportation in the region, and evidently buses aren't taxed heavily at all. Whereas airlines who you could say that they operate much more safely than buses and it's much more of a shorter trip and just initiate so much more connectivity and buses aren't taxed. And I just thought that was really interesting, and it just kind of shows some of the nuance of the region that don't exist probably in other parts of the world.

Karen Walker:              

And more than that, they're also don't have safety regulations, the same as airlines, so they can do a lot more that the airline can't maneuver into that space. Laurie, thank you so much for your insights. It was really great working with you last week at the summit. A really, really great summit as well. Fantastic conversations. So thank you for joining me today and thank you to our listeners. I hope you'll join us again next week for our next episode. Make sure you don't miss us by subscribing to the Window Seat Podcast on Apple Podcast or wherever you listen until then I hope you forward to your next flight. This is Karen Walker from Window Seat.