00:00Is this what stagflation looks like? No, I don't think so. I genuinely don't believe what we're
00:05seeing is a crisis in the industry. I think this is going to be a bit of a challenge.
00:10But the general economic environment, I think, although weaker than it had been,
00:15is still positive. Demand for flying continues to be pretty robust, to be honest with you,
00:21despite everything we've seen. And I would expect that to continue through the years. So,
00:26you know, personally, I see this as a challenging environment, but by no means is it a crisis for
00:33the industry. So stagflation is a word that gets thrown around elsewhere. That's not a word you
00:39want to use. It's not a word. I don't think we've ever used stagflation in the airline industry. So
00:44we'll come up with a different term if there is a problem, but it won't be stagflation. Does it get
00:47worse before it gets better? Like the fuel situation, the European airlines, certainly the
00:51global airlines are talking about the fact they've got enough for now. But for now, it doesn't feel
00:55like it's going to last very long. Well, I don't think the fuel problem is as severe as we thought
00:59it would be. I think there could be some challenges along the way. So it doesn't get worse before it
01:05gets better? No, I think there will be periods later on in this year where the supply will get
01:11very tight because it's been impacted by the crude supply and then by refining capacity.
01:19But the positive is that there are a lot of refineries who have the scope to increase the production
01:26of jet. And given where prices for jet fuel have been, you know, I think that's provided an incentive
01:33for refineries to actually start producing more jet fuel. So, you know, that the lost capacity can be
01:40replaced by increased production in other refineries around the world. Consumers willing to pay the higher price?
01:46Well, I think that's the bit that has surprised me that, you know, the demand has continued to be
01:51pretty robust. And you could argue that in the early stages, people have commitments to fly and
01:58therefore will continue to fly even if the prices are higher. But the research that we've done suggests
02:03that consumers understand that because of the high oil prices, ticket prices will be higher and expect to
02:10pay more this year. So that to me sort of says that they understand what's happening. They still want
02:17to fly and they're going to continue to do so. Do you think there's a danger that weak airlines, weak
02:22balance sheets, high fuel prices puts people out of business? Do you think you're going to see
02:25consolidation? We've already seen we've already seen some failures. Yeah, no, I think that's very much
02:30the case. You know, if you have a weak balance sheet, you won't have hedged. So you're going to be
02:34fully
02:35exposed to the very significant increase in the spot price. I think while the demand remains strong
02:41through the peak period, you know, there's scope for people to, you know, to offset some of the
02:48increases. But when you get into the traditionally weaker demand period later on this year, I think
02:53it's going to put a lot of pressure on those smaller, weaker airlines that I think would have been
02:58in trouble anyway. Right. But yeah. So the trouble comes in September, October. Yeah, I expect there
03:04to be, you know, some failures. And I think the environment plays towards further consolidation.
03:11Now, I believe there's going to be consolidation anyway. But I think this makes the case for
03:15consolidation even stronger. Do you think the Iran will create long term structural changes? Either
03:21European carriers, global carriers are talking about better Asia demand at the moment. People aren't
03:25flying through the Gulf in the way that they once were. They can't fly through the Gulf.
03:28How much of that becomes structural and permanent? I don't think it's structural. And I don't think
03:33it's permanent. I think the Gulf, first and foremost, it's too important a segment of the
03:38industry. If you look at international travel, it's about 14 and a half, 15 percent of global
03:44international travel. There's no way other airlines can replace that capacity, particularly in the
03:50environment where aircraft availability continues to be stressed. So they'll replace some in the short
03:57term. But the Gulf structurally is very important to the global industry. And I would expect them to
04:03regain their strong position once we have stability in the region. Do you think they regain that by
04:08cutting prices? People are getting very afraid that we see a price war once the Gulf carriers come back and
04:14they want that capacity? Yeah, but I think if there is a price war, and I think there will be,
04:20you know, to try and
04:20encourage people back, I think it will be very short. It's not going to be sustained. Because once people
04:25become aware of the fact that the Gulf carriers have restarted all of their network, you know, I think the
04:33requirement for them to discount pricing will go pretty quickly. And they will want to take action,
04:40obviously, to repair any damage that they've done. I think the thing you do have to give credit to both
04:45the
04:45carriers and the governments in the region. I think they've been very conscious of supporting people
04:50who have been disrupted as a result of this. I'm hearing very positive stories about what the
04:55airlines have done and what the governments have done to help people who got caught up in the initial
05:00disruption, you know, looking after people and people will remember that. So that's why I don't
05:04think this is going to be structural. And I think once we see a more stable environment, I think they'll
05:09recover their position pretty quickly. We get a World Cup bump or a World Cup slump? It's interesting,
05:13you tend to get a big impact, a negative impact on business travel and an increase in leisure travel,
05:21people traveling for the World Cup. And then it tends to be one way, you know, everybody wants to
05:25travel to see a match. There's very few people coming back until they're returning. So it is a
05:33disruptive period for airlines. It doesn't tend to be positive. It tends to be more a negative
05:39environment for airlines, similar with the Olympics as well. You know, there's a big halo effect,
05:45which tends to be very positive. But in terms of the commercial effect, it tends to be negative.
05:50You are still forecasting the industry will be profitable this year. If I take out the first two
05:55months of the year, does it look different? It does. Obviously, we had a very good start to the
06:00year. In fact, not just the first two months, the first quarter, because the real impact of the
06:05increase in the fuel price didn't really hit until April. So the first quarter was good, demand was
06:10good. And I think airlines were looking forward to another good year. But obviously, you know,
06:16with the significant impact to disruption in the Gulf and the very significant impact on oil prices,
06:23we're now forecasting lower growth, principally as a result of the negative impact in the Gulf.
06:29And then, you know, much higher costs for the industry. Fuel bill will be about 100 billion US
06:37dollars higher. Okay. What number are you plugging in to get to that figure? Like, is it about where
06:41we are now? Or is it lower or higher? Yeah, it's about where we are now. So jet at 152
06:47US dollars
06:47a barrel. Yes, I think jet was 144. I think the average up until this point has been about 170.
06:55So
06:55we're sort of looking at the trends that we've seen since April into May, and looking at about 152
07:02average jet price for the year. But you're not forecasting a that 2% margin that we've got
07:09currently built in will go away very quickly if prices rise from what you've got plugged in at the
07:14moment. It obviously will have a big impact. I think the positive is demand continues to be strong.
07:20The negative will be the oil price. You know, will it continue to be at elevated levels? We believe
07:25because of the structural damage to fuel supply, both in terms of crude and then the refining
07:31capacity, that we're looking at an environment where jet fuel prices will be elevated through
07:36this year and probably into next year and maybe even beyond. So I think we're into a higher fuel
07:42cost environment for the industry. That in itself isn't necessarily a negative. We've, you know,
07:47we've dealt with higher fuel costs in the past. What tends to impact on the industry is the rapid
07:52increase in the price. Some airlines will be hedged. A lot of airlines won't be hedged,
07:58so they, you know, they will feel the pain of that increase very quickly. But I think we are
08:04moving into an environment where fuel prices are going to be structurally higher.
08:07How does that change the industry? It actually, you could argue it's a positive for the industry
08:11because the industry tends to be more disciplined, given that fuel is a variable cost. So what we've
08:18tended to see in the past is there's more caution around growth, you know, so less capacity going into
08:24the market. I think the challenge that commercial people will have to justify expansion becomes much
08:31harder when, you know, you're operating in an environment where the fuel price is high. So I
08:35don't necessarily see it as a bad thing for the industry. And if I go back, you know, in 2015,
08:442016,
08:45we were looking at fuel prices that were similar to what we're seeing today. Do you think it'll take the
08:49pressure off the OEMs? I hope not. In fact, I can tell you, no, it won't. Because, you know, we
08:55still
08:55need these new aircraft. We're operating with a fleet of aircraft that's way older than we would expect.
09:01So, you know, I see the supply problem being one of replacement, not necessarily one of growth,
09:08because airlines had planned to replace a lot of the aircraft that they have in service.
09:13And there's a very strong economic argument for that because, you know, maintenance charges
09:18are higher on older aircraft. Fuel costs, which obviously, again, you know, it will be significantly
09:23higher. So older aircraft burn more fuel. So I think the pressure will actually continue to be on
09:29the OEMs to produce the aircraft so that airlines can replace the older aircraft and get back to a
09:35more efficient operation.
Comments